Since the start of the Covid-19 pandemic in early 2020 more than 100 airlines across the world have completed a restructuring or are in the midst of one. Others have not even begun rehabilitation proceedings, while others have already been liquidated.
An expert panel at the Airfinance Journal China 2021 virtual conference has discussed the varied challenges many leasing firms, especially the smaller entities, are facing as their airline customers restructure and aircraft remain largely grounded.
"Many airlines simply don’t have access to additional funding or haven’t been able to raise enough. This has led to restructurings and bankruptcies on a scale we’ve never seen before,” says Bird & Bird partner Leo Fattorini.
The Singapore-based lawyer recalls that in March 2020 Flybe was the first bankruptcy of the Covid-19 era, followed by Virgin Australia.
This was then followed by the three large Latin American carriers - Avianca, Latam and Aeromexico – when they filed for Chapter 11 in the USA. Up next were Thai Airways and Nok Air, which entered into Thai business rehabilitation schemes, while Nok Scoot left the market altogether.
Norwegian has been through an Irish examinership process and Virgin Atlantic restructured its debts using the new UK Part 26A restructuring plan legislation.
Back in Asia again, Malaysia Airlines considered following Virgin in using part 26A, but eventually proceeded with a successful UK scheme of arrangement.
Air Asia X has been involved in a restructuring process with its creditors for some time, as has PAL in the Philippines, with the latter thought by many to be about to file for Chapter 11.
Garuda has indicated that it seeks a formal suspension of its debt payments, with advisers to look at a more significant restructuring, while the future of Lion Group is highly uncertain.
“The largest restructuring to date is the HNA Group bankruptcy filing in China in March 2021, with over 67,000 creditors seeking debt of almost $200 billion from the company. Of course, this isn’t all airline related but it does include Hainan Airlines, China's fourth largest carrier, and other airlines in the group operating over 600 aircraft,” says Fattorini.
“These bankruptcies and restructurings obviously have a very damaging impact on creditors. One of the largest creditor groups to airlines are lessors. More than 45% of the global fleet is leased, in some countries often much higher. Hainan has about 70% of its fleet leased, many of these were SLBs where the lessors invested tens if not hundreds of millions of dollars to acquire aircraft from manufacturers on behalf of HNA on the assumption of being paid an agreed lease rental for the lease term,” the aviation legal expert notes.
“Many lessors have borrowed money to finance these acquisitions and thus have their own payment obligations,” Fattorini says.
He adds: “I hear there are bilateral discussions with some creditors which may expedite the process. But overall, in terms of complexity, it looks like this has many months if not years to run.”
Allbright Law Offices senior partner Jordan Yang agrees with his Singapore-based colleague that the HNA restructurings present an unprecedented set of challenges. After all, this is the biggest bankruptcy in China to date.
The first concept I’d like to introduce, which may be unknown to some outside China, is that the Chinese law offers three options to distressed companies: one, liquidation; two, restructuring; and three, settlement.
So far, the HNA case involves a restructuring, a substantive consolidation restructuring, a concept known from the US but regulated differently. All together there are 321 companies involved in this case, including peer-to-peer creditors which may be more seriously considered.
Yang notes that thus far there has only been one creditors meeting, on 4 June, and that not much is known at this stage, with all parties still trying "to figure things out". One of the suggestions from the administrators is to appoint trustees to a trust that will eventually pay creditors, Yang says.
The Beijing-based aviation lawyer, who has been advising leading airlines inside and outside China, also suggests that the HNA case is subject to certain “sensitivities”. These include: extremely complex aircraft transactions and governing law issues from cross-border transactions, as well as jurisdiction problems; the involvement of many local governments; and the sheer size of the HNA restructuring, with more than RMB1 trillion in total creditor claims.
Yang notes that, for example, HNA’s Tianjin Airlines and Fuzhou Airlines were effectively government-operated airlines, which adds to both the sensitivity and complexity of the proceedings.
The big leasing companies are here to stay, the Airfinance Journal's conference panellists agree, but the smaller platforms are often finding themselves in difficult situations as a result of airlines defaulting on their lease rentals. How are lessors internally assessing airline restructurings and credentials?
