Exclusive: Malaysia to stop funding state carrier if talks with lessors fail -letter

From Anshuman Daga
SINGAPORE (Reuters) - Malaysia Airlines' parent company has warned leasing companies that the state-run Khazanah fund will stop funding the group and force it into a wind-up process if restructuring talks with lessors remain unsuccessful. This emerges from a letter from Reuters.
The warning from the Malaysia Aviation Group (MAG), the national airline's holding company, increases the amount of negotiating a financial restructuring known as "Plan A" and sets out an alternative plan for diverting funds to a sister airline called " Plan A "firmly Firefly.
"If Plan A fails, the shareholder (khazanah) will suspend funding for MAG and initiate a liquidation / liquidation process for MAG," states the document, the contents of which have been confirmed by six people familiar with the matter.
Khazanah, the sole shareholder of MAG, declined to comment.
Finance Minister Tengku Zafrul Abdul Aziz said in a radio interview on Thursday that the government would not grant the airline any financial relief or debt guarantees.
When asked if the government would shut down the airline, he said, "It's up to Khazanah as a shareholder in Malaysia Airlines. I never said I would shut down Malaysia Airlines."
In an email response to Reuters on Wednesday, MAG said it would "state its final position after reaching a settlement with the parties it is negotiating with". The restructuring plan is a crucial step to emerge as a "sustainable and profitable organization in the future".
MAG's comments in the Reuters-audited letter came days after the airline group sent a letter to lessors asking for significant discounts on aircraft rentals as part of a major restructuring plan, some respondents said.
According to the latest document, as part of a "Plan B" scenario, Khazanah would "raise funds directly into Firefly to launch new jet operations in Kuala Lumpur on a much smaller scale, with an initial focus on domestic services."
The low-cost airline Firefly, which operates a fleet of 12 twin turboprops mainly in the country, is currently a wholly owned subsidiary of MAG.
According to the document, Firefly would purchase narrow-body aircraft and then wide-body aircraft from the market in the "Plan B" scenario.

PREVIOUS RESTRUCTURING
Malaysia's national airline struggled to recover from two tragedies in 2014 - the mysterious disappearance of flight MH370 and the downing of flight MH17 over eastern Ukraine.
Khazanah privatized it this year as part of a $ 1.5 billion restructuring, but the COVID-19 pandemic has further intensified efforts to reverse its business.
Since last year Malaysia has been looking for a strategic partner for its airline that is characterized by high costs and a bloated workforce.
The airline has a total fleet of 88 aircraft, 25 of which are in storage, according to Cirium, an aviation analysis company.
Late Tuesday, Malaysia's AirAsia X, the long-haul arm of AirAsia Group, a competitor to Malaysia Airline, said it needed to restructure $ 15.3 billion in debt to prevent liquidation.
Governments around the world rescued airlines that were destroyed this year, but that wasn't enough to prevent layoffs.
Sources, refusing to be identified due to the sensitivity of the matter, say Malaysia Airlines is negotiating discounts with lessors over a restructuring plan it plans to implement through a UK lawsuit.
Freshfields Bruckhaus Deringer and Clifford Chance are among the law firms involved in the restructuring process, while some lessors and other financiers have also tapped other law firms. Freshfields declined to comment while Clifford Chance did not give an immediate response.
Lessors were given October 7th to respond to MAG. However, according to sources, the lessors were also investigating bilateral negotiations with the aviation group.
Khazanah wealth fund told Reuters last week that it was supporting Malaysia Airlines' restructuring efforts. However, if they were found to be unsuccessful, options to maintain connectivity for Malaysia would need to be examined.

(Reporting by Anshuman Daga; Additional reporting by Liz Lee in Kuala Lumpur; Editing by Tim Hepher, Mark Potter, Lisa Shumaker and Gerry Doyle)

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