Garuda Indonesia (GA, Jakarta Soekarno-Hatta) has secured shareholder approval to issue seven-year convertible bonds with a maximum amount of IDR8.5 trillion rupiah (USD600 million), with Indonesia’s finance ministry stepping up to buy them as part of a government rescue for the ailing flag carrier, the company announced in a stock exchange filing.

The ministry will acquire the bonds via its “special mission vehicle” Sarana Multi Infrastruktur (Persero), a state-owned investment company that finances infrastructure projects. They will be mandatory convertible bonds, meaning that they will be converted into stocks once the seven years are up.

The Indonesian House of Representatives approved the bailout, which was originally proposed by the Ministry of State-Owned Enterprises, in July.

If all of the bonds are converted into shares, the government will raise its stake in Garuda Indonesia from 60.54% now to 76.99%, strengthening state control over the company. Under the conditions of the bonds, the coupon rate Garuda will pay has been kept at a minimum.

“The proceeds from the transaction will be used to support the liquidity and solvency of the company, especially for financing operations,” the company said in the filing.

The company needs the aid as it is in “a strategic line of business” in which it plays “an important role in Indonesia’s future economic growth, as connectivity support for the flow of goods and passengers in Indonesia and abroad that is crucial for driving economic growth, [...] in particular to assist the company’s liquidity problems,” it explained.

The filing added that the total liabilities at Garuda Indonesia exceed total assets by 80%, a factor that chief executive Irfan Setiaputra repeated at a November 20 online news briefing that followed the shareholders’ meeting.

The proceeds are needed because “the company already has negative net working capital and has liabilities exceeding 80% of assets,” he said, according to Nikkei Asia. He added that he hoped the bond issuance “can encourage faster recovery in the aviation industry, which, in turn, can help the national economic recovery.”

The company hopes the funds raised from the bonds will start to flow in before the end of 2020, the CEO said.

Garuda Indonesia posted a net loss of USD1.1 billion in the nine-month period to September, unaudited financial results show, a contrast from its USD122.4 million profit a year earlier.

In related news, Garuda Indonesia plans to bring in a dedicated freighter aircraft in mid-2021 while using converted passenger freighters in the interim, the business magazine SWA reported. More passenger aircraft may be converted to cargo aircraft in 2021.

Mohammad Rizal Pahlevi, the airline’s director of commerce and cargo at Garuda Indonesia, told the publication that rising demand for seafood exports to China, Singapore, and Japan is an opportunity for the carrier to boost its cargo capacity.

So far, these marine products, which come from regional airports such as Makassar, Manado, Ambon, and Ternate, are mostly exported via Jakarta Soekarno-Hatta and Denpasar, Bali. Garuda Indonesia officially launched a Denpasar-Hong Kong Int'l cargo route on November 7 to support such exports. In the future, most of the products are expected to be shipped directly from Makassar and Manado, maintaining their quality while also cutting transport costs.

Bringing in a dedicated freighter next year, the model for which is currently being studied, is expected to be a strategic step towards meeting this demand for direct flights, Pahlevi said. In the meantime, more passenger aircraft may be converted into freighters in 2021.

As previously reported, Garuda Indonesia debuted scheduled international cargo-only flights from Manado to Tokyo Narita and from Makassar to Singapore Changi in September using an unconverted A330-200 and an unconverted A330-300, respectively. The carrier does not as yet have any dedicated freighter aircraft.