Global Aviation Restructuring Index 2021

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GARI, GARI quite extraordinary, what does your scoring show?

WFW’s Global Aviation Restructuring Index (GARI) launched on 19 October 2021 and has already attracted praise for its innovation and utility.

Having spent several weeks collecting and scoring the data for each of the 50 restructuring procedures spanning 25 jurisdictions around the world, there has been plenty of scope for us to conduct data analysis beyond the headline debtor-friendliness and creditor-friendliness scores.

In this article, we share some of our initial insights.

All method, no madness

Each restructuring procedure covered by GARI is scored based on responses given to 33 questions. For each question, the response given feeds into one or more of the six component scores, namely accessibility, speed and cost, debtor protections, creditor rights, competency and flexibility. GARI’s scoring system is ‘two-dimensional’ and is based on a matrix of the responses to questions marked against six component scores. As an example, the response to question 3.2 on the availability of the restructuring procedure to foreign debtors feeds into the accessibility, competency and flexibility component scores (but not the other three component scores).

The extent to which a response to a question affects each component score relevant to it may be weighted differently. For example, the response given to question 3.2 potentially accounts for about 50% of the total accessibility score, but potentially accounts for only about 8% of the total flexibility score.

When creating the scoring system, care was taken to ensure there was no ‘double-counting’ or compounding of scores where the subject matter of one question substantially overlapped with another (for example, the ‘maximum moratorium period’ in question 6.2 and the ‘alternative A waiting period’ in question 7.2).

The creditor-friendliness score (CFS) is calculated by aggregating the following component scores, each weighted as indicated in parentheses: speed and cost (25%), creditor rights (45%), and competency (30%).

The debtor-friendliness score (DFS) is calculated by aggregating the following component scores, each weighted as indicated in parentheses: accessibility (10%), speed and cost (10%), debtor protections (40%), competency (30%), and flexibility (10%).

Summing up the differences

One fundamental observation about the GARI scoring system and the scores produced is that often a response to a question scoring highly against the ‘debtor protections’ score produces the inverse, a low score, for the ‘creditor rights’ score. Therefore, the creditor friendliness and debtor friendliness scores are, to some extent, ‘zero-sum’ and, consequently, the scores for each are heavily tempered by the balancing effect of the other. Because of this a ‘high’ DFS is between 55 and 65%, and a high CFS between 65 and 75%.

An interesting additional set of scores, which can easily be derived from the CFS and DFS, are a restructuring procedure’s ‘composite score’ (CMP), calculated by adding together with DFS and CFS, and a ‘balancing score’ (BAL), calculated by subtracting the DFS from the CFS, or vice-versa, with ‘zero’ theoretically representing a perfectly balanced procedure as between a debtor and the affected creditors.

"GARI’s scoring system is ‘two-dimensional’ and is based on a matrix of the responses to questions marked against six component scores."

Availability of foreign restructuring procedures

There has been a trend, since the start of the COVID-19 pandemic, of airline debtors seeking to access restructuring procedures outside of their ‘home’ jurisdiction. Notably, LATAM, AeroMexico, Avianca and PAL have commenced Chapter 11 bankruptcy proceedings in the United States, while Malaysian Airlines took advantage of a UK scheme of arrangement.

However, not all debtors are able to access foreign restructuring procedures. This could be either because the law in their ‘home’ jurisdiction generally prevents local debtors from accessing restructuring procedures in foreign jurisdictions, or because the rules governing a foreign restructuring procedure only allow local debtors in that jurisdiction to take advantage of it. For example, Italian law allows local debtors to access foreign restructuring procedures but restricts foreign debtors from accessing Italian restructuring procedures. In contrast, both French and German law prohibit local debtors from accessing foreign restructuring procedures as well as foreign debtors accessing French and German restructuring procedures. Both the UK and the US are (perhaps famously) entirely accessible to foreign debtors and impose no restrictions on local debtors accessible foreign restructuring procedures.

This is useful information for creditors to know. You can find the answers to both these jurisdictional questions on GARI on the restructuring procedure’s results page and in the dropdown list when selecting a second or third restructuring procedure to compare. The grouping and layout of the dropdown list incorporates this analysis into an easy to use format by sorting the options into ‘available’ and ‘unavailable’ restructuring procedures as compared to the first-selected country.

It is interesting to observe that restructuring procedures with lower scores are generally more restrictive, whereas higher scoring restructuring procedures are generally more permissive.

Rank and file

Score rankings can help explain trends or decisions made by debtors relating to where and why they have commenced a particular restructuring procedure. Below we examine how the various restructuring procedures rank according to DFS, CFS and CMP.

