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A raw deal from AAX

THIS column had previously written about AirAsia X Bhd’s (AAX) proposed restructuring scheme as published on Dec 21, 2020. At that point, a call was made for AAX to come clean on the figures that constitute its restructuring scheme and whether the RM63.5bil figure being bandied about then was an overestimation or otherwise.

Well, guess what? AAX, in a 127-page explanatory statement to the scheme’s creditors last week, outlined a planned restructuring scheme involving RM33.65bil, comprising RM4.27bil in outstanding accrued liabilities and RM29.38bil in termination claims, into just RM21.3mil, which will be paid one year after the scheme is effective.

In other words, AAX is seeking a waiver of a whopping RM33.63bil.

However, in reality, AAX does not make a single settlement with respect to the above termination claims, and in essence, the restructuring is only with respect to RM4.27bil of outstanding accrued liabilities, which are again broken into Class A, B and C creditors.

AAX has also thrown in a sweetener to this restructuring scheme, whereby Class A and Class B creditors will be entitled to receive a proportionate share of AAX’s earnings before interest, tax, depreciation, amortisation, lease rentals, and where applicable restructuring cost (Ebitdar) in excess of RM300mil for the financial years between 2023 and 2026.

Certain creditors are defined in both Class A and Class B and this consists of airport and authorities amounting to RM165.8mil, other aviation creditors (RM36.9mil); financial institutions (RM332.9mil), and maintenance providers (RM72.9mil).

The next group, the Class B creditors comprise the largest group of creditors and these are the passengers who had purchased advanced tickets amounting to RM517.1mil; lessors (RM444.3mil); related companies (RM370.9mil); engine suppliers (RM326.1mil); travel and other charter agents (RM82.7mi) and trade and non-trade creditors (RM57.2mil).

Airline passengers are not creditors

It is perplexing to think that AAX has classified paying customers as creditors. First, it is AAX’s business model that it sells tickets in advance as do many other airlines. Second, when these advanced sales are made, the services are not rendered until a passenger has made the trip.

Third, when monies are received from the sale of advanced tickets, the correct approach of handling the amounts received is to place them in trust, and only when the services have been rendered, the airline is allowed to drawdown from the trust account.

Yes, the pandemic was unforeseen and has impacted the airline business greatly, but don’t the passengers deserve a refund ringgit for ringgit? It is unfair for AAX to treat customers, who have been loyal and supportive, by giving them in return today a mere RM10 for every RM2,000 worth of ticket purchased.

As many of the passengers may have purchased flight tickets costing only several hundred ringgit, they may even forego their entitlement altogether, as the payout is meaningless to begin with.

Hence, they have every right to demand AAX to return what is owed to them in full, even without interest. After all, paid passengers have been demanding this for a while now and all AAX could come up with was a credit. This credit now has near to zero in value and the promise of a refund has not been fulfilled.

AAX would not face this problem if the monies received were kept in trust. In addition, even the authorities should have come down hard on AAX as the Malaysian Aviation Commission (Mavcom) has the powers to do so. Many have asked whether AAX or even AirAsia Group should be left off the hook just because they are impacted by the pandemic.

Furthermore, AAX had said before in its previous announcement related to this restructuring scheme that airline customers who had purchased or made advance payments for flights will receive travel credits with extended validity for future travel or purchase of seat inventory. So, why the change of classification for these poor passengers who have now been made even poorer?

For the current scheme, according to AAX’s s explanatory statement, where the settlement sum due to any scheme creditor of AAX is less than RM50 in aggregate, the amount due will be credited to the customer’s account if the customer has an account with AAX, or paid in cash if the customer does not have an account.

In essence, if a passenger had purchased tickets worth RM10,000 and below, the settlement amount is not in cash but another credit, which an affected passenger may or may not be able to utilise in the future.

It is a given fact that almost all airlines around the world have struggled during the pandemic, and many have refunded monies that were paid by passengers in the form of a cashback.

The second best solution is a credit for the monies owed, but that too has its negative effect as the value of the credit may have deteriorated post-pandemic compared with pre-pandemic times. To have customers receiving only 0.5% or RM5 for every RM1,000 that was paid is being treated worse than shareholders.

AAX’s share price today is approximately 9.5 sen per share. Investors who had subscribed to its initial public offering (IPO) at RM1.25 and subsequent rights issue of three new shares for every four shares held at 22 sen per share, have a theoretical cost of 80.9 sen.

