National flag carrier Garuda Indonesia will seek a suspension of debt payments to creditors and lessors under a “standstill agreement” in order to avoid bankruptcy, a senior government official said on Thursday (Jun 3).

The coronavirus pandemic has put the state-controlled airline’s finances under serious strain with a negative cashflow of about US$100 million a month and ballooning debt, Kartika Wirjoatmodjo, Indonesia’s deputy minister of state-owned enterprises (SOEs), told a parliamentary hearing.

The carrier needed a “fundamental restructuring” to reduce its debt to around US$1 billion to US$1.5 billion, from US$4.5 billion currently, to continue as a going concern, he said.

“We are appointing legal and financial consultants to begin this process and we must immediately conduct a moratorium (of debt repayments) or a standstill in the near term,” Kartika said.

“Because without a moratorium, it will run out of cash in a very short time,” he added.

Kartika said the process will be complicated by having parties within and outside Indonesia, including holders of its US$500 million Islamic bonds (sukuk) in the Middle East, with risks of disagreements leading to legal problems.

“We hope that 270 days after the moratorium, we can conclude the restructuring,” Kartika said, warning failure to reach a quorum “could lead to bankruptcy and this is what we’re trying to avoid”.

Garuda previously extended the maturity of its sukuk, due last June, by three years after a drop of passenger volume during the pandemic.

There was also an 8.5 trillion rupiah (US$594.4 million) government bailout via a convertible bond sale in 2020, but Kartika said the finance ministry halted payments after just 1 trillion rupiah because Garuda did not meet some covenants.

The deputy minister said Garuda’s finances were already strained before the pandemic, with higher-than-normal leasing costs for a fleet that includes planes made by four different manufacturers.

Its international routes were also unprofitable, Kartika said.

On Wednesday, SOEs minister Erick Thohir told reporters Garuda will focus on serving domestic routes during the restructuring process.

Garuda’s chief executive Irfan Setiaputra declined to comment.

In a stock exchange filing last week, Garuda said it was negotiating with all lenders and lessors to mitigate insolvency risks and developing its cargo business to improve revenue.

SOURCE: Reuters