Garuda decision decides fate of $ 9.8 billion debt overhaul

(Bloomberg) – PT Garuda Indonesia begins court-supervised debt restructuring process after a Jakarta court accepts a debt petition filed against the airline to determine how far the Indonesian government will go to save a public company.

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Garuda has accumulated $ 9.8 billion in debt, and judges at the Jakarta Central Commercial Court have accepted a petition to suspend payment of the debt to his creditors. The move potentially paves the way for debt reduction to $ 3.7 billion and allows the national carrier to renegotiate lease terms or return planes to aircraft lessors with the lowest possible penalties.

The judges ruled that PT Mitra Buana Koorporindo, an IT company hired by the airline to purchase equipment and manage services, was able to prove that Garuda owed them 4.2 billion rupees ($ 293,000), that the carrier is indebted to more than one creditor, has unpaid debt and is probably unable to pay its debt.

The court will hold a new hearing after the 45-day window to negotiate with creditors on January 24. The process could be extended to 270 days if the state-owned airline and its creditors need more time.

“Garuda will communicate his restructuring plan to all creditors,” CEO Irfan Setiaputra told reporters after the decision. He said that future negotiations will be protected by law and that he is optimistic about the positive outcome of the talks.

Garuda’s fate is of national significance, given its role as a key transporter of people and goods between 69 destinations in Indonesia, the world’s largest archipelago. The fact that its shares are 60.5% owned by the Indonesian government means that parliament would have to approve major corporate changes.

How did he get here?

Even before the pandemic decimated the global airline industry, Garuda struggled to remain profitable. The impact of corruption in the purchase of aircraft and engines, aggressive fleet expansion and high costs have contributed to the annual net losses since 2017.

Between 2014 and 2019, Garuda’s ratio of aircraft rental costs to revenue was the highest among global airlines, according to data compiled by Bloomberg. Last year, when revenues fell 67%, the carrier spent nearly 28% of its revenues on fuel, the highest share among full-service carriers in Asia-Pacific.

The first signs of trouble appeared in early 2020 when Garuda hired advisers to help him stay in business, fearing he would not be able to repay interest on a $ 500 million sukuk. Sukuk holders ultimately approved a three-year extension to the maturity of Sharia-compliant debt securities, but Garuda continues to struggle to pay out a distribution to investors.

Struggling Garuda considers halting debt payments as bankruptcy looms

Like other carriers, Garuda faces several lawsuits from aircraft rental companies. The London Court of International Arbitration ruled that it should settle unpaid aircraft rental rents, as well as other liabilities, to Helice Leasing and Goshawk Aviation.

Why does Garuda have to sort this out quickly?

Falling travel costs and runaways caused the carrier to consume huge amounts of money. Its average net cash outflow from operations in the first nine months of this year was nearly $ 64 million per month.

Garuda runs the risk of losing business if global air traffic picks up, unless it reaches an agreement with donors, with which it secures the majority of its fleet. Negotiating individually with a large number of creditors and lessors, most of them foreign, would take too much time.

Prolonged negotiations while air traffic resumes would be a problem for the carrier, which is “why a judicial settlement is best for us,” Garuda CEO Irfan Setiaputra said at a parliamentary hearing on the 9th. November.

And after?

Investors will keep a close eye on any deal Garuda and creditors reach after the court-ordered restructuring. Market participants will also see how he plans to free up an additional $ 1 billion to keep him afloat. Government funding should be approved by cabinet and parliament.

The government is now considering the issue realistically, according to Deputy Minister of State Enterprises Kartika Wirjoatmodjo, who oversees state-owned transport companies. It is even open to the possibility of private investors taking over the company, eroding the state’s majority stake, Wirjoatmodjo said.

(Updates with comments, court decision)

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