Garuda Indonesia gains U.S. recognition of Indonesian proceedings

By Sarah Lizee

Olympia, Wash., Oct. 26 – Garuda Indonesia (Persero) Tbk. gained recognition from the U.S. Bankruptcy Court for the Southern District of New York of its Indonesian proceedings, according to court documents filed Wednesday.

As previously reported, Irfan Setiaputra, chief executive officer and foreign representative of Garuda, said the Covid-19 pandemic had immediate and lasting effects on the airline company.

In fiscal year 2020, Garuda served less than a third of the number of passengers and operated less than half of the capacity year over year as compared to pre-pandemic.

Initially, the Indonesian government authorized funding of an Rp 8.5 trillion non-equity loan to Garuda as mandatory convertible bonds. The amount was supposed to be disbursed to Garuda in several phases during 2020 through 2021. Garuda received Rp 1 trillion in June 2022. The remaining Rp 7.5 trillion commitment was canceled and can’t be withdrawn.

Garuda also launched a consent solicitation on sukuk trust certificates due in 2020 totaling $500 million in order to extend their maturity by three years and implement a covenant holiday until Garuda’s operations return to pre-pandemic levels.

One year into the pandemic, Garuda announced a comprehensive restructuring scheme for implementation in the last three quarters of 2021. Through this restructuring scheme, Garuda sought to resolve liquidity issues and ensure a going-concern status by imposing a moratorium on all its debt, minimizing its operations and fundraising.

In the longer term, Garuda sought to reduce its outstanding debt, extend the maturity of its debt, lower interest expenses to match its cash flow ability, and increase its profitability by optimizing ancillary revenue and aggressively restructuring its cost structure.

On Oct. 22, 2021, one of Garuda’s creditors filed an Indonesian penundaan kewajiban pembayaran utang (PKPU) petition against Garuda. A PKPU is a court-enforced suspension of payments processes, designed to provide a debtor a definite period to restructure its debt and reorganize its affairs under a composition plan with its creditors.

Plan terms

On June 17, Garuda proposed a PKPU plan developed in consultation with an informal group of its aircraft lessors, sukuk holders and other creditors.

The PKPU plan anticipates Garuda continuing to operate in the ordinary course and provides the following treatment to Garuda’s creditors:

• The Indonesian government will receive 100% recovery on the Pr 1 trillion mandatory convertible bonds issued by Garuda in the form of new ordinary shares in Garuda. All other preferred creditors, including Garuda employees, will have their claims repaid in full from operational cash flow over time;

• Each aircraft lessor is given the option to terminate their existing lease agreement and Garuda and its subsidiaries will have no further obligations under the relevant lease agreement, or if the aircraft is (a) part of Garuda’s go-forward business plan, to amend the terms of the existing lease, or (b) not part of the go-forward plan, to provide a proposal to enter into an alternative lease arrangement;

• Each spare engine lessor will amend the terms of its respective exiting lease under the go-forward spare engine term sheets included in the PKPU plan;

• Export Development Canada, as party to an aircraft leasing facility agreement, will receive a pro rata share of new notes and new equity;

• Different settlement terms apply to different aircraft manufactures. Existing aircraft purchase agreements with Boeing will be canceled in full, the Airbus purchase agreement will be amended, the existing aircraft purchase agreement with Avions De Transport Regional GIE has been canceled in full, and each aircraft manufacturer will receive its pro rata share of new notes and new equity;

• Garuda has entered into individual settlements with its maintenance, repair and/or overhaul service providers to ensure continued performance after the conclusion of the PKPU proceedings.

• The existing loan agreement will be deemed amended to reflect the new payment terms agreed to in furtherance of the PKPU plan and the financing creditors will receive settlement of its claims in line with those new payment terms;

• Holders of sukuk certificates will receive their pro rata share of new sukuk certificates and new equity. All obligations under the existing sukuk certificates will be deemed discharged on the effective date.

• Trade creditors with a claim equal to or below Rp 255 million will be repaid in full from operational cash flow over time. Trade creditors with a claim greater than Rp 255 million will receive (i) in the case of onshore other trade creditors, local debt claims and new equity, and (ii) in the case of offshore other trade creditors, new notes and new equity.

In total, $825 million will be distributed to Garuda’s creditors under the PKPU plan in the form of local debt claims, new notes and new sukuk certificates.

Additionally, Garuda will issue new equity through a rights issue in the amount representing the greater of (x) the amount equal to 19% of the equity eligible creditors’ settlement claims less the amount of debt allocated to them under the plan, and (y) $330 million.

On June 17, 95.07% in number of creditors, which represented 97.46% in amount voting by the unsecured creditors, voted to approve the PKPU plan. Because there were no secured creditors in the PKPU proceeding, the unsecured creditors’ votes met the threshold.

The plan was approved by the Indonesian court on June 27.

Aircraft lessor appeals

On July 4, Greylag Goose Leasing 1446 DAC and Greylag Goose Leasing 1410 DAC, aircraft lessors to Garuda, each filed an appeal to the Indonesian supreme court relating to the PKPU judgment.

Garuda is actively defending the appeal and filed its counter memorandum of appeal in the Indonesian court on July 14.

If the appeal is decided in Greylag’s favor, the plan will no longer be in force and Garuda may be declared bankrupt, which would result in the start of a liquidation process. Once the appeal has concluded, the role of the PKPU administrators will end.

Pending the decision of the appeal, the PKPU plan remains effective, but the PKPU proceeding can’t be closed, and the PKPU administrators remain in their roles.

Some actions, such as disbursement of new money financing and the issuance of new notes and new sukuk certificates, can only be completed after the Indonesian supreme court decides the appeal.

Garuda Indonesia is an airline based in Tangerang, Indonesia. The Chapter 15 case number is 22-11274.

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