"All human life was in this deal"


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Issuer: GPA Amount: $4.05 billion Launched: March 11 Lead manager: Morgan Stanley

Issuer: GPA
Amount: $4.05 billion

Launched: March 11
Lead manager: Morgan Stanley

They managed it, but only just. In early March, GPA sold $4.05 billion of asset-backed global bonds, hauling the company back from the brink just weeks before directors at the Irish-based aircraft leasing company would probably have been forced to apply for receivership.

The issue, one of the largest and most complicated bonds ever sold outside the government sector, capped 18 months of intensive negotiations. Right up to the wire it looked as if the deal could fail, with one creditor refusing to agree to details of the restructuring.

"All human life was in this deal," said John Tierney GPA's chief financial officer. Alongside the securitization, the company had to settle litigation, reschedule aircraft orders, and sell off loss-making subsidiaries. Failure to complete any of these could have scuppered the deal.

Channelled through special purpose vehicle, Airplanes Group, the $4.05 billion bond issue parcelled up cashflow from 229 airplanes owned by GPA in the first-ever securitization of rental income from airplane leases. The proceeds from the issue allowed the company to pay down $2.9 billion of bank and secured debt as well as to raise new money for operating purposes and to pre-fund further debt payments. Although the first slug of debt didn't actually fall due until September 1997, Irish company law requires directors to take a view on company solvency over an 18-month period. Failing to complete the Airplanes financing by June would have forced the GPA board to apply for examination, Ireland's form of receivership.

"It was this deal or examination, more or less," says Karl Essig, a managing director at Morgan Stanley, GPA's adviser and underwriter of the bond issue.

The wings almost fell off the deal right at the end, when the Pennsylvania-based Public School Employees' Retirement System (PSERS) refused to agree to details of the restructuring. A noted hardball player in fund management circles, PSERS was holding out for better terms on a $100 million chunk of second preference shares it had bought in an earlier GPA refinancing. The preference shares were not directly included in the restructuring and, on any valuation, were worth far less than their face value.

PSERS held a trump card for its high-stakes poker game with the company and its advisers: around $40 million of secured notes. That class of debt was included in the refinancing along with the bank lines, and, for the deal to go ahead, all holders had to sign.

Even if GPA wanted to strike a deal with PSERS it couldn't have done so; the company had always stressed that a cardinal feature of the restructuring was that all creditors remained in the same relative position as before, after the deal had been done. Cutting a deal with PSERS would have laid the company open to accusations of favourable treatment from other classes of creditors.

After weeks of mounting tension the clash finally broke into the open on February 6 when GPA issued a press-release outlining the bleak future for the company if PSERS continued to hold out on the restructuring. A few days of increasingly fierce negotiations between Morgan Stanley and PSERS led to the impasse finally being broken on February 16. Lazard Frères bought out the PSERS-held preference shares at 25 cents in the dollar, and all of the secured note-holders received a fee for surrendering the convertible element of their stakes.

That agreement cleared the way for the Airplane deal to fly. "After that, all we had left to do was sell $4 billion of bonds," says Essig who had co-headed the Morgan Stanley effort from the start, along with Scott Bok, a managing director in the firm's restructuring and mergers and acquisitions department. Key players at GPA included Tierney and Patrick Blaney, who had been elevated to chief executive during the 1993 refinancing.

It was the new GPA management team that hired Morgan Stanley to construct a long-term financing plan for the company back in August 1994. Following an abortive IPO in 1992, GPA had been rescued by GE Capital of the US, which bought 35 planes from the company at a cost of $1.3 billion. GE also took over the management of the GPA fleet as well as acquiring an option to buy a majority stake in the company until March 1998, since extended until October 2001.

The 1993 GE intervention averted impending disaster, but it didn't promise the company a long-term future. "It was an uneasy alliance between various classes of creditors and new investors," said Tierney. "It was at best a breathing space."

The GPA board could not assume that GE would exercise its option, and so needed a refinancing plan that would take the company beyond 1998.

Once the banks had been corralled into a one-year debt extension, GPA and Morgan Stanley examined six alternative long-term plans, including further bank refinancing and a high-yield bond issue. One by one, all were discarded, except the securitization of most of the company. "It seemed an outrageous idea at the time," says Tierney. "But the more we examined it, the more it seemed to make sense."

Morgan Stanley's Essig explains that the company had strong cash-streams flowing from its aircraft portfolio; its problem was that the maturity of its liabilities didn't match, and nor could they be made to - save by securitization. Hence began Project Atlanta, the template that was fashioned into the Airplanes Group.

Securitization wasn't entirely new to GPA - it had parcelled up and sold aircraft via two aircraft lease portfolio securitization (ALPS) transactions in the past - but this one was different.

All previous aircraft securitizations had depended on eventual sale of the underlying aircraft to pay off principal; this structure was created in order to harness the income stream from the leases themselves, allowing the vehicle to realize more of the value of the portfolio. (Aircraft sales are necessarily a lumpy process and the rating agencies assume that each plane may be sold at the bottom of a business cycle. Rental rates go up and down as well, of course, but agencies can price in the expected upswings as well as the downturns.)

By December 5, most of the legal and tax issues had been addressed and the Airplanes structure had been sufficiently honed to allow an SEC filing. A Morgan Stanley-led syndicate of 17 banks launched the issue on March 11, following a two-week worldwide roadshow .

"It was a buyers' market," says one syndicate member. "It was a deal that had to get done."

But for fair pricing, don't read rip-off for the issuer. Structuring the issue and selling it into the capital markets allowed GPA to realize 87% of the market value of the Airplanes portfolio, as against 75% advanced by the banks and the secured note-holders.

For that financial alchemy Morgan Stanley received fees estimated at between $30 million and $40 million.