PAL Rehab Plan Likely to Get Nod of SEC Team

Business World

Monday, December 28, 1998

By MARICRIS C. CARLOS Senior Reporter

and MA. SALVE I. DUPLITO Reporter

National flag carrier Philippine Airlines Inc. (PAL) may be in serious financial bind, but  the task force created by the Securities and Exchange Commission is expected to recommend the approval of a proposed rehabilitation plan.

At the same time, the government-owned Social Security System (SSS) is willing to put in P1 billion in new investment provided the flag carrier undergoes a facelift that will ensure profitability in the next few years.

In an interview, SSS Chairman and President Carlos Arellano said he still finds PAL attractive. “As of now, it is not a good day; they still have to clear out the situation there… but as long as they show it can be profitable institution, I’m willing to bring in more money, “ Mr. Arellano, sitting on top of a P152-billion fund, said.

Interviewed by Business World separately, two members of a three-man SEC task force said they favor the approval of PAL’s rehabilitation plan as submitted.

The task force is expected to formally submit its recommendation to a three-member hearing panel, chaired by SEC Acting Chief Fe Eloisa Gloria, on Jan.7. The hearing panel will decide whether or not PAL should be rehabilitated.

Favoring the proposed rehabilitation plan were SEC lawyers Rosita Guerrero and Manolito Soller. The third member, Jesus Ulunday, was unavailable for comment.

TECHNICALS

The task force was created by the SEC hearing panel to assist in evaluating the feasibility of the rehabilitation plan. In particular, the task force looked into the “technical” of the rehabilitation plan, paying particular attention to provisions regarding PAL’s finances. In fact, all three task force members are certified public accountants.

Ms. Guerrero said that as it is, PAL’s rehabilitation plan seems feasible, adding it was able to specify how management plans to infuse the needed capital in case the flag carrier fails to find a strategic partner.

Mr. Soller also agreed that PAL is still “viable”. It even has an alternative plan in case it fails to get a strategic partner, he said, referring to the $150-million equity infusion that would come from existing stakeholders.

Both Ms. Guerrero and Mr. Soller though stressed the task force is just a recommendatory body. In the end, they said the decision whether or not PAL will be allowed to continue operations will come from the three-member SEC hearing panel.

At the same time, Ms.Guerrero and Mr. Soller emphasized that their decisions was based solely on what the submitted rehabilitation plan says. The comments of creditors and other stockholders will be considered by the hearing panel, not the task force, Mr. Soller added.

As it is, he said he doesn’t see any hitch should PAL decide to go ahead with the equity infusion and capital restructuring components of its rehabilitation plan.

Under existing corporation statutes, PAL needs the approval of two-thirds of 70% of its stakeholders to proceed with the proposed capital restructuring program outlines in the plan.

LEGAL HINDRANCE

But since Chairman Lucio Tan controls about 70% of PAL’s shares, Mr. Soller sees no legal hindrance to the implementation of the plan.

Nevertheless, during the conference hearing with PAL officials on Dec. 23, the task force directed the flag carrier to submit a more detailed explanation of its proposed capital restructuring program.

The SEC task force called members of the airline’s interim rehabilitation receiver to a meeting last week to clarify certain provisions of the plan.

Emerging from the closed-door meeting, PAL chief finance officer Jaime Bautista admitted “most (of PAL’s creditors) have not accepted” the rehabilitation plan.

He said though PAL remains confident it will be able to convince its creditors once the plan’s fine prints are explained to them.

Initially, he said PAL expected opposition from the creditors considering the plan contains debt and capital restructuring components. ”We are ready to negotiate with them,” he said referring to PAL’s 9,000 creditors.

Already, PAL’s European creditors led by Credit Agricole Indosuez have voiced their objections against the plan. Credit Agricole is trustee for various credit facilities which enable PAL to acquire 12 Airbus A330/A340 aircraft from different lessors. In particular, the European creditors said the plan does not embody “two fundamental elements” they said are crucial to PAL’s recovery – the entry of a strategic partner and the $200-million initial investment needed to support the rehabilitation plan.

Two legal banks also expressed reservations. These are PCI Bank and the Philippine National Bank (PNB).

PCI Bank’s objection concerns the 15-year leeway PAL is seeking from its creditors concerning the maturity period of its loans. It instead proposed a maturity period limited to 10 years, inclusive of the grace and payment periods. It also balked at PAL’s proposal fro creditors to waive interest on all “post-petition” loans including default interest.

For its part, PNB’s objection is based on Pal’s proposed move to reduce the par value existing common shares to only P0.01 a piece from the current P5 per share. It said the capital restructuring “will substantially dilute” its stake in PAL.

Meanwhile, SSS’s proposed P1-billion new investment in PAL, if it pushes through, is equivalent to one-sixth of the $150 million the airline is desperately in need of. Mr. Arellano said his first concern is still the labor problem hounding the airline, which also caused it to lose its fragile links to prospective strategic partner Cathay Pacific Airways Ltd.

He also said there has to be a cleaning up of PAL’s balance sheet and the entry of a strategic investor, foreign or local, should be ensured.

Mr. Arellano said it is imperative for PAL or the government to come out with a new vehicle that will present clear solutions to PAL’s problems.

The SSS chief said the government has already taken one step in this direction in trying to create a management team that will “professionalize” the management of PAL.

Finance Secretary Eduardo Espiritu earlier said he is looking at letting a team of creditors constitute this team. Some junior officials of PAL’s foreign creditors have been called to a meeting at the Department of Finance (DoF) the other week with Mr. Espiritu and have already given their approval of the plan.

Asked whether he wants a change in PAL’s Management before he plunks in more investments, Mr. Arellano pointed out the issue in PAL is not Mr. Tan as some investors and creditors have been saying. “I don’t think the issue in PAL is Lucio,” he said.