Global Aviation Restructuring Index

SCORING WITH GARI

WFW’s Global Aviation Restructuring Index (GARI) launched on 19 October 2021 and has already attracted praise for its innovation and utility. It was updated on 18 January 2022 to cover the restructuring procedures in four new jurisdictions: Chile, Colombia, Israel and the Philippines.

Having spent several weeks collecting and scoring the data for each of the 56 restructuring procedures spanning 30 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.

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 CMP.

Listed alphabetically in the table above are all 56 restructuring procedures and their respective composite scores. As noted, 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 scheme of arrangement, Irish scheme of arrangement, UK restructuring plan and Chapter 11 bankruptcy proceeding occupy four of the seven top spots. This is no surprise for the reasons discussed and helps explains why they are popular internationally. A surprise entry for second place (at least for those outside North America) is the Canadian ‘Debtor in Possession Proceeding (Proposal)’ (DIPPP) which ranks second behind only the UK scheme 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. The two Israeli restructuring procedures (‘Composition with Creditors without Commencing Proceedings’ and ‘Economic Rehabilitation under the Insolvency Law 2018’) are also surprise entries, both scoring highly for speed and cost, accessibility to all debtors and, in the case of the latter, having very strong debtor protections (including, similar to Chapter 11 proceedings, the ability to terminate unexpired leases and the availability of cross-class creditor cram down).

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.