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Garuda to get $600m rescue via bond sale to Indonesia government

Shareholders approve plan of beefing up state control of struggling airline

A Garuda Indonesia Boeing 737-800 at a maintenance facility at Soekarno-Hatta airport near Jakarta in January. The company will issue bonds to be bought by the government to help it ride out the coronavirus pandemic.   © Reuters

JAKARTA -- Shareholders of Garuda Indonesia, the country's flagship carrier, on Friday approved the issuance of bonds to a maximum amount of 8.5 trillion rupiah ($600 million) in a bid to save the company, badly struggling from the coronavirus pandemic.

The issuance is part of the government's rescue plan for the airline. The bonds will be purchased by the Finance Ministry through Sarana Multi Infrastruktur, a state-owned investment firm for financing and preparing infrastructure projects. The bonds will be mandatory convertible bonds with a tenure of seven years, meaning that after that period, they will be converted to stocks.

The proceeds "will be used to support the liquidity and solvency of the company," CEO Irfan Setiaputra said at a news conference after the shareholders meeting, "with the aim of improving financial position because the company already has negative net working capital and has liabilities exceeding 80% of assets."

The CEO added that he hoped the bond issuance "can encourage faster recovery [in the aviation industry], which can help national economic recovery."

If all 8.5 trillion rupiah worth of bonds are converted to shares, the government will increase its holdings in the company to 76.99% from the current 60.54%. While the government's hold on the company will increase significantly, analysts do not expect a material change to the way it is run because the state already owns a majority.

Garuda Indonesia was showing signs of recovery before the pandemic; after having gone two full years with a net loss, it managed to eke out a net profit of $6.9 million in 2019. But travel restrictions induced by COVID-19 have put the airline between a rock and a hard place again, with the company suffering a net loss of $1 billion in the nine months ended in September. The company had booked a net profit of $122 million in the same period last year.

The airline, like so many others, is now carrying fewer passengers at higher costs. Seat load factor -- the percentage of available seats occupied by passengers -- fell to 49.8% in the first nine months of this year from 72.8% in the same period last year, while the cost per available seat kilometer, an often-used measurement of airline costs, was 7 cents in the same period from 6.4 cents last year, despite lower fuel prices.

The conditions of the convertible bonds have been structured so that interest payments will not be a burden on Garuda. If Garuda's interest coverage ratio -- a measure of a company's ability to pay interests on its outstanding debt -- is below 1 at the time of payment, the airline has no obligation to pay the coupon rate -- the rate of interest paid by bond issuers on the bonds' face value. If the interest coverage ratio is 1 or above, the coupon rate will be the same as Bank Indonesia's benchmark interest rate at the time. 

The country's benchmark rate now stands at 3.75% after a surprise rate cut by the central bank in Thursday's monetary policy meeting. Garuda's interest coverage ratio was minus 3.1% as of end of September, according to FactSet.

On the U.S. Federal Aviation Administration's decision Thursday to lift the 20-month-old flight ban on Boeing's 737 Max aircraft, Irfan said that the company was "reviewing the operational feasibility" of the aircraft but it is "not a priority for Garuda to fly" the 737 Max, as "we still have several planes that have not flown" due to weak aviation demand.

Garuda operated a single 737 Max but was awaiting delivery of 49 more before the aircraft was grounded after two fatal crashes. Prior to Setiaputra taking over at the helm in January this year, Garuda was locked in negotiations with the U.S. company on whether to cancel the orders outright or to switch to other aircraft.

But 20 months after the company made the call, a final decision has yet to be made. "Our talks with Boeing are still ongoing," Setiaputra said.

Additional reporting by Bobby Nugroho and Ismi Damayanti.

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