Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on November 22, 2021 - November 28, 2021

Here are excerpts from The Edge’s interview with AirAsia X Bhd deputy chairman Datuk Lim Kian Onn.

 

The Edge: Last October, AAX proposed to reconstitute RM63.5 billion of its debts into an acknowledgement of indebtedness for a principal amount of up to RM200 million by shaving off 99.9% of its issued share capital, as well as a proposed share consolidation of every 10 existing shares in AAX into one share. The RM63.5 billion figure was reduced to RM33.65 billion after a proof-of-debt exercise conducted by AAX to determine and finalise the list of scheme creditors and the value of their scheme amount. How was this ascertained?

Datuk Lim Kian Onn: The scheme is complex and this is further compounded by FRS (Financial Reporting Standards) reporting, which has grown a lot more confusing in recent years. There are three components to our debt. First, the accrued liabilities of RM4 billion. Once a default is triggered, under accounting standards, the full contingent liabilities are crystallised and we had to account for RM64 billion of it in total. However, for the purpose of voting in the scheme, there is a process of loss mitigation, which the law provides for and the mitigated debt was reduced to RM33 billion. The value was ascertained by an independent third party.

When we announced the scheme in October last year, there was outrage from all creditors. As part of a scheme, we had to go to the courts to seek permission to hold the creditors’ meeting and most of the major creditors intervened to stop the process because they said it was grossly unfair.

They said the deep haircut was unacceptable, setting a dangerous precedent for airline restructurings, the business plan was unrealistic, there was inequitable shareholder pain without any guarantee of equity funding and so on. But our arguments prevailed and the High Court allowed our application to hold the meeting but not without some fundamental changes to the classification.

 

What were they?

The creditors are a disparate group. Besides lessors, there are two large ones — Airbus and Rolls-Royce. There was a lot of suspicion. What’s good for lessors may not necessarily be good for Airbus and vice versa. The more planes we have on order, the fewer planes we can afford from lessors. Some lessors thought that we were in bed with Airbus. As it turned out, the negotiations with Airbus were the most protracted and difficult and we only signed with them at 1am on the day of voting.

The classification of creditors for voting is a big thing and in the end, the court accepted the lessors’ arguments and had Airbus in a class of its own, away from the lessors.

 

How did you arrive at the scheme in the first place? Did you not anticipate the resistance?

We had never been involved in an airline restructuring, so we went into it using basic first principles, which is to pay only what the recapitalised company can afford and a willingness to understand and work with each individual creditor. We put together a business and financial plan that could be safely funded. This is a rather non-conventional approach to an airline restructuring as typically, it would have significant debt equity conversions with large upfront commitment of equity and much smaller haircuts.

The other aspect that is not conventional is that this is an all-encompassing comprehensive plan that covers all creditors. Typically, an airline restructuring is about a select group of creditors and mostly about restructuring leases. We felt that we needed a one-time resolution to all our problems and the scheme addressed that.

Most aviation agreements are grounded on English law and the English courts would be a logical place to implement the scheme. The thresholds are easier to achieve in London, but we decided early on that we could not afford the costs of hearings in London.

Despite some strong objections initially, many of our creditors and lessors eventually became supporters. This was achieved through very transparent discussions on our plans for the future and with the help of a more structured approach to the process when we hired Seabury Securities midway through the discussions, though the financial aspects of the scheme remained as that when first announced.

 

Have the lessors agreed to these terms? Can you provide more details on what was agreed?

Broad agreement has been achieved with lessors having 13 planes. We have returned or are in the process of returning planes to lessors that have decided not to continue with us because they could not agree to the new terms. There are quite a few of them. But interestingly enough, all of them voted to support the scheme even though they do not agree with our terms. They are professionals and are pragmatic. Just like our passengers, it’s not good for them if we go bust. There will be so many good planes in the market and this will further depress lease rates. None of them are particularly happy, but they are all realistic with what we can achieve under the circumstances.

 

What are the new lease rates?

For us to compete well, we need to be competitive with the lowest cost. Market lease rates have come down significantly and we need to be able to enjoy these new market rates. These are at least 50% below pre-Covid levels. In return, we extended the leases and they are now locked in for the next 8 to 10 years.

 

Are 13 planes enough?

In the next two years, 12 or 13 planes will be perfect. We are now fully operating four planes. Two more will be returned to service in December and we will progressively bring the rest back as demand picks up. It will be a good problem if we do not have enough planes.

There is a glut of wide-body aircraft worldwide and we can readily get more planes if we need to. Thai, Garuda and a few other airlines have returned quite a number of A330s to lessors and in the next two or three years or so, there should be quite a good supply. Bear in mind, however, that a number of routes we fly are in the five- to six-hour range and we can also lease some of Air Asia’s narrow bodies if we do run out of the A330s.

 

Who were the dissenting votes? What were their main grouses?

Across all three classes, 99.03% voted for the scheme and in class A and C, it was 100%. It was an unprecedented outcome in the history of aviation restructuring.

One dissenter was a small lessor, whose plane was repossessed in March 2020. Of the 280,000 affected passengers, 600 turned up on voting day with 150 who voted in support.

The majority of the noise around this restructuring has been misinformation on how passengers are being treated and has come from seasoned analysts and opinion writers.

The most important question for a creditor to ask is what they will gain from us being out of business. In this approved scheme, passengers will get full travel credits and take part in a profit-sharing for the next three years. Detractors only point out the 99.5% haircut without stating the full facts.

One could argue that passengers could be excluded from the scheme by classifying them as essential creditors. However, the clarification of ‘essential’ would embroil us in legal entanglements for many years to come.

Equally essential are airports, the lessors and the maintenance and engine providers, without which we will have no planes to fly. It is crucial, therefore, that there is no discrimination between creditors and as such, all creditors within a specific class receive the same terms.

 

Do you see any problems in getting the debt restructuring plan sanctioned by the High Court? When is the hearing date?

We don’t think so as all the interventions have been done and settled in the many hearings before the vote. We would like to get this done soonest and our lawyers are trying to fix a hearing date. It will probably be sometime in December.

 

Under the profit-sharing scheme, if AAX were to garner more than RM300 million in its annual earnings before interest, tax, depreciation and amortisation, lease rentals and restructuring costs (Ebitdar) during the 2023-2026 financial years then all creditors except Airbus would be entitled to 20% of those earnings. What were the scenarios that AAX used to come up with the RM300 million Ebitdar figure? How confident is it in meeting that target?

If we raise RM500 million and we assume investors want at least a 10% return and the expected lease rentals are RM250 million a year based on the fleet of planes we have, then profit sharing can only kick in after RM300 million Ebitdar.

The RM300 million is not a target. It’s a calculated threshold beyond which we share profits with creditors and the providers of capital.

 

What is your reading of the leisure travel market internationally? Is it too early to call this a recovery for the travel industry?

Travel will resume. Business meetings are never the same with Zoom calls. The best results are from face-to-face meetings. We had to fly to London for two days because we needed a breakthrough in our negotiations with Rolls-Royce and a face-to-face meeting achieved what we could not in three months. There will be revenge leisure travel but we will also have to be realistic. It will take time for everyone to feel comfortable again.

 

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