Government, 4 GFIs to exercise put option on PAL

The National Government and four government financial institutions are preparing to serve demand letters to Philippine Airlines (PAL) in exercise of their "put option" that would require beer and tobacco magnate Lucio Tan to come up with P2 billion to buy the shares held by the government.

Industry sources revealed that the NG and the GFIs were preparing to serve the demand letters through the Office of Solicitor General before the deadline expires on May 6, 2002.

The GFIs are the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP), the Government Service Insurance System (GSIS), Armed Forces of the Philippines-Retirement Service and Benefits System (AFP-RSBS).

After the demand letters are served, sources said PAL would have one month to respond and settle the claims of the GFIs. Failure to settle would compel the NG and the GFIs to "go after the guarantors."

Earlier, Finance Secretary Jose Isidro Camacho said the flag carrier was in a position to settle the claims since it had two strong guarantors – Fortune Tobacco and Asia Brewery – companies owned by Tan.

PAL raised legal questions on government’s plan to call on the agreement signed in 1996 where Tan agreed to buy the shares after six years, at P5 per share. However, government is determined to exercise its put option on its remaining shares, resigned to the fact that it could never recover the value of its original investment in the airline.

According to Camacho, the basic contention forwarded by PAL was that the government had agreed not to exercise its put option until the flagship carrier was restored to financial health.

This means that the transaction depends on whether PAL and the government can agree on exactly how stable PAL has become since being placed under receivership.

Although PAL’s performance has improved since being under receivership, it still has a long way to go from being out of the woods as it reported losses of P1.6 billion to P1.8 billion during its fiscal year ended March 2002. This was actually better than the original projected loss of P2.7 billion for the period.

The legal question put forward by PAL, according to Camacho, was not necessarily a problem. He said PAL had two guarantors that were financially healthy and could foot the bill to settle the transaction.

The put option agreement was signed after the PAL board agreed to require existing shareholders to raise P3.4 billion to finance its ambitious re-fleeting program.

The GFIs decided not to exercise their preemptive rights to the capital call and in exchange, asked Tan to enter into the put-option agreement.

Government used to own 40 percent of the airline but this has been diluted significantly since 1995 when Tan’s holding company, PR Holdings, controlled 67 percent.

The National Government still owns a total of 4.26 percent broken down as follows: GSIS with 1.37 percent, Landbank with 0.69 percent, AFP-RSBS 0.31 percent, DBP with 0.36 percent, PNB with 0.46 percent and NG which directly holds 0.95 percent.

Tan himself directly owns 53.79 percent while PAL employees still own 2.61 percent. The new investors that infused capital into the airline together own 35.15 percent and other investors control 4.19 percent.