Garuda Indonesia reaches debt restructuring deal – The Diplomat


In mid-June, Indonesia’s national airline, Garuda Indonesia, won approval for 95% of its creditors restructure more than $9 billion in liabilities. As Reuters reported, the deal requires creditors to take a “haircut” or significant debt write-down and swap the remaining amount with $825 million in 9-year bonds and $330 million of equity. That means Garuda can consolidate his long-term debt, get some relief for others, and with the return of air traffic following the pandemic, he’s likely to remain solvent and a constant concern as cash flow picks up. .

The past two years have been difficult for Garuda which, like many airlines, does not own the majority of its fleet and instead leases many of its planes to third parties. These lease liabilities are often disguised as operating expenses, depending on the nature of the accounting rules used. But they’re still there, and if an airline were to experience a sudden cash outage, like the one induced by the pandemic, those liabilities suddenly become very visible.

In the case of Garuda, it became clear last year that the airline would not be able to meet all of its obligations and ultimately defaulted on a $500 million Islamic bond. But in fact, this bond and the obligations owed to major airlines like Airbus or Boeing were never the biggest part of Garuda’s unpaid debts. Most of it was due to aircraft leasing companies, so getting their approval would be key to any successful restructuring plan.

After last year’s default, there was a lot of speculation about the fate of the company. Allegations on questionable leases came to light. Leaders and ministers made dramatic statements about plans to liquidate the airline, privatize it or rebrand it, which I considered unlikely. The state owns 60% of Garuda and the airline plays more than just a commercial role in the country’s political economy.

It is a strategic asset and the government would not let it sink unless there was no other choice. I was writing at the time for East Asia Forum that it was more likely that “Garuda’s company management and the government would use the threat of bankruptcy as leverage as they entered into restructuring negotiations with lessors”. And that’s more or less how things turned out.

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So what does this mean for other struggling Indonesian state-owned enterprises and for the country’s broader strategy of using debt and state-owned enterprises to spur economic growth? There have been several high-profile debt restructurings or impending insolvencies at other major state-owned companies in recent years, including Krakatau Steel and embattled construction company Waskita Karya. Does all this tell us that the state should stay out of the market and leave commercial enterprise to the private sector?

I do not think so. On the contrary, it shows that Indonesia’s strategy of integrating state-owned enterprises into global and domestic capital markets through a variety of financial instruments has created a degree of economic resilience. The fact that Garuda can default and then undergo court-supervised debt restructuring without his financial woes causing wider systemic contagion underscores this point.

In other words, because Garuda raised funds through a combination of bonds, stocks, loans, and entered into direct contractual agreements with foreign creditors like aircraft lessors, he was able to spread the risk of default and then negotiate with its creditors in an orderly manner. . This is very different from, say, the situation in Laos, where so much capital has come in a single form (foreign direct investment) and from a single source (China).

A single creditor can then exert much more leverage, while systemic risk becomes highly concentrated and makes any external shock more likely to spread throughout the economy. When we look at countries or state-owned companies incurring many liabilities, we should always consider these factors: what kind of liabilities are they? In Garuda’s case, the liabilities included bank debt from a number of different lenders, bonds and leases, and although cumulatively quite large, Garuda also had options available to him to restructure them, in particular by converting a portion into equity.

This is partly the result of deliberate policy decisions taken by the Indonesian government in recent years to make the financial system more resilient by deepening domestic capital markets and diversifying sources of foreign capital. This gives struggling businesses a wider range of options and spreads risk. And, at least for now, it worked more or less as expected and Garuda lives to fly another day.


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