Latam Air concludes bankruptcy agreement that leaves the reins to creditors

Latam Airlines Group SA has reached an agreement with the main stakeholders which paves the way for the Chilean carrier to reduce its debt and come out of bankruptcy under a new owner.

Latin America’s largest airline plans to raise around $ 5 billion by issuing shares and convertible notes to current shareholders and creditors upon exiting the Chapter 11 bankruptcy, according to court documents. Ultimately, the deal allows a group of creditors – led by Sixth Street Partners, Sculptor Capital and SVPGlobal – to take control of the company.

It will also allow Santiago-based Latam to reduce its debt by around $ 4 billion upon exiting the process, which could occur as early as mid-2022 if approved by a judge and shareholders. Delta Air Lines Inc., Qatar Airways and the Chilean Cueto family – who together owned most of the company before the reorganization – agreed to back the plan, helping to iron out thorny Chilean legal issues that weighed on the negotiations.

Creditors and shareholders “have joined forces to provide more than $ 5 billion in fresh capital to Latam to support and move the restructuring forward,” said Roberto Alvo, CEO of Latam, in an interview. The plan and the agreement “provide the basis for a very strong and solid future for Latam”.

The deal marks a victory for Latam, who filed for bankruptcy in 2020 as Covid-19 lockdowns hampered international travel. If the company had not filed a restructuring plan on Friday, it risked losing control of its bankruptcy exit strategy. Rival carrier Azul SA has said it wants to buy Latam if the opportunity arises.

For Latam, the plan is a major step towards exiting bankruptcy. Creditors unhappy with the deal can still seek to block it, but U.S. bankruptcy rules allow a company to force a restructuring deal on reluctant creditors if certain legal hurdles are encountered.

The airline plans to issue $ 800 million of common stock and resume trading in Santiago with U.S. certificates of deposit, or ADRs, in New York City, Alvo said. Existing shareholders will have the first chance to buy the new shares – an unusual event in a US bankruptcy, which typically sees shareholders wiped out entirely. But Chilean regulations give shareholders rights to new shares sold by their companies.

A group of creditors to whom Latam owes billions of dollars agreed to buy all the new shares not bought by existing shareholders. In addition to Sixth Street, Sculptor and SVPGlobal, this group of creditors included Monarch Alternative Capital and Silver Point Capital as of October 27, according to court documents.

Importantly, the plan provides for the issuance of three categories of notes that can be converted into shares. According to Chilean law, current shareholders will also have the right to buy them, but their structure makes them more attractive to creditors and shareholders supporting the plan, Alvo said.

Lower-ranking creditors can swap their claims for a category of notes, while the others are designed for stakeholders who have already agreed to support the plan or who are bringing fresh money to Latam, Alvo said.

In total, Latam’s existing shareholders could end up with nearly 30% of the airline’s stake, with the rest ending up in the hands of creditors, he said.

In addition, Latam will contract $ 2.75 billion in new debt – to be raised either in the bond market or on term loans, as well as a credit facility – which will be used in part to repay current creditors. Overall, the plan will reduce Latam’s debt to around $ 7 billion, down from around $ 11 billion at the start of the bankruptcy.

Rival Brazilian airline Azul SA – founded by David Neeleman who also launched JetBlue Airways – has made an offer to buy Latam’s operations. Latam considered Azul’s proposal, but Alvo said it lacked specificity.

“It was a proposal that was hypothetical and impossible to move forward,” he said, without providing details. “We considered its merits. It is insufficient.

Azul has worked with a small group of creditors on an alternative bankruptcy exit plan, according to a person with direct knowledge of the proposal who requested anonymity as the details are confidential. The proposal would result in the formation of a new company owned by Latam’s creditors and Azul shareholders. The combination of two of the largest carriers in the Brazilian domestic market would create a more efficient business and lower operating costs, the person said.

But under US bankruptcy rules, because Latam filed his plan within a time specified by the court, Azul and other creditors’ ability to initiate their own plans is severely curtailed. Latam has the exclusive right to present a restructuring proposal until such right is terminated.

Latam used Chapter 11 to downsize its fleet, renegotiate aircraft leases and cut other costs, including downsizing its workforce to around 29,000 from 43,000 previously. The company has seen domestic travel in key markets, such as Brazil, Colombia and Chile, rebound, but it will not reach pre-pandemic demand levels until 2024, Alvo said.

It will emerge in a Latin American travel market shaken by the pandemic, some of the largest carriers, including the Colombian Avianca Holdings SA and Grupo Aeromexico, forced into bankruptcy.

Alvo said Latam has reduced its operating costs to enable it to compete with ultra-low cost carriers and is in the process of receiving regulatory approval for a joint venture with Delta that will strengthen its international flight options.

“The whole industry and business have been brought to their knees by this unforeseen event,” he said, referring to the impact of Covid-19. “Today our position in all countries where we have operations is equal to or better than what we had before entering the pandemic.”

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