Norwegian Blues

An ex-Airline or merely resting?

Norwegian Air Shuttle may be shuffling off this mortal coil after a bout of Covid with some observers parrotting that it is now an ex-Airline. The low-cost operator counters that it is merely resting and filing for Irish Examinership will jolt it back into life. 

Norwegian was struggling for air before the Covid-19 pandemic, being forced to raise equity three times from 2017 to 2019. This year, it tried to avoid extinction via a series of debt for equity swaps, launching yet another equity raising and securing a state-aid package from the Norwegian Government with NOK 3bn of loan guarantees. In total, NOK 18.2bn was added to equity in 2020, as it pined from the Fjords.

The airline sought compensation from Boeing for the grounding of 737 Max aircraft, while cancelling orders for another 92 737 Max planes and five remaining 787s. 

But to avoid being bereft of life, Norwegian Air needed further funds in first quarter to support working capital for 2021. On a conference call in August, it claimed enough liquidity for another six or seven months, but renewed lockdowns hasten its demise. 

The Norwegian Government on 9 November decided it was not merely stunned by the virus, the capability of flight was lost, and it wouldn’t recover its voom. Even worse, Norway then announced further travel restrictions further impacting its health. The Airline hastily cancelled its Q3 earnings call, and filed on 18 November

It initiated an Irish Examinership process for two of its subsidiaries, adding that the wider group will receive protection as a related party. The aim is to reduce debt, right size the fleet and secure new capital, said Norwegian in its release. 

A Reuters report quoting a spokesman for the Irish Courts service said the application will be heard on 7 December. The company claims enough liquidity to last the five-month process. 

“Our aim is to find solutions with our stakeholders that will allow us to emerge as a financially stronger and secure airline.” 

Reasons for Irish Examinership 

According to a primer from Deloitte “Examinership is a process used by a company in financial difficulty to reach a binding agreement with its creditors that typically involves a significant portion of its debts being written off by the company’s creditors.”

The company is protected from its creditors by the court during the examinership period, a receiver or liquidator cannot be appointed during the five-month process. The aim is to give breathing space to find fresh investment and for an agreement to be put in place.

Proposals are drawn up by the Examiner who can devise an Irish Scheme and convene a creditors meeting. He must persuade at least one class to accept the scheme before it can be brought to the court for approval. This allows the possibility for a cram-down. 

Importantly, unlike with a UK scheme leases can be renegotiated or disclaimed in Examinership. 

As you can see from the excerpt from the latest financial report, financing and lease liabilities make up the bulk of the airlines’ borrowings. 

Most of the aircraft lessors are incorporated in Ireland and Examinership might circumvent the lack of moratoria for aircraft lease under typical insolvency for most restructuring regimes, noted one analyst. Under Chapter 11, according to a Winston & Strawn briefing note, the automatic stay for aircraft equipment is just 60 days.

During 2020, Norwegian agreed with its aircraft lessors to convert a total of approximately $886m of lease liabilities to equity. Liabilities converted “consisted of overdue payments at the conversion date, contractual rent forgiven for the period until the end of June 2020 and the effect of a reduction of the lease rates from July 2020.”

Lessors agreed to a “power by the hour” (“PBH”) arrangement from 1 July 2020 until 31 March 2021, meaning that Norwegian would only pay rentals when it is operating the leased aircraft. It settles the rent for operated aircraft in cash based on operated block hours and the agreed price per hour. The difference between the cash settlement and the contractually agreed revised monthly lease rate settled in shares after the PBH period, in April 2021.

On 9 November Norwegian said it would furlough an additional 1,600 employees, leaving only 600 employees employed. 15 of the 21 aircraft in operation the past months will be parked.