Hence, at 9.5 sen per share, the shareholders have lost 88.3% of the value of their investment. But why are passengers being subjected to a 99.5% haircut? Clearly, passengers are being given the raw end of the stick in this restructuring scheme.

Assuming this restructuring scheme is approved, AAX shareholders will undergo a capital reduction, a share consolidation exercise on the basis of ten AAX shares into one share, and a rights issue exercise on the basis of nine shares for every five shares held at approximately 40 sen per share, which will raise approximately RM300mil.

This will see the theoretical value of the investment of the original shareholders of AAX from the time of its IPO to approximately RM3.14 per share but the adjusted share price on an ex-all basis after the rights issue exercise is almost RM0.60 sen per share.

Hence, shareholders’ loss will be 81% from their original investment cost, against a near total loss for passengers. This again shows that airline passengers are not treated fairly when compared with shareholders, who seem to be the least affected.

Travel agents are just agents

Even travel and charter agents have been classified under Class B creditors and this too appears wrong and they too may reject this restructuring scheme. Travel agents have been the second-biggest supporters of AAX and to treat them as creditors is entirely misleading.

For them, there is no reason to accept a meagre 0.5% settlement when they are just agents. A lot of them have suffered greatly during the pandemic and a full settlement is only fair. After all, monies owed to travel agents are as a result of services that have been rendered to AAX.

One of the challenges in AAX’s recapitalisation plan is understanding the level of liabilities that is defined in the restructuring scheme, especially those related to its sole Class C Creditor, Airbus.

There are two parts to this exposure, one is accrued liabilities of RM1.86bil and the other is RM17.17bil in termination claims, bringing the total to RM19.03bil. As part of the restructuring scheme, only the accrued liabilities are being dealt with and AAX will settle the amount with a payout of RM9.3mil, while the termination claims will be waived in its entirety.

Recently, AAX made headlines when it reported its sixth quarterly results for the financial year ended June 30, 2021. AAX reported a whopping loss of RM24.63bil, which included an accounting provision of RM23.8bil under MFRS137, as the company made a provision during the quarter for contractual liabilities.

AAX also highlighted the fact that the contractual liabilities that were provided in the accounts will be waived upon successful completion of the debt restructuring exercise. The issue here is whether this provision was even really necessary and why was it that AAX deemed fit to put through the provision in the Q6 period but none before this.

After all, AAX has a huge aircraft order sitting under capital commitments amounting to a whopping RM136.8bil as at June 30, 2021. If they were off-balance sheet items before, why are some of the amounts now being recognised on the balance sheet? Why didn’t AAX recognise them earlier when AAX is aware that it is not going to meet its contractual liability?

What happens to the current RM136.8bil capital commitment that is described in the notes to the accounts post-debt restructuring? Will AAX be taking another hit one or two years down the road again?

Failure is an option

According to AAX, a failure to implement the scheme will likely result in insolvency and/or liquidation of AAX and may cause material losses to the stakeholders of AAX.

However, judging from the deep haircut that almost everyone is taking, scheme creditors may be better off rejecting the proposed restructuring.

Furthermore, the downsized AAX post-restructuring and post-recapitalisation is simply too small to compete in the market, as shareholders’ funds by then will be less than RM500mil and that too on the assumption that the rights issue to raise RM300mil is fully taken up and a private placement exercise of 500 million new shares at 40 sen per share, raising another RM200mil, is completed as well.

The new shareholder(s) via the private placement is effectively subscribing the AAX shares at a price that is 33% cheaper than AAX’s current share price and if AAX does turn around after this whole exercise, the main beneficiary of the share price appreciation will be the new shareholder(s) from the private placement exercise, which collectively will own 30% of the enlarged share base of the company, post-restructuring.

Another point of note is that there are several excluded creditors that are not part of this exercise and they include tax authorities from the US, Korea, India (both income taxes and goods and services tax), Taiwan, Indonesia as well as the Transportation Security Administration of the US.

AAX makes no mention of the amounts involved but only explained that it will pursue a bilateral and separate settlement arrangement with the respective excluded creditors.

The Court Convened Meetings of AAX and its various scheme creditors will be held on Nov 12, 2021. It is hoped that the various classes of scheme creditors have a clear picture before making an informed decision.

An approval of at least 75% of the total debt value in each class of scheme creditors is present and voting either in person or by proxy is required to have the proposed debt restructuring scheme approved.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.



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