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Doubts About Gpa's Future May Be More Than Blarney

International Business


It was only six months ago when GPA Group PLC's top managers saw a pot of gold at the end of the rainbow. The Shannon (Ireland) upstarts, led by founder and Chairman Tony Ryan, had used financial ingenuity and a little Irish luck to claw their way to the top of a fiercely competitive industry, building the world's biggest aircraft-leasing concern. If their worldwide initial public offering had gone as planned in June, a company that started with a $50,000 loan 17 years ago would be worth $3 billion. And they would all be millionaires.

Things didn't turn out that way. Instead, the IPO flopped, victim of a decline in world air traffic, a rising number of airline mergers and bankruptcies, and a looming glut of planes. Now, GPA is fighting for its life. It needs $1.1 billion to meet annual debt repayments and $2.7 billion more to pay for aircraft orders coming due this year and next.

The situation is coming to a head. On Nov. 23, some 100 bankers holding $3 billion in GPA loans will gather in London to decide the company's fate. One London banker familiar with GPA's condition says that unless it negotiates more favorable deals with aircraft manufacturers and persuades its banks to postpone $900 million in principal repayments over the next two years, "the company's future is in grave doubt."

MONEYBAGS? Sheer nonsense, says GPA. Deputy Chairman Maurice A. Foley blames "erroneous reports in the media" for GPA's inability to obtain financing. GPA insists its leasing operations, which account for half the company's income, are still making money. Furthermore, GPA says it has $670 million in cash and about $350 million in annual lease revenue. But chief strategist Ken Holden concedes that "the core of our problem is finding the funds to pay for airplanes on order over the next two years."

It's an ignoble position for a highflier whose innovative financing schemes changed the face of the aircraft industry. By providing leases, pilots, and maintenance, GPA provided one-stop shopping to fledgling carriers in such Third World countries as China, India, and Mexico. They could acquire modern aircraft in months rather than the years it once took with conventional financing.

By the mid-1980s, Ryan's company had won massive cash infusions from private holders Air Canada, General Electric Capital, Prudential Insurance, and several Japanese banks, and it boasted assets of $400 million. The company grew even faster after Ryan branched out from lease financing into selling preleased aircraft to private investors. In the fiscal year ending last Mar. 31, GPA showed record profits of $268 million from a fleet of 442 aircraft leased to 109 airlines in 48 countries.

But there were already warning signals. The recession in the world airline industry threatened GPA's success formula. The very nature of its business--ordering aircraft on spec to get a discount and then selling planes at full market value--was giving potential investors the willies. And some of GPA's customers, including bankrupt America West Airlines Inc., were on the rocks.

BIG FLACK ATTACK. These uncertainties doomed GPA's plan for an IPO. And the doubts raised when the IPO bombed quickly infected GPA's lenders. To recoup, company officials are aiming a public-relations blitz at bankers, suppliers, and the financial press, insisting that the business is sound. GPA says that in September, it leased a record 40 aircraft. It has only 6 unleased planes, down from 14 in June. And GPA even appears to have taken the recent collapse of Brazilian airline VASP in stride. Of 13 planes that GPA will repossess, six are committed.

But brushfires keep breaking out. The company recently shelved plans to raise $350 million in additional equity funds from large shareholders such as Aer Lingus and Air Canada, themselves financially ailing. GPA also canceled plans to raise $750 million through the sale of debt securities backed by 18 aircraft. And credit-rating agencies have downgraded GPA's debt to speculative levels.

The financial uncertainty has holders of GPA securities and debt looking for an escape hatch. Steven F. Udvar-Hazy, chief executive of rival International Lease Finance Corp., says he has been "inundated" with offers by investors who are desperate to unload GPA paper. GPA's publicly traded bonds now sell for 65 cents on the dollar, vs. 95 cents just a few months ago.

There's an element of personal resentment operating, too. Bad feelings still fester between GPA and the investment community in London and New York over the IPO bust. Ryan apparently displayed such temper, says one banker, that "we thought he was going to get physical." Other bankers say GPA stepped on too many toes in the past. A corporate-finance expert in a major London bank says he took a financing idea to GPA two years ago, only to find out a month later that GPA had taken the idea as its own. Says Deputy Chairman Foley: "If that's what people say, that's what they say." One of Ryan's closest advisers admits: "Tony Ryan is not a cuddly personality. Successful entrepreneurs rarely are."

IN A TAILSPIN. The turbulence rocking the company is making a lot of people airsick. The syndicate of 100 banks is well-secured with planes, but numerous corporate shareholders and unsecured creditors aren't protected. And because GPA has commitments or options on 10% of worldwide commercial-aircraft production, the shock waves if GPA sought refuge in the courts would hit all the manufacturers--Boeing, Airbus, and McDonnell Douglas. "It doesn't do anybody any good to have extra airplanes sitting on the ground," says Ernest "Tex" Boullion, a former Boeing Co. executive who now heads aircraft lessor Boullion Aviation Services. A chain reaction would also hit like a ton of bricks in Japan, where one-third of GPA's bank debt is held.

Sources close to the negotiations say the prospect of a major meltdown has some bankers leaning toward a postponement of principal payments. But others are playing hardball by asking GPA to cancel additional aircraft orders. Says one Japanese banker: "They'll get no new money from us. I recommend they cancel the aircraft that can becanceled."

And that's a word that makes GPA officials choke. Pressured by bankers, they have already reluctantly walked away from a few orders, but mostly they've stretched out their delivery schedule. To cancel more, GPA might endanger $850 million in downpayments. Even worse, Boeing Executive Vice-President Richard R. Albrecht says that "under certain circumstances" GPA could lose the volume discounts of up to 30% that are key to GPA's future profits and growth.

That presents GPA with a conundrum: Unless it further reduces its order book, it can't get financing for new aircraft. But without new aircraft, GPA will shrink. Facing this predicament, GPA's executives will soon cram into a room with bankers to negotiate their fate. If the banks agree to give the company breathing room, it would have several months to complete the restructuring, but GPA would emerge much smaller. Could it be that the pot at the end of the rainbow is sometimes filled with fool's gold?GPA'S FAST AND BUMPY FLIGHT

1975 Irishman Tony Ryan borrows $50,000 to start GPA as a broker of used planes

1985 Assets reach $400 million, after GPA attracts such big-name investors as

General Electric Capital and Prudential Insurance

1986 High-growth strategy calls for $4 billion in assets and ownership of 300

planes in five years

1988 Orders 70 Boeing aircraft. Citicorp and 11 other banks

finance $1.5 billion of the deal

1989 On a spree, GPA orders 308 aircraft worth $17 billion

1990 Prolonged downturn hits civil aviation industry

1992 GPA plan to sell a $1 billion global initial public offering is canceled

in June when U.S. investors fail to go along. Syndicate of 100 banks agrees to

meet Nov. 23 to decide GPA's fate


Paula Dwyer in London, with Dori Jones Yang in Seattle and bureau reports

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