How restructuring is helping airlines weather COVID-19

Examinership and other financial structures can be a chance to streamline and strengthen in anticipation of recovery, writes Jonathon Keane. 

As seen across the industry, the coronavirus pandemic and travel restrictions have seriously impacted parts of the aviation industry with airlines and aircraft lessors restructuring their businesses to stave off the worst-case scenario and buy time to prepare for an uncertain future. 

Many international airlines have sought protection of the courts in various jurisdictions around the world over the past six months. Some companies however have looked to the Irish courts for relief. Earlier this month Norwegian Air Shuttle became the latest airline to make headlines with the company seeking Examinership in the Irish High Court. It is a customer of many Irish and international companies so it caused a flurry of activity by creditors to understand the potential consequences. As another example, CityJet exited Examinership in August with the company continuing as a going concern and the restructuring leading to job losses.

During the summer, Limerick-based Nordic Aviation Capital (NAC), the world’s largest lessor of regional aircraft, secured a Scheme of Arrangement with investors through the Irish High Court which involved an agreement with creditors for a standstill and deferral of obligations and a further €60m equity investment.

Marie O’Brien, head of aviation and transport finance at A&L Goodbody, said that the start of the pandemic crisis saw a lot of “firefighting” as companies scrambled to adjust to the sudden drop in revenue as airlines stopped flying. ALG's aviation group has been working closely with the firm's insolvency and restructuring group to help clients navigate the pandemic. “There are airlines around the world going through various types of bankruptcies. Some will fail but some will come through reshaped and streamlined to respond to the new circumstances."

For aircraft leasing companies, the impact has been stark. Ireland houses a significant aircraft leasing industry with 14 out of 15 of the world’s largest lessors based in the country and they will feel the crunch too. David Baxter, head of the restructuring and insolvency group at A&L Goodbody, said that lessors are in a difficult position trying to gauge when any type of normality will return. “When you look at NAC back in Q2 2020, one of the company's aims was to buy more time and get through the traditionally slow winter period and into the first half of 2021 when hopefully there will be greater clarity for the aviation industry in terms of revenue projections for ensuing years. That’s the big issue,” he said. 

Baxter said that there is no one blueprint for restructuring of aviation firms but there are a variety of mechanisms under Irish insolvency law which can help aircraft lessors and airlines restructure their businesses. Nordic Aviation chose a creditor Scheme of Arrangement through the Irish courts to come to an agreement with creditors while CityJet pursued Examinership and did so successfully. “Examinership typically implements both an operational and a financial restructuring; it's a powerful and effective tool. It's not dissimilar to US Chapter 11. Schemes of arrangement tend to be restructurings whereby the only creditors affected are the financial ones – plus sponsors - and where the deal is reached before the company has tripped covenants and defaulted,” said Baxter.

O’Brien added that the varying types of profiles of companies means different restructuring requirements. “As the months progressed, liquidity options have opened up,” said O’Brien. “I think there is appetite out there to invest in this industry. What you may find is that there are out of court corporate restructurings in terms of joint ventures or M&A activity in this space in order to capture that investor appetite as well,” she said.

She said that in the coming years the leasing industry is going to take on an even more central role in aviation as airlines lease more aircraft rather than acquire and hold ownership interests to assist with their liquidity planning. Ireland will see its position a prime leasing jurisdiction reinforced, O’Brien explained. The industry has existed in Ireland since the 1970s and provides a reliable and stable legal environment to do business as well as the availability of talent and experienced advisors. “The aviation industry will come back and people will start flying and lessors will be how the aircraft are supplied to the airlines.”

Ireland has also shown that in the appropriate circumstances it can be an effective jurisdiction for aviation restructuring proceedings as the industry continues to grapple with the Covid-19 crisis. “Norwegian Air has just filed for Examinership and one of the questions that we are frequently asked by creditors is why was Examinership chosen over Chapter 11,” said Baxter. "Examinership has a lot of similarities to Chapter 11" says Baxter. "In terms of what is required for this restructuring, there will be fleet reduction, significant compromise of creditors, other operational restructuring steps and new investment required – that can all be delivered via Examinership; it’s an effective tool to turnaround a company."

Baxter said the Examinership process and other avenues like Schemes of Arrangement in Ireland are quick and effective compared to other jurisdictions while also being overseen by a robust legal system that is predictable and efficient. 

O’Brien added: “Ireland would not have experienced many significant aviation related restructurings up to now. The industry previously didn't have to deal with something as globally destructive as Covid, albeit it had other issues to deal with.”

Irish legislation provides lessors and financiers with strong protections, especially after Ireland adopted Alternative A under the Cape Town Convention, an international treaty dealing with aircraft assets during an insolvency, in 2017.

The news on vaccines is a positive development but there is pain still to be felt in the aviation industry and more potential bankruptcies and restructures will be needed to reshape the industry.

There is no one blueprint for how this will be done, but according to A&L Goodbody, there will likely be a mix of new and existing investors and structures as companies position themselves for the recovery.

For queries in relation to this topic or any other aviation finance or restructuring & insolvency matter please contact Marie O'Brien, Partner, or David Baxter, Partner, A&L Goodbody or your usual A&L Goodbody contact.

This article first appeared in the Business Post written by Jonathon Keane on Sunday 29 November 2020.  

Date published: 30 November 2020