“Lessors typically have payment obligations to their financiers against which the lease rentals would have been arrived at with the airlines. Not long after the pandemic began airlines began approaching lessors for deferrals and maintenance reserves. In the beginning it was typically for three months, then it became six, now we are often looking at power-by-the-hour,” says PH Aviation Asia director Peter Huijbers.
“Lessors usually put airline lessees into different categories: the good, bad and the ugly. With the ugly being on the watchlist of course.
"Today, basically everybody is on the watchlist, so you might have to take a different approach to how you assess your lessees. Key obviously is whether you think the lessee is going to make it in the long run. You also need to check if there were issues in the past. Did you have to always pick up the phone the day after the rent was due, was it always difficult to inspect your aircraft? Or is all of this just a result of the pandemic,” Huijbers tells the panel.
Airlines in most parts of the world, with the principal exception of Southeast Asia, have been receiving significant support throughout the pandemic. This, too, can change the way a lessor views its airline customers.
“Airlines have been receiving a lot of government money. As a lessor I need to think about how this might affect my leases. It’s a change-of-control event. There might be new environmental concerns and requirements from governments. As an airline you may be required to lower the age of your fleet, it’s not always easy,” says Huijbers.
The industry has not seen large-scale repossessions since the start of the pandemic. Is this trend about to change?
“Lessors are people who own aircraft, not fly or maintain aircraft,” PH Aviation director Huijbers says.
Huijbers has more than 35 years in aviation. His expertise covers the commercial and capital markets, risk and technical. He advises investment vehicles, lessors and airlines on aircraft procurement and financing.
“Lessors have been hesitant to take aircraft back. Why? Not only do they need to take back the aircraft, they also need to pay for parking. Moreover, from an airworthiness perspective, the lessor becomes the operator and as the operator you should take care of insurance. That’s not a lessor’s business. A lessor’s business is to rent out the aircraft to people as quickly as possible for as much money as possible,” says Huijbers.
“Many lessors say, ‘I don’t want my aircraft back, please keep it on your AOC’, because finding today another airline that actually has the capabilities to take that aircraft, pay for rent and have it on their AOC is really tough. That's why many don’t do what they should do, which is repossess their aircraft,” Huijbers adds.
“The big lessors are fine, but some of the smaller ones are really struggling and maybe this means that it’s time to consolidate. Dealing with lessee requests is a really difficult thing. Naturally, you’d think you should pull the plug, but now is not a good time to pull the plug,” he concludes.
A Taipei-based Fitch Ratings director, Katie Chen, agrees that lessors are still facing many uncertainties despite the recent positive news of certain air travel markets reopening, particularly in North America and Europe.
“The overall environment remains challenging, so repossessing and remarketing aircraft currently still remains not the preferred option for lessors,” Chen tells the conference.
She, too, believes that the smaller leasing players have suffered the most. “They actually need to restructure their own debt as well because their own financing capabilities have been severely impacted by non-paying lessees,” she says. “They typically extended their debt maturities or changed the terms to reduce the pressure on their funding profiles. We consider them distressed,” says Chen.
Large lessors’ liquidity positions have largely been maintained, if not increased, throughout the pandemic as capital markets remained open to those with strong ratings.
The Fitch analyst observes that usage-based aircraft rental payments create significant uncertainty for lessors.
“PBH brings a lot of uncertainty to cash flow. If the aircraft is secured by secured lending, usually what we’ve seen the lessors do before they agree any deferrals, they would consult with their secured lending providers to gain consensus. Then they will agree to grant concessions,” Chen says.
“In the case of rent deferrals, what we have observed is that rent is usually deferred between three to six months and usually repaid in the subsequent period with interest. If the airlines can repay as specified, the impact on lessors will be temporary on cashflow. It will cause some delay in recognition of cash flow and/or revenue. The effect of impairments or credit loss would be quite minimal in that case,” says the Fitch analyst.
“Of course, if the deferral amount is quite large and the deferral period quite long it may create significant stress to the lessors because they need to repay their debt on schedule. Reduced rents could also lower the discounted cash flows in the future and lead to impairment loss on the aircraft,” Chen adds.