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Creditor-assisted rehabilitation

The lockdown measures imposed by the government to arrest the spread of COVID-19 have forced some companies to adopt extraordinary measures to enable them to maintain their operations.

Saddled by huge debts and the return of air travel to prepandemic levels a big question mark, Philippine Airlines (PAL) has been reported to be considering filing Chapter 11 protection in the United States where the bulk of its creditors are based.

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If favorably acted upon by a US court, that filing would enable PAL to restructure its financial obligations and fend off possible efforts by creditors to take over its assets while implementing its recovery program.

Ahead of that action, PAL is reportedly seeking support from the majority of its creditors to expedite the Chapter 11 proceedings.

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A similar approach has been taken by GMR Megawide Cebu Airports Corp. (GMCAC), the consortium that operates and manages the Mactan Cebu International Airport.

In a disclosure to the stock exchange, GMCAC said it had entered into an agreement with its lenders to restructure its P24-billion debt and relax the loan covenants related to its operation and management of the said airport.

GMCAC and its creditor banks, which consist of the country’s three largest private banks and two government-owned financial institutions, avoided the prospect of getting entangled in legal proceedings over GMCAC’s inability to comply with its loan obligations due to the pandemic.

The collective action was a deft move.

Under the Financial Rehabilitation and Insolvency Act, an insolvent debtor may, at its initiative, file a petition for rehabilitation with a court for, among others, the suspension of actions or claims against it by its creditors and approval of its rehabilitation plan.

A similar petition may be filed by any creditor or group of creditors with claims of at least P1,000,000, or 25 percent, of the debtor-corporation’s subscribed capital stock.

Based on past experience, a rehabilitation petition, whether voluntary or involuntary, is a pain in the neck for the parties.

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The process is expensive in terms of time and effort and, more so, financially because the parties have to pay for the services of lawyers and whoever is appointed by the court to act as rehabilitation receiver.

Worse, considering the congested court dockets, the proceedings could take years so that by the time it is resolved, the debtor may have completely shut down, or the creditors have helped themselves to the debtor’s assets so there is no business to rehabilitate anymore.

Thus, it makes good business sense for a financially distressed company or business to talk to its creditors first to find a mutually acceptable way out of its financial problem before seeking judicial relief.

By and large, banks prefer to restructure their loans to errant debtors rather than go through a loan foreclosure process or get involved in insolvency proceedings.

Besides, when a loan is considered nonperforming or bad debt and it happens to be substantial, the bank has to comply with certain accounting and regulatory requirements on its treatment.

Although some banks may be averse to debt restructuring requests because of their impact on their loan schedule and bottom line, they are sometimes forced to (grudgingly) agree to them for strategic reasons.

Who knows, what may be a financially distressed company now may get a new lease in life and be profitable again? There are many stories of businesses that were thought to be goners, only to prove their detractors wrong after a change of management.

A bank that makes or imposes unreasonable demands or conditions during restructuring discussions could find itself in the “do not entertain calls” list of erstwhile financially strapped companies that have regained their footing.

The wheels of fortune in business are unpredictable. But one thing is certain in the Philippine context, acts of compassion and understanding during times of distress are reciprocated in kind (and more) when the opportunity presents itself. INQFor comments, please send your email to [email protected]

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