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Freshfields Bruckhaus Deringer was introduced to Malaysia Airlines by a local Malaysian firm that was advising on restructuring matters and went on to win the mandate to advise on a scheme proposed by MAB Leasing Limited (MABL), the main aircraft leasing entity of the Malaysia Aviation Group.

Many airlines suffered during the Covid-19 pandemic and required operational and financial restructuring to survive. Such airlines typically have three options to reduce lease liabilities, which are among their most significant fixed costs.

First, an agreement with each lessor, but a series of bilateral negotiations can be time consuming given the variety of terms and economic levers in play, and an agreement with every lessor is not guaranteed. Second, local insolvency or restructuring proceedings. Some airlines have done this, but outcomes have not always been favourable, and finally, Chapter 11 of the US bankruptcy code, which while easy to access, is expensive and, as it amounts to a full bankruptcy, the airline is subjecting all its operations and liabilities to the jurisdiction of the US court. The creditors could also take control of the process, or the court opt to do something against the company’s interests.

Malaysia Airlines’ leases (like most outside the Americas) were governed by English law – an English scheme of arrangement was therefore a possibility, but there was no precedent for it. A scheme of arrangement is a procedure under the UK Companies Act for the court to approve an arrangement between a company and specified creditors. The terms must be approved by a majority in number and 75 per cent in value of each class of the affected creditors. Once sanctioned by the court, it is binding on all scheme creditors. Thus, the majority can bind a minority.

Johannes Vogel is a counsel in Freshfields’ finance practice. He qualified in Germany and is based in the firm’s Frankfurt office and focuses on aviation and aviation finance. “I was part of the team for the Malaysia Airlines restructuring from the first pitch session until the completion of the project, covered a significant part of the aviation and aircraft leasing related workstreams and was the main point of contact between the restructuring and the aviation teams on the transaction,” he says.

Vogel joined Freshfields in 2008 with a background in insolvency. During and following the financial crisis of 2007/2008, he focused on high-profile financial restructurings. He particularly enjoyed the international dimension of aviation finance transactions. After having helped, among others, Air Berlin before and during its insolvency, the covid-19 pandemic presented the unfortunate opportunity to combine his aviation and restructuring experiences in “what can only be described as a historically unprecedented set-back for the aviation industry”.

Among the many challenges presented by this restructuring, Vogel particularly remembers the “massive due diligence exercise” at the outset. “Together with our LegalTech specialists we developed bespoke tools that helped us collect, swiftly select and sort and display data,” he recalls. “Based on the feedback of the creditors after initial negotiations we had to rethink the strategy and recalibrate the approach to the restructuring negotiations. This could only be done in a joint process between the client, the financial advisor, technical specialists and the legal team. In practice, we had a series of very intense strategy calls to achieve that. The process was iterative, time consuming and felt painful at times. But the result speaks for itself, I think.”

As well as the pandemic being the very catalyst for this restructuring, Vogel recalls the lockdown as being particularly helpful in limiting distractions. “But, at the same time, I was very grateful once the sleep-eat-work-repeat routine ended and it became easier again to find clear demarcation lines between work and private life,” he says.

Johannes Vogel, Freshfields
Johannes Vogel, Freshfields

“I was impressed by the hard work and commitment that everybody showed despite the hardships of the lockdown for each individual and these experiences have already influenced my approach to smart and flexible working. And I see that the unavoidability of having to share details of one’s private life whilst working during lockdown (personal offices on video conferences, details of childcare arrangements etc.) has already led to a more thoughtful and understanding working environment and more honest dialogues about work-life balance.”

The effects of the Covid-19 pandemic on the aviation industry gave Vogel the chance to combine his experience in aviation and restructuring and to work on international landmark transactions in this area, including the Malaysia Airlines restructuring and the Virgin Atlantic recapitalisation. “On a professional level, this is an incredible opportunity which I had not seen coming (leaving aside for a moment all the negative aspects of the covid-19 pandemic). I am benefitting from the experiences I have had over the last 18 months and am seeking to exploit them,” he says.

About the Malaysia Airlines restructuring plan

Virgin Atlantic had recently proposed an English restructuring plan of its lease liabilities, but it was a UK airline, it had 100 per cent agreement and was deferring rather than writing off the rent, so it was not a useful precedent.

The UK scheme has several advantages over the traditional options. Unlike Chapter 11, it is not a bankruptcy and the company directors (not the court) remain in control. They select the liabilities that will be subject to scheme (so long as there is a rational basis). The scheme also allows for continuous operations under the relevant aviation regulatory regimes, unlike a local insolvency. It could be combined with some local law processes, if non-English liabilities need to be included and the jurisdiction threshold jurisdiction is low. It gives maximum recognition, given that a foreign restructuring of English-law obligations is not technically effective, and in many cases, a scheme will be quicker and more cost-effective than a Chapter 11 or local process. The court process is particularly quick, with time being devoted instead to negotiating with lessors to ensure a fair balance for all.

