Speedy lease deal key to Malaysia Airlines restructuring | Analysis | Airfinance Journal

Speedy lease deal key to Malaysia Airlines restructuring

CEO of flag carrier's parent notes lessors now have more options to redeploy aircraft.

With Malaysia Airlines the first Asian airline to successfully restructure during the ongoing Covid crisis, the chief executive of Malaysia Aviation Group (MAG), the flag carrier’s parent, tells Airfinance Journal how he convinced lessors and other creditors to give the legacy airline another chance.

MAG chief executive Izham Ismail stresses that transparency and trust were the only elements that really mattered in the group’s negotiations with creditors. Without them, the national carrier could already be in liquidation, he says.

“We went to the English courts because we were not sure the Malaysian courts were familiar with our situation. After all, our contracts are written in English law, so why do we have to have conversations with courts in two venues?” Izham recalls.

“What made our mission successful was that we entered the conversation with complete transparency. What this means is that if I were to offer you something and you have a counteroffer, I put it in a shared drive that the other creditors will be able to view. That way creditor B can say , ‘Hey, I like what you’re giving to creditor A’, and I can respond, ‘OK, let’s have a conversation on this’,” Izham tells AFJ.

This is in stark contrast to the talks at Lion Group in neighbouring Indonesia where communication and cooperation by the airline group with lessors has been significantly poorer.

“The other airlines are having issues. The key principal is trust and transparency. You’ve got to be completely open with the lessors, don’t try to hide anything. Of course what also helped us very much was that we had a shareholder who said, ‘OK, if you manage to talk to your creditors, we will give you new money, including interim funding until the restructuring is agreed’,” Izham recalls.

Izham also observes that it was important to secure agreement for the restructuring quickly.

“Look at North America, look at Europe, look at Russia. People need airplanes now. They didn’t need them last year when we didn’t even know we would have vaccines ready. Creditors now have more choices. Lessors can just place the aircraft somewhere else,” says the MAG chief.

Don’t burn bridges

“What was also very important, what I kept reminding people, was that we will need new aircraft again from 2023-24. So, I asked, do we really want to burn all our bridges? Of course, the answer is no. So, from the very beginning, I made it clear that we are not ganging up against the lessors because we want the industry to survive. That’s why we acted as openly as we could,” Izham tells AFJ.

Malaysia Airlines has 25 Boeing 737 Max aircraft on order. The flag carrier has agreed a deal with Boeing that allows it to transfer its Max delivery slots to aircraft lessors.

The MAG CEO recalls that there were five major categories of creditors that needed to agree to restructured deals: aircraft operating and finance lessors; maintenance providers; engine lessors; and financial institutions.

“We were able to secure about MYR15 billion ($3.6 billion) in savings from these negotiations and remove about MYR10 billion in debt,” Izham tells AFJ, adding that this also included the restructuring of Sukuk bonds once used to finance the airline’s Airbus A380 acquisitions.

In 2012, Malaysia Airlines brought the world’s first shariah-compliant offering of MYR2.5 billion perpetual Sukuk to market for working capital and its A380 purchases; in September 2020, the Ministry of Finance agreed to restructure the payment terms on the bond as part of the flag carrier's rehabilitation.

The speed at which MAG marched through its restructuring was fundamental to its success.

“We started as early as March last year. We are very fortunate that we achieved the outcome we achieved. I don’t think this would have been possible without such a young and motivated team. We all had full conviction, were completely aligned, including with our shareholder. I said that we needed to achieve this as fast as possible because our cash burn was crazy and they said, 'OK, we will support you if you get all your creditors to come together’."

Industry leaders have bemoaned a lack of shareholder support to airlines in the Asia-Pacific amid the Covid crisis, particularly amid carriers in ASEAN. The notable exceptions are Singapore Airlines, which has secured more funds more rapidly than any other airline during the pandemic, and the now-restructured Malaysia Airlines, where shareholder Khazanah agreed to recapitalise the airline if the carrier renegotiated with its creditors

“The advisers only came in late September. Lokey only came in late October, early November. Until then it was all just us,” Izham says.

“Oliver Wyman was helping us on day-to-day cash management as advisers, but the team running the show and burning the midnight oil was the MAG team itself. Time zones presented a big challenge. In the morning we were dealing with creditors in Korea and China. At night we were dealing with Europe and the UK. It was almost 20 hours every day. It paid off to have a very young team,” Izham tells AFJ.

Houlihan Lokey provided restructuring consultation services to MAG that proved essential in the national carrier’s negotiations with aircraft lessors.

“They have accepted the new terms: reduced lease rates, deferrals and PBH . We have achieved a very interesting outcome that is beneficial to both sides, especially the aircraft lessors,” Izham says.

“To be honest with you, and as you know, this restructuring was long overdue. When I started in 2017, during my first month, this is when I already knew we needed to do something. When I saw the balance sheet, the cost structure was still very high, way too high, so I knew we needed to do something to become competitive in the marketplace,” says the A330 captain.

“Before Covid, we had gained some good traction with potential investors as you know, but then Covid-19 happened. I believe this must be divine intervention,” the MAG chief laughs.

More deferrals on the horizon

MAG’s usage-based rent agreements with aircraft lessors will expire at the end of 2021.

These could be extended by another 12 months as part of terms agreed, although the airline has “not pulled the trigger” on that yet. “We have a contingent deferral option in 2022, which we will be evaluating based on market conditions,” the group chief explains.

“We’re not out of the woods, 2021 is worse than 2020. At least last year we had a good quarter one. This year, however, will be a complete wipeout here in our region,” Izham says.

“We agreed on contingent deferrals. We’ve established a baseline scenario and a worst-case scenario. What it means is that if the capacity in the market is 40% below baseline, then MAG could trigger the contingency deferrals for all of 2022. We push everything back to 2024, with a 2% interest rate at the end of 2024,” the flag carrier chief reveals exclusively to AFJ.

“What we’re currently seeing in the marketplace here in our region is that we’re in the worst-case scenario situation because of new lockdowns here in Malaysia and low vaccination rates through the region.

I have conversations with my peers in Oneworld and I’m sometimes a bit frustrated because when I talk to Doug Parker he tells me that American is cash positive already. The same story with Alaska ,” Izham says.

MAG is hoping a reversal of fortunes could occur by the fourth quarter of 2021, or first quarter of 2022.

“I believe optimistically it may be quarter four, but more likely quarter one next year will be when we see a meaningful recovery for us. Initially we were hoping to be at approximately -40% pre-Covid levels by quarter four this year but I don’t think that’s feasible any more. Now I’m crossing my fingers it will be -70% or -75% but more likely it will be -90% pre-Covid through the end of the year,” the group chief predicts.

Not all is bad news, however. As observed by airline CEOs across the world, the cargo segment continues performing very well throughout the pandemic. Mas Kargo is benefitting from this strong demand, too.

“Cargo is my cash cow this year. We’re also pushing very hard for MRO. There’s been good progress. Sometimes I lose track which new clients are coming in. Just last week my team sent me a picture of a Nepal Airlines A330 in our maintenance facilities here,” says Izham.

Transaction SnapshotMalaysia Airlines | PDP financing | 12-19 | 4x737Max8

Transaction SnapshotMalaysia Airlines | ECA Guaranteed loan | 10-19 | $250m (est.) | 4xA330-300

Financial Close:
MAS A330 Cayman I Limited
$250.00m USD
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