PAL Holdings, Inc.PAL

Comprehensive Corporate Disclosure on Issuance of Shares

In its meeting held on 27 September 2021, the Board of Directors of PAL Holdings, Inc. (the “Issuer”) approved the proposal to increase the authorized capital stock from Thirteen Billion Five Hundred Million Pesos (PhP13,500,000,000.00) to Thirty Billion Pesos (PhP30,000,000,000.00).

The Board thereafter delegated to Management the authority to finalize the details of the capital increase, including the subscription necessary to support the same.

As finalized by Management, the capital hike of Issuer will be supported by a private placement by Buona Sorte Holdings, Inc. (“BSHI”, the parent company of the Issuer’s controlling shareholder Trustmark Holdings Corporation or “Trustmark”) in the amount of Two Hundred Fifty Five Million United States Dollars (USD255,000,000.00) equivalent to Twelve Billion Seven Hundred Fifty Million Pesos (PhP12,750,000,000.00) which will be received by Issuer in cash by way of fresh and additional capital.

The PhP12.75 billion cash from BSHI will constitute the full and final payment for its subscription to Ten Billion Two Hundred Million (10,200,000,000) common shares at a subscription price of One Peso & Twenty Five Centavos (PhP1.25) per share (the “BSHI Shares”), to be issued in support of Issuer’s application for increase in capital. Upon issuance of new shares, BSHI is expected to own 46.77% of the resulting outstanding capital stock of Issuer. Post capital hike, BSHI, together with Cosmic Holdings Corporation and Trustmark which collectively comprise the Lucio Tan Group, will own 89.45% of Issuer.

Issuer’s increase in authorized capital stock will be presented for approval of the shareholders at the Annual Stockholders’ Meeting scheduled on 25 November 2021. Also to be submitted for consideration of the minority shareholders at said meeting is the proposal to waive the requirement of the Exchange to conduct a rights or public offering in respect of the BSHI Shares.

Meantime, the fresh capital to be received from BSHI will be down-streamed by Issuer to its subsidiary, Philippine Airlines, Inc. (“PAI”). In addition, BSHI will, as part of the plan of reorganization described below, extend a 5-year term loan to PAI in the amount of Two Hundred Fifty Million Dollars (USD250,000,000.00) thereby completing the US$505 Million working capital requirement of PAI under its proposed plan of reorganization submitted in connection with a voluntary petition for relief filed with the United States Bankruptcy Court in the Southern District of New York under Chapter 11 of the United States Code (“Chapter 11 Filing”, discussed in greater detail below).

To be presented for consideration of the PAI stockholders in the meeting scheduled on 28 October 2021 is, among others, the proposal for a capital increase. Issuer’s cash infusion as well as the loans of other unsecured creditors (the “Creditors”) will be used to support PAI’s application for capital increase via debt-to-equity, which is targeted to be filed in the latter part of the year. In accordance with the terms negotiated with Creditors, Creditors may thereafter, at its discretion, swap its new PAI shares for shares of Issuer (the “Swap”). Issuer expects most, if not all, of the Creditors to participate in the Swap.

The Swap is expected to take place within the first quarter of 2022. The shares to be issued by Issuer to the Creditors will, upon completion of all regulatory requirements of the Securities and Exchange Commission and of the Bureau of Internal Revenue, be listed with the Exchange.

For purposes of its cash infusion into Issuer, BSHI will execute a Subscription Agreement as soon as the shareholders of Issuer approve the proposed capital increase to be presented at the Annual Shareholders Meeting scheduled on 25 November 2021. Likewise, a Subscription Agreement will be executed by Issuer in relation to its infusion of USD255 million into PAI to support PAI’s application for capital increase. The documentation for the Swap contemplated in 2022 has not yet been finalized. Issuer will furnish the Exchange copies of the foregoing documents as soon as the same is finalized and executed.

The Lucio Tan Group is committed to support PAI’s overall plan to position itself for the post-pandemic environment. To this end, the Lucio Tan Group, through the BSHI private placement with Issuer and the loan to be extended by BSHI to PAI, is ready to underwrite a substantial portion of the financial burden to assist PAI in its recovery plan. Emergence from the bankruptcy proceedings is expected upon completion of the debt-to-equity conversion at the PAI level which, once completed, will thereby enhance shareholder value in PAI and by extension, in Issuer.

The above-mentioned increase in capital corresponds to Issuer’s obligation to infuse fresh capital into its subsidiary, Philippine Airlines, Inc. (“PAI”), pursuant to the court-supervised reorganization of PAI.

Reference is made to the disclosure submitted by Issuer on 6 September 2021 regarding the voluntary petition for relief filed by PAI under Title 11 of the United States Code (the “Bankruptcy Code”) in order to pursue confirmation of a pre-arranged plan of reorganization to effect the restructuring contemplated by various Restructuring Support Agreements (“RSAs”).

In summary, the PAI plan of reorganization included resizing and reshaping its operations, permanent restructuring of its obligations and broad recapitalization. ----

(Please see attached Annex B for a brief discussion on the nature of bankruptcy proceedings in the U.S. and the relief sought by PAI.)

The Issuer expects to receive a total of USD255 million or PhP12.75 billion in cash from BSHI before the end of 2021, which, as soon as received, will be applied by Issuer in full payment for 10.2 billion new shares to BSHI, subject to approval of shareholders and of the SEC.