While Freshfields helped the Group to agree bilateral compromises with key stakeholders such as RCF lenders, aircraft finance lessors and maintenance service providers, MABL did not have consensus among its aircraft operating lessors. The firm laid out both English scheme and Chapter 11 options and persuaded the client to opt for the English scheme (which was without precedent).

There are two reasons why there was no precedent. First, creditors must be split into classes according to how they are affected by the scheme. MABL wanted to move all leases to a market rent, which meant a 10 per cent haircut for some lessors and a 40 per cent haircut for others. On a traditional analysis, this would have meant every lease being in its own class, defeating the purpose of the scheme.

Second, it was widely argued that the Cape Town Convention (CTC) prevented lessors from being forced to accept a deal without their consent. This is because, if a scheme is an ‘insolvency proceeding’ ‘no obligations of the debtor under the agreement may be modified without the consent of the creditor’. Most lessors and the Aviation Working Group, which is a lessor industry body, argued strongly that a scheme is an ‘insolvency proceeding’ and that a scheme could not proceed.

On both counts, the firm was satisfied that it was possible to use a scheme and persuaded the client to take the risk of being the first mover. Working together with financial adviser Houlihan Lokey, Freshfields developed a proposal that satisfied lessors’ concerns and achieved the significant savings the Group required, achieving high levels of support and in the end no formal opposition. The Court held that lessors could vote as a single class – a decision which has future implications well beyond aircraft leasing – and that there were strong arguments that the CTC did not prevent a scheme from being sanctioned.

The scheme offered affected lessors four options for the amendment of their lease terms, to be given effect via an over-ride agreement, which MABL would execute on the lessors’ behalf pursuant to a power of attorney. One option was to terminate the lease, take redelivery of the aircraft and receive a one-off termination payment of 115 per cent of the upper end of the lessor’s estimated liquidation return. Lessors that did not terminate would have their lease rent switched to a ‘power by the hour’ basis for 2021, following which a market rent would apply, with one of three variations from which the lessors could elect.

On 22 February the English High Court sanctioned the MABL scheme. This marked the first occasion on which an airline has used the English courts to compromise its aircraft lease liabilities. With lease rents being among the most significant fixed cost for airlines and, given the prevalence of English-law aircraft leases, it is likely that the UK scheme will be used more widely by lessees.

“Every transaction reaches a point of no return, after which failure is not an option. This is particularly true for restructurings. Whilst this was clear to everyone, I was deeply impressed by how well the Malaysia Airlines team coped with this reality,” Vogel says.

“The process in which a practical challenge, the effects of the lockdown on Malaysia Airlines’ financial situation, was overcome within the constraints of the legal framework, such as the Cape Town Convention regime, using an innovative solution through discussion between the stakeholders, industry and legal experts and with an engaged and responsive client, is a perfect example of what I always wished my job as a lawyer to be like.

“For me, this restructuring was the first time I turned to legal tech tools and am thrilled about what can be achieved with it. The scale and complexity of the lease renegotiations with dozens of lessors and the need to fit the commercial outcome in to the legal framework of a scheme of arrangement (which had no precedent and gave rise to challenging class issues) and ultimately pass the relevant test in court was a new experience to me.”

About Johannes Vogel

2017-present: Counsel, Freshfields

2011-17: Principal associate, Freshfields

2008-11: Associate, Freshfields

Who’s Who: the Freshfields team

Leading: Craig Montgomery (partner, London), Catherine Balmond (partner, London) and Konrad Schott (partner, Frankfurt)

London restructuring team: Dan Butler (senior associate), Adam Jones, Miryam Farrelly, Ed Lewis (associates), Freddie Money, Oskar Forsblom and Yoonji Lee (trainees)

Europe aviation finance team: Flora McLean (partner), Johannes Vogel (counsel), Alper Utlu, Mathias Lehner, Celine Zeng (principal associates) Rosemary Lobley (senior associate), Sebastian Naujoks (associate) and Prerna Sateesh (trainee)

Hong Kong aviation finance team: Bing Guan (partner), Yong Wei Chan (counsel) and Arthur Law (associate).

Advice on maintenance and service contracts: Torsten Schreier (partner, Frankfurt) together with Nora Louisa Hesse, Marius Li-Yang Stein (associates, Frankfurt) and Inna Komaruk (trainee, Frankfurt)

Advice on Chapter 11: Madlyn Primoff (partner, New York) and Alexander Rich (associate, New York)

Aviation regulatory advice: Alan Ryan (partner, Brussels) and Laurent Bougard (principal associate, Hong Kong)

Further support: Freshfields Lab in Berlin (Gerrit Beckhaus (counsel), Marvin Hartmann and Dustin Hartmann (legal tech project managers)) and the Freshfields Hubs in Manchester, Frankfurt and Berlin.

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