By debtor-friendliness score (DFS)

Listed in the table below are the top 25 restructuring procedures, ranked according to debtor-friendliness score. Chapter 11 bankruptcy in the United States is the top-ranking restructuring procedure on this measure. This perhaps comes as no surprise given the strong rights and protections it affords to debtors in reorganising their assets and liabilities, notably the right to reject aircraft leases, attracting a GARI ‘debtor protection’ component score of 74%, and how popular and reliable it is for local and foreign debtors as a means of bringing creditors into line, attracting a GARI ‘accessibility’ and ‘competency’ score of 98% and 86% respectively. Chapter 11 bankruptcy scores poorly on speed and cost, which we do not think should come as a surprise, with costs sometimes eating into a significant portion of the value of the debtor’s business.

Also of note is that UK, Australian and Irish schemes of arrangement, Irish examinership and UK restructuring plans also all feature in the top 13. All of these restructuring procedures are well trusted internationally and have either been utilised by or are attractive options to debtors outside of those jurisdictions, so this makes sense.

Other high-ranking restructuring procedures in the DFS table that are less well known are the new Dutch ‘Scheme of Arrangement’ (wet homologatie onderhands akkoord), ranked second and scoring 62%, the South Korean ‘Rehabilitation Proceedings’, ranked fifth and scoring 60%, and the Canadian ‘Debtor in Possession Proceeding (Proposal)’, ranked seventh and scoring 58%. All of these procedures allow foreign debtors to take advantage of them, and while debtors outside of these countries may not presently consider these to be internationally available procedures, they might do in the future subject to overcoming any language barriers and other practical obstacles.

One last thing to note on the DFS rankings is that, while a political stability modifier has been applied to all scores, any ‘home country’ bias that might exist has not been factored in. It could be, for example, that in some jurisdictions a restructuring procedure may result in a more favourable outcome to a local debtor than its debtor-friendliness score suggests. This, as well as home country familiarity, may explain why some airlines in countries which do allow debtors to access foreign procedures have opted instead to use a local restructuring procedure.

CountryRestructuring ProcedureDFS
United StatesChapter 11 Bankruptcy64%
NetherlandsDebt Restructuring Proceedings (Wet Homologatie Onderhands Akkoord)62%
FranceJudicial Safeguard (Sauvegarde Judiciaire)61%
FranceRehabilitation Proceedings (Redressement Judiciaire)61%
South KoreaRehabilitation Proceedings60%
IrelandExaminership59%
CanadaDebtor in Possession Proceeding (Proposal) under Bankruptcy and Insolvency Act58%
United KingdomRestructuring Plan57%
United KingdomScheme of Arrangement55%
AustraliaScheme of Arrangement55%
JapanCivil Rehabilitation (Minji Saisei)54%
SpainRefinancing Court-Approved Agreements54%
IrelandScheme of Arrangement54%
JapanCorporate Reorganisation (Kaisha Kosei)53%
GermanyBankruptcy Plan (Insolvenzplan)53%
NetherlandsSuspension of Payments (Surseance van Betaling)53%
SpainNon-Judicial Payments Agreement53%
ItalyPreventative Composition with Creditors (Concordato Preventivo)52%
AustraliaVoluntary Administration51%
United KingdomAdministration51%
United KingdomCompany Voluntary Arrangement50%
CanadaDebtor in Possession Proceeding under Companies' Creditors Arrangement Act50%
GermanyPreventive Restructuring Mechanism (Präventiver Restrukturierungsrahmen)50%
ItalyArticle 182bis Restructuring Agreement49%
SpainCommunication of the Opening of Negotiations with Creditors49%

"There has been a trend, since the start of the COVID-19 pandemic, of airline debtors seeking to access restructuring procedures outside of their ‘home’ jurisdiction."

By creditor-friendliness score (CFS)

Listed in the table below are the top 25 restructuring procedures, ranked according to creditor-friendliness score. A UK scheme of arrangement is the top-ranking restructuring procedure on this measure. This is primarily because of its fast speed and low cost, with a UK scheme typically concluding within 3 months, its flexibility in that it can be applied to selected creditor classes on a ‘surgical’ basis, and its reliability as a restructuring tool, including as one available to foreign debtors.

While not as good as Chapter 11 from a debtor-friendliness standpoint, and in light of its highly creditor-friendly nature, it is interesting to consider why UK schemes (and their analogues in other countries) are so attractive to debtors and why they are sometimes used, particularly by foreign debtors, in preference to a local restructuring procedure or Chapter 11 bankruptcy.

It is helpful to think of UK schemes as enhanced ‘voluntary restructurings’ (that is, those restructurings where the debtor and its creditors reach a commercial agreement to restructure the debtor’s debts without recourse to any formal, or ‘involuntary’, restructuring procedure), but with a ‘statutory wrapper’ to facilitate bringing creditors to the table. A UK scheme provides debtors with the same ‘blank canvas’ as a voluntary restructuring on which to draw up a proposal to selected creditor classes save that, once the proposal is approved by the requisite majority of creditors and sanctioned by the court, the proposal becomes binding on such selected creditor classes. It is these ‘light touch’ and ‘surgical’ characteristics, as well as their speed and cost effectiveness, which make UK schemes attractive to debtors and creditors as a ‘restructuring procedure of first instance’, often preferable to a less effective or less attractive local restructuring procedure or the ‘sledge-hammer’ feel of a Chapter 11 bankruptcy.

