Garuda shelves partner search as debt talks continue

This story is sourced from

Garuda Indonesia has shelved its search for a strategic equity partner as it continues to work on a badly needed debt restructuring.

The Indonesian flag carrier has been in financial difficulty for some time and over the past six to 12 months has been looking for a strategic equity partner.

But it says in a statement that it informed its creditors at a meeting in Singapore last week that it has “suspended its search for a strategic partner for Garuda pending the successful completion of a debt restructuring”. It does not elaborate.

Garuda has been suffering badly as a result of intense competition at home, high fuel prices, higher interest rates and a drop in demand following terrorist bombings on the resort island of Bali.

It stopped making principal payments on its debt of nearly $800 million at the end of 2005, although it has continued to make interest payments as talks have been taking place with key creditors on a hoped-for debt restructuring.

Garuda says that during its meeting last week in Singapore with holders of floating rate notes it informed creditors that it needs to maintain the “standstill” on the repayment of principal on its unsecured debt and has extended this to the payment of principal on six Airbus A330s on finance lease arrangements.

It says it now plans to submit a detailed restructuring proposal to creditors after a revised business plan is completed this month.

“As Garuda had described previously, it has proposed a restructuring framework that divides its debt into two tranches with one tranche being restructured with a commercial repayment profile and the other tranche being bought back at a discount through an auction mechanism or restructured with an extended maturity,” it says.

“Garuda has already received commitments for significant government support that form the framework for a restructuring. The Government hopes that Garuda can complete its restructuring in a timely fashion and that the airline can be revitalised.”

Last year the Indonesian government approved the conversion of $36 million of debt into equity and approved plans for a capital injection of around Rp1 trillion ($109 million), of which Rp500 billion has already been made available.

“These funds are retained in a segregated account pending a successful debt restructuring,” says the airline. “The debt conversion and financial support already agreed by the Government represents approximately $145 million to be provided to Garuda.”

The airline also says the Government has agreed to extend the conversion period for convertible bonds worth nearly $100 million by two years to November 2008.

“It is extremely positive that we are engaged in frank and open talks with our financial creditors,” says Garuda president and CEO Emirsyah Satar.

Related story