Hong Kong Airlines to face second hearing of US$6.2 billion debt restructuring in the UK after revenue slump and headcount cut

Hong Kong Airlines will face a second hearing in a British court next month on its US$6.2 billion debt restructuring plan, as the carrier’s path back to profits was waylaid by the travel slump during the Covid-19 pandemic and a 65 per cent slash in headcount.

An ad hoc group of bondholders with 40 per cent of the voting rights on HK$6.6 billion (US$841 million) of perpetual notes will hold a vote on the debt workout plan by the airline, a unit under the former serial asset buyer HNA Group, which went bankrupt in 2021. They are likely to reject the plan at a creditors’ meeting on November 25, according to people familiar with the matter. The High Court of Justice of England and Wales is due to hear the matter separately late next month.

The crux of the dispute is the plan by Hong Kong Airlines to separate its creditors into three groups, comprising unsecured creditors, critical lessors, and holders of the perpetual bonds, according to documents seen by the South China Morning Post.

Under the proposal, the perpetual bondholders will receive an upfront payment equivalent to 2.5 per cent of the outstanding principal amount of the notes, a non-discretionary performance-linked distribution amount and later annual distributions “solely at the election of the issuer.” The airline also proposed a drastic haircut, slashing the principal amount of the notes from US$683 million to US$100 million.

In an October 25 hearing, the bondholders argued that the segregation placed them in an unfavourable position.

The recovery rate is too low, said one bondholder who declined to be named, saying that his firm will vote against the proposal while discussing with other bondholders to further negotiate with the airline.

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The outstanding amount of the perpetual bonds issued under a special purpose vehicle Blue Skyview Company, ballooned to HK$6.6 billion including interest, from an original issuance amount of US$683 million. The jump came after the carrier deferred payments, resulting in a hike in interest rate by five percentage points to 12.125 per cent in 2020.

“The restructuring of the Company is still in progress. Since the related negotiation is subject to commercial sensitivity, the Company is not in a position to disclose details at this stage,” Hong Kong Airlines said in an emailed reply to the Post.

Hong Kong Airlines has suffered from the pause of lending and recalls of certain loans made to the carrier in recent years, after HNA Group was embroiled in a debt crisis. The carrier was also hit hard by the social unrest in Hong Kong since 2019 and later the coronavirus pandemic which had grounded global carriers.

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The saga is clouding one of the few major airlines in the city, an aviation hub in Asia. The debt restructuring could give a hint on the future direction of a Hong Kong-based carrier, after its controlling shareholder HNA Group’s bankruptcy restructuring had placed the control of HNA’s core airline assets to steel and commercial conglomerate Fangda Group.

The UK hearing is not the carrier’s sole battlefront. It faces a hearing on October 31 at the High Court of Hong Kong, where the Irish aircraft leasing company Stellar Aircraft Holding has petitioned to wind up Hong Kong Airlines pending since March.

Hong Kong Airlines’ operating revenue had plummeted 85.3 per cent to around HK$1.26 billion for the period between February 2020 to January 2021 from the same period a year earlier, according to a letter provided to creditors earlier this month seen by the Post. Its workforce was downsized by more than 65 per cent to 1,224 between January 2020 to April 2022.

The airline had HK$49 billion of debt as of December 31, 2021, with around 46 per cent, or HK$22.5 billion, owed to financial and operating lessors of aircraft and aviation parts, the largest group of creditors. Its 13.4 per cent indebtedness or HK$6.56 billion was owed to holders of the perpetual bonds.

HNA Aviation and other unnamed joint venture partners are investing HK$3 billion in exchange for the issuance of new ordinary shares in the carrier, which will represent at least 94 per cent of the issued shares of Hong Kong Airlines, as part of the broader restructuring.