CountryRestructuring ProcedureCFS
United KingdomScheme of Arrangement75%
IrelandScheme of Arrangement74%
CanadaDebtor in Possession Proceeding (Proposal) under Bankruptcy and Insolvency Act72%
United KingdomCompany Voluntary Arrangement70%
United KingdomRestructuring Plan69%
AustraliaDeed of Company Arrangement66%
Hong Kong (SAR, PRC)Scheme of Arrangement66%
United KingdomAdministration66%
SpainCommunication of the Opening of Negotiations with Creditors63%
South AfricaStatutory Compromise62%
SwedenCompany Reorganisation (Företagsrekonstruktion)62%
AustraliaVoluntary Administration61%
IrelandExaminership61%
CanadaDebtor in Possession Proceeding under Companies' Creditors Arrangement Act61%
SpainNon-Judicial Payments Agreement60%
SpainRefinancing Court-Approved Agreements59%
NetherlandsSuspension of Payments (Surseance van Betaling)59%
NetherlandsDebt Restructuring Proceedings (Wet Homologatie Onderhands Akkoord)59%
JapanCorporate Reorganisation (Kaisha Kosei)58%
AustraliaScheme of Arrangement58%
SingaporeJudicial Management57%
JapanCivil Rehabilitation (Minji Saisei)57%
United StatesChapter 11 Bankruptcy57%
SingaporeScheme of Arrangement57%
MalaysiaScheme of Arrangement56%

"A UK scheme of arrangement is the top-ranking restructuring procedure on this measure. This is primarily because of its fast speed and low cost…"

By composite score (CMP)

Turning, finally, to the top 25 restructuring procedures ranked according to composite score, these are listed below. As noted above, the composite score is calculated by adding together the creditor-friendliness and debtor-friendliness scores and is helpful in comparing restructuring procedures because it cancels out the balancing effect of such scores in order to provide a more informative view of which restructuring procedures score better overall.

UK schemes of arrangement, Irish schemes of arrangement, UK restructuring plans and Chapter 11 bankruptcy proceedings occupy four of the five top spots. This is no surprise for the reasons discussed and helps explains why they are popular internationally. The surprise entry here (at least for those outside North America) is the Canadian ‘Debtor in Possession Proceeding (Proposal)’ (DIPPP) which ranks second behind only UK schemes of arrangement. Canadian DIPPP scores highly on both DFS at 58% and CFS at 72%, is speedy and cost effective and is available to all debtors, including non-Canadian debtors, who pass a solvency test.

CountryRestructuring ProcedureCMP
United KingdomScheme of Arrangement130
CanadaDebtor in Possession Proceeding (Proposal) under Bankruptcy and Insolvency Act130
IrelandScheme of Arrangement127
United KingdomRestructuring Plan126
United StatesChapter 11 Bankruptcy121
NetherlandsDebt Restructuring Proceedings (Wet Homologatie Onderhands Akkoord)121
IrelandExaminership120
United KingdomCompany Voluntary Arrangement120
United KingdomAdministration116
AustraliaDeed of Company Arrangement114
SpainRefinancing Court-Approved Agreements113
AustraliaVoluntary Administration113
AustraliaScheme of Arrangement112
SpainNon-Judicial Payments Agreement112
South KoreaRehabilitation Proceedings112
NetherlandsSuspension of Payments (Surseance van Betaling)112
SpainCommunication of the Opening of Negotiations with Creditors112
JapanCivil Rehabilitation (Minji Saisei)112
JapanCorporate Reorganisation (Kaisha Kosei)111
Hong Kong (SAR, PRC)Scheme of Arrangement111
CanadaDebtor in Possession Proceeding under Companies' Creditors Arrangement Act111
FranceJudicial Safeguard (Sauvegarde Judiciaire)110
FranceRehabilitation Proceedings (Redressement Judiciaire)110
SwedenCompany Reorganisation (Företagsrekonstruktion)109
SingaporeScheme of Arrangement105

Watch this airspace

The data contained within GARI is vast, and this article only scratches the surface in terms of analysing, commenting and drawing conclusions from that data. As we see more airlines access restructuring procedures either locally or internationally, we hope that GARI will be helpful in explaining (or predicting) the path taken.

"The surprise entry here (at least for those outside North America) is the Canadian ‘Debtor in Possession Proceeding (Proposal)’ (DIPPP) which ranks second behind only UK schemes of arrangement."

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