The 10.2 billion new shares to be received by BSHI from Issuer will be issued at a subscription price of PhP1.25 per share. Both the Issuer and BSHI being part of the Lucio Tan Group, the issue price was a negotiated price between Issuer and its affiliate, BSHI, taking into account the expected improved viability of PAI upon emergence from bankruptcy, based on the forecast of PAI which was submitted to the Bankruptcy Court (mentioned below) as part of its plan of reorganization. The issue value used by the parties was deemed justified by the said forecast showing improved profitability and liquidity of PAI by the end of 2025. A copy of the forecast and the plan of reorganization will be submitted to the Exchange as soon as the same is approved by the Bankruptcy Court.

The USD255 million or PhP12.75 billion cash received by Issuer from BSHI will be downstreamed to PAI pursuant to the above-described court-supervised reorganization of PAI to effect the restructuring contemplated by various Restructuring Support Agreements (“RSAs”).

In summary, the RSAs and the plan of reorganization contemplated (a) the reduction of PAI’s aircraft related obligations by approximately US$2.1 billion, (b) a US$505 million infusion of working capital to fund PAI’s ongoing operations during the Chapter 11 Filing of which, US$255 million from Issuer will be subsequently converted into equity in PAI, (c) optimizing PAI’s fleet size, composition and ownership costs as required by the new market, (d) maintaining and enhancing PAI’s key contracts and business partners to strengthen its viability during the pending COVID-19 pandemic and beyond, and (e) obtaining commitments for a US$150 million exit facility from new investors to ensure PAI has adequate liquidity and runway to complete its restructuring.

A copy of said plan of reorganization will be submitted to the Exchange as soon as the same has been approved by the Bankruptcy Court.

BSHI is a privately owned company and is part of the Lucio Tan Group’s network of corporate entities for its airline business.

With the catastrophic impact of the COVID-19 pandemic to the global airline industry, the Lucio Tan Group, through BSHI, set about to provide the much needed capital to support PAI’s plan of reorganization submitted in connection with the voluntary petition for relief filed by PAI with the United States Bankruptcy Court in the Southern District of New York under Chapter 11 of the Bankruptcy Code (“Chapter 11 Filing”). The Chapter 11 Filing sought, among others, that PAI be authorized to continue to operate its business and manage its operations as a debtor-in-possession pursuant to Sections 1107 and 1108 of the United States Code (“Bankruptcy Code”).

BSHI’s role in the plan cannot be overemphasized, being responsible for the USD505 million working capital requirement of PAI during the Chapter 11 Filing. This it will provide via a USD255 million equity infusion in Issuer which will be downstreamed to PAI and a 5-year loan to PAI of USD250 million.

(Please see attached Annex B for a summary and update of PAI’s Chapter 11 Filing.)

Messrs. Lucio C. Tan and Carmen K. Tan, directors of BSHI, also sit as directors of Issuer and Issuer’s subsidiary, PAI. Ms. Sheila T. Pascual, a director of BSHI, is nominated as director of Issuer for 2021 – 2022 which will be submitted at the Annual Stockholders’ Meeting of Issuer on 25 November 2021. Additionally, Mr. Lucio C. Tan is the Chairman of the Board and CEO of PAI and the Chairman and President of BSHI and the Issuer.

Other directors who simultaneously serve in Issuer’s Board and PAI’s Board are Lucio Tan III, Gilbert Gabriel Santa Maria, Johnip G. Cua (as Independent Director of both companies) and Junichiro Miyagawa (as representative of ANA in both companies).

We wish to underscore that the proposed transaction is part of the overall plan of PAI to position itself for the post-pandemic environment which upon completion, is expected to enhance the shareholder value of PAI, and by extension, that of the Issuer, thereby ultimately redounding to the benefit of all shareholders of Issuer, including minority and independent shareholders.

As required by law, the proposed capital increase will be submitted for approval of the shareholders at the Annual Stockholders’ Meeting of Issuer on 25 November 2021 where independent shareholders may freely vote for or against the proposal.

Since the BSHI subscription is a related party transaction, Management also seeks to secure the approval of majority of the outstanding shares held by the minority shareholders present or represented at the Annual Stockholders’ Meeting to waive the requirement of a rights or public offering.

The BSHI funding to the extent of USD255 million to support Issuer’s proposed capital increase is subject to the approval of the Securities and Exchange Commission (the “SEC”). In order to list the new shares issued to BSHI, Issuer should obtain the approval by majority of the outstanding shares held by the minority shareholders present or represented at the Annual Stockholders’ Meeting of the waiver of the requirement of the Exchange for a rights or public offering preceding the BSHI subscription.

Likewise, the infusion of capital by Issuer in its subsidiary, PAI, will also be submitted to the SEC for approval of increase in capital.

After receiving new PAI shares, the Creditors are expected to swap the same for new shares of Issuer (the “New Shares”). The New Shares will be submitted to the SEC for confirmation of valuation. Upon approval of the SEC and upon issuance by the Bureau of Internal Revenue of the requisite Certificate Approving Registration for the secondary transfer of PAI shares, the New Shares will be applied for listing with the Exchange.

Part of the agenda of the Annual Stockholders Meeting of Issuer scheduled on 25 November 2021 is the election of directors. In its meeting held on 14 October 2021 the Nomination Committee of Issuer has approved the following nominees to the Board of Issuer for 2021-2022:

1. Lucio C. Tan;
2. Carmen K. Tan;
3. Lucio C. Tan III;
4. Gilbert Santa Maria;
5. Sheila T. Pascual;
6. Junichiro Miyagawa;
7. Johnip G. Cua (ID);
8. Jerome Su Tan (ID); and
9. Bienvenido E. Laguesma (ID).

Please see attached Annex B for additional information.