SEC Orders Two Aviation Companies to Leave PAL Alone

The Philippine Star

Friday, December 18, 1998

Des Ferriols

The Securities and Exchange Commission (SEC) ordered two aviation firms yesterday to refrain from forcing Philippine Airlines (PAL) to return a leased airbus or any other leased property without the SEC's prior order.

Pacer Aviation Ltd. (Pacer) and Credit Agricole Indosuez S.A. (CAI) were ordered by the SEC late yesterday to stop pressuring PAL in returning the aircraft pending the revolution of its application for rehabilitation and the approval of its proposed rehabilitation plan.

The SEC said Pacer and Credit Agricole had tendered 2 notice of termination to PAL, terminating the lease on an Airbus A330-300 aircraft after PAL failed to settle the lease payment on the property.

PAL was directed to return the aircraft to Pacer in Hong Kong not later than Dec. 17, along with the technical records accompanying the aircraft.

The notice prompted the Interim Rehabilitation Receiver (IRR) to ask the SEC to intervene and direct the companies to cease-and-desist from requiring the redelivery to the aircraft and that Credit Agricole be ordered to file their comments on the rehabilitation plan immediately.

“Considering that Pacer appeared and voluntarily submitted itself to the jurisdiction of the commission by filing the petition, and finding that the abovementioned aircraft is currently used in PAL’s regional operations and vital for the rehabilitation of PAL, the hearing panel hereby grants the IRR's request,” the commission said.

“Consequently Pacer and Credit Agricole’s notice of termination over Airbus A330 addressed to PAL is hereby given no effect and set aside,” the SEC said.

“Pacer and Credit Agricole are hereby mandated to cease-and-desist from henceforth requiring PAL to deliver the above subject leased property or any other leased properties at any given period without orders from the SEC,” the order said.

The SEC also ordered the companies to submit their comments on PAL’s proposed rehabilitation plan as part of the airline firm’s roster of creditors.

The SEC had given PAL’s creditors 15 days after their receipt of the plan to submit their comment to the hearing panel which would evaluate the plan for approval.

The rehabilitation plan provided, among others, the proposed infusion of some $150 million in equity by its existing stockholders, the extension of its $2.2 billion maturing debits up to 15 years, waiver of certain interests on loans, and reduction of fleet size.

“This rehab plan, along with the comments and suggestions of PAL’s creditors, will be used as the basis for our decision on whether PAL should be rehabilitated or liquidated,” the SEC said. “But we have to review this document ourselves before we can say whether the pullout of prospective investors will have a critical impact on the plan.”

In the rehabilitation plan, PAL said its assumptions were based mostly on its plan to reduce capacity and fleet size to only 22 aircraft serving 13 international routes and 17 domestic routes.

“Securing a strategic partner, most likely in the form of a foreign airline, has been and continues to be a priority for PAL,” the plan stated. However, since no partner has agreed to come into the company, PAL said its Base Case Business Plan would be based on fresh equity infusion by existing stockholders and the restructuring of its existing debts.

In the rehabilitation plan, PAL said much of its future would depend on a number of critical factors, especially the injection of some $150 million in shareholders’ equity by business tycoon Lucio Tan as well as the government financial institutions which together hold the controlling interest in the airline firm.

PAL said the company and its shareholders have to agree on the date of infusion but it should be later than 180 days following the implementation date of the program.

PAL said all its secured creditors would be required to extend the maturity of all their fully secured credited facilities from a minimum of three to a maximum of 15 years, as well as to waive certain default interests and to grant grace periods on the payment of the principal amounts.

This provision would cover all of PAL’s $1.725 billion secured debts consisting $1.517 billion Aircraft Secured Claims and $207 million in miscellaneous secured claims.

The SEC said it has to be convinced that there is still hope for PAL’s rehabilitation and that it could maintain viable. Under SEC rules, all companies applying for rehabilitation are given five years to turn their operation around.

“If it is going to take more than five years to rehabilitate any losing company, that means it can’t be rehabilitated in the first place,” the SEC said.

As of last month, PAL reported that its losses ballooned to P6.1 billion for the first six months of its fiscal year ending Sept. 30, a P399 billion increase over the same period the previous year. Its second quarter income alone showed a net loss of P3.9 billion compared to only P1.6 billion for the same period the previous fiscal years. On the other hand, PAL's outstanding liabilities also jumped to P98.53 billion from P94 billion as of July this year.