Business Rehabilitation: Thai Airways to Lead COVID-19 Induced Debt Restructuring

Wirot Poonsuwan

“THAI has temporarily suspended operations due to the COVID-19 outbreak.” That’s the banner everyone sees these days when they log on to the official website of Thai Airways International Plc.

Given the unhealthy state of the airline’s business prior to the coronavirus outbreak that began in March, one can’t help wondering: Is it because of the global pandemic and the ensuing worldwide travel restrictions or due to the pre-existing operational condition of the national flag carrier? Maybe both.

One thing is for certain. Today, Thai Airways’ billion-dollar enterprise has no income and its large fleet of passenger planes stop flying, while mountains of bills are piling up: staff salaries, maintenance costs, loan payments, aircraft-financing lease payments, overheads and supplier trade expenses.

There has been a fierce debate on social media whether the national airline should be allowed to stop its business forever or whether it should somehow be assisted to carry on as a going concern.

Bankruptcy or Business Rehabilitation
With or without the airline formally declaring a debt moratorium across the board to effectively pause debt service, creditors of all sorts, trade or financial, are getting anxious.

Although an expensive direct bailout said to amount to 54 billion baht or USD 1.7 billion is not in the pipeline, the Thai government will never let what was once a national asset go bust in a doomsday extinction fashion known as a permanent “bankruptcy.”
The current administration has decided authoritatively and decisively last week that the way going forward is for Thai Airways to take a long, meandering and challenging road of business rehabilitation under the Thai Bankruptcy Act of 1940, the equivalent of the U.S. Chapter 11 bankruptcy protection, introduced into the Act during a major legal reform in 1998, following the 1997 Asian financial crisis.
Debt Restructuring as Part of Business Rehabilitation

The notion of business rehabilitation centers on the potential for Thai Airways to compete in the world of aviation at normal times in the aftermath of the pandemic, amid the reality that there is no end date to the hiatus of zero income and how much funding is needed to bridge the gap.

Looking at the bright side, that dormant period could last anywhere between 12-18 months until scientists successfully come up with a mass production of vaccines—sometime in 2021. The period in-between could turn out into productivity by restructuring Thai Airways debt, a significant tool to aid the ailing airline under the process of business rehabilitation.

The process travels through a specialized court, the Central Bankruptcy Court, tasked with revitalizing down-but-not out companies and opening for service since 1999, operated by seasoned judges with actual experience of more than two decades.
“Hair Cut” Again?

The word, “haircut” was on everyone’s lips as a catchphrase associated with the financial crisis of 1997; it means a debt forgiven by creditors so as to keep the debtor company afloat, less laden with a lighter burden of debt.

The expression is no doubt a darling to all the debtors and, by an equal measure, abhorred by creditors. Thanks to COVID-19, the catchphrase is being revived again.

The good news for the national flag carrier, listed on the Stock Exchange of Thailand, is, under a business rehabilitation plan, a haircut will certainly be on the table.

The haircut is expected to offer a great reduction of its debt load, rearranged and spread over longer years to enable it to afford debt payments while it is staggering to its feet, recovering from the setback.

State Enterprise No More, Means Nothing to Creditors

Until late this month, the airline had historically always been characterized a state-enterprise, with more than 50% of its shares owned by the government, and was governed by strict state-enterprise laws.

Its operations have been scrutinized from time to time by its 20,000-strong employees through a powerful labor union.

Priming for a business rehabilitation and adding flexibility to the financial and operational maneuvering inevitable in a business rehabilitation, the airline’s status as a state-enterprise ended in recent days after the government transferred its shares to a government-controlled fund leaving its holding below the 50% benchmark.

The complicated state-enterprise laws will no longer apply and the labor union existing under those laws will be disbanded.
To creditors, this public-to-private sector change does not mean much. It simply puts the company at par with other ordinary corporate enterprises, freed from government rules.

Minority Creditors Bear the Brunt

As the news of a possible haircut is enthusiastically received by the company, the message is not viewed in a positive light by creditors, whose debt will only get paid a few cents on the dollar.

Not something they foresaw at the time of entering into a deal with this supposedly solid state-enterprise, well-backed financially by the government.

Notwithstanding the company’s status as a state-enterprise having ended, its private-sector status will be assumed only in name and on paper, and the ardent support by the state, in one form or another, will continue indefinitely.

In a business rehabilitation scenario, a haircut on a new schedule of debt service can only be executed by a majority of creditors, agreed by the debtor, and approved by the court.

Hit hard would be the minority creditors who disagree with the haircut and with the extended payment timeline, yet are bound by law to go along.

The Planner, the First and Foremost Player

The haircut is not a free lunch and has to be traded with a massive corporate reorganization of the company and severe cost-cutting programs. Rumors of a layoff of thousands of employees—up to half of the workforce–are swirling in the market.

Any parts of the business that could be considered as slipshod and inefficient would be eradicated.

All this will come in a package of a business rehabilitation plan encompassing the most crucial part of the process: how to get the airline into the money-making mode again.

The plan will be drafted by a professional planner appointed by the court for the approval of a general meetings of creditors.

Even though an individual person, a legal entity, a group of persons, the creditors or even the airline or its executives are eligible to be tapped as the planner, not just anyone can serve the function.

They have to be nominated by a meeting of creditors and confirmed by the court and, except for the debtor and its executives acting as their own planner, have to be registered with the Bureau of Business Rehabilitation, the Execution Department, the Ministry of Justice.
Qualified Thai and foreign planners are anticipated to be working together.

Wirot Poonsuwan is Senior Counsel and Head of Special Projects at Bangkok law firm Blumenthal Richter & Sumet and can be contacted at wirot@brslawyers.com.

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