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Garuda Indonesia share trading halted after Islamic bond default

COVID-induced headaches mount for carrier struggling with debts

Garuda Indonesia is facing a host of financial woes brought about by the coronavirus pandemic.   © Getty Images

JAKARTA -- The Indonesian stock market suspended trading in Garuda Indonesia on Friday after the nation's flagship air carrier defaulted on coupon payments of a $500 million Islamic bond.

The halt is the latest page in the ailing airline's struggle caused by fallout from the pandemic and raises questions over the airline's survival amid the continuing spread of COVID-19.

The Indonesia Stock Exchange, or IDX, said trading in Garuda shares is suspended until further notice as the carrier's inability to pay the coupon on its bonds "indicates that there are problems in the continuity of the company's business." It marks the first time Garuda has experienced such a suspension.

Garuda did not immediately respond to a request for comment from Nikkei Asia on the trading suspension and the concerns expressed by the IDX.

Garuda had announced on June 3 that it was utilizing a 14-day grace period for coupon payments on the $500 million debt instrument, known as sukuk. But with the company failing to scrape up enough cash during the period, it announced late Thursday that it "has reluctantly concluded that it must continue to defer the [coupon] payment."

The airline had nearly defaulted on the $500 million sukuk last year, but managed to extend its maturity by three years.

Shares prices in Garuda have nearly halved since the end of last year, with the price closing Thursday at 222 rupiah, its lowest since early October. Garuda's IPO price when it went public in 2011 was 750 rupiah per share.

Garuda is just one of many airlines facing difficulties due to the pandemic. PAL Holdings, which operates Philippine Airlines, reported on Thursday a net loss of 8.6 billion pesos ($178 million) for the three months through March, while its capital deficit -- the difference between assets and liabilities -- worsened by nearly 10 billion pesos to 83.9 billion pesos over the quarter.

The Indonesian carrier is also dealing with a broader financial crisis. By the end of September 2020, its net debt amounted to $6.5 billion, according to its financial statement, an increase of over 300% since the end of 2019. It also has both negative cash flow and negative equity, meaning total liabilities exceed total assets.

The deputy minister at the Ministry of State Owned Enterprises said earlier this month that the carrier was losing $100 million a month.

It racked up a $1 billion net loss in the nine months ended in September, a marked downturn from $122 million in red ink during the same period last year. The company is yet to release its full-year financial results for 2020.

As part of its plans to stay afloat, Garuda is looking to slash its 142-strong fleet of aircraft in half by returning them to lessors before the lease is up. It has already returned two B737-800 NG planes to one lessor, the company said in a stock exchange filing earlier in the month.

Garuda owns just six planes in its 142-strong fleet, with others leased, according to a different stock exchange filing. Of its fleet, only 53 are in service. There are "no restrictions" under its agreement with lessors and creditors on returning the aircraft early, the company said.

The carrier is also offering an early retirement program for employees, which includes its vice president.

Garuda will need to cut costs by "at least 50%" from now to sustain its business, said independent aviation expert Gatot Raharjo. He does not see the carrier going bankrupt, however, saying Indonesia "still needs [a national] airline" and the government will ultimately step in.

Maintaining good relations with lessors even as Garuda looks to end contracts early is crucial going forward "because once the business is taking off again [after COVID-19], Garuda will need additional" airplanes and "good relationship{s} will help with [cost] efficiency, unlike now" when leasing costs are becoming a major burden on the company, he added.

Garuda had agreed to a rescue package of 8.5 trillion rupiah with the government last year, whereby the airline newly issues convertible bonds to be purchased by the finance ministry to inject cash into the company.

But Garuda says that only 1 trillion rupiah has been raised so far, with that "used entirely for payment of fuel costs to Pertamina," Indonesia's state-owned oil and gas giant. For Garuda to receive the rest of the funds it needs to hit several performance requirements of the rescue package. The airline "has not been able to fulfill" those because of distressed operating conditions under continued COVID-19 restrictions on travel," it said.

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