The owners of Philippine Airlines (PAL) are buying time with a proposal to inject their own capital into the airline while they ask creditors to give them another three more months to find investors willing to put up more.
That is the nub of PAL's plan filed with the Philippine Securities and Exchange Commission (SEC) in early December. PAL has been under SEC-supervised receivership since June when it suspended payments on its $2.1 billion in debts.
Before PAL filed this plan, creditors had agreed to forebear if PAL raised at least $150 million in new capital. But that has proven harder than expected. Right before PAL's plan was due, its talks with Cathay Pacific and Northwest Airlines over strategic investments appeared to break down. Singapore Airlines then denied reports that it was interested in a PAL stake, leaving Asia's oldest airline to file a plan on its own.
PAL's plan proposes that local investors, including Lucio Tan, majority owner, would put up $90 million in new capital. By early March, PAL would raise another $60 million from outside investors. Current shareholder interests would be diluted to 5%. The airline's employees, who accepted 20% of the airline's shares under a deal reached in October, would retain another 5%. The remaining 90% of PAL's shares would go to whoever pays the $150 million total in new capital.
It is unclear whether the government, which owns 14% of the airline, is willing to participate in the local portion of this recapitalisation. Philippines President Joseph Estrada, who has acted as a broker between the airline and its unions and between PAL and Cathay, has stressed, "The government has no money. It will not guarantee any private firm."
Finance secretary Edgardo Espiritu says government agencies might provide some "bridge financing" if PAL secured a partner, however.
Two major issues face any strategic investor. One is the question of management control. By law, foreign ownership in PAL is limited to 40%. Under PAL's proposal, whoever pays in the $60 million in new capital it still needs would acquire only 36% of PAL's shares. This is a concession by PAL's present owners, who were trying to sell a 40% stake to Cathay Pacific for something between $75 million and $100 million. Lowering the price should help, but one of the stumbling blocks in talks with Cathay was over how it could gain effective control with only 40%.
The other issue is the airline's employees. A massive pilots' strike last June triggered the airline's receivership. It shut down again in September when unions rejected management's demand that they forego the right to strike for the next 10 years. Ultimately they relented, but only in exchange for 20% of the airline's equity, seats on its board, and certain protections against layoffs. Talks with Cathay also tripped over these protections. According to Manila sources, Cathay wanted to cut PAL's workforce by 3,000, including 200 pilots.
President Estrada, who was not party to the talks, added that layoffs should be avoided "at any cost".
At press time efforts were underway to revive talks with Cathay Pacific. A lawyer for Tan claimed talks with Northwest were ongoing.
Source: Airline Business
