After the US Bankruptcy Court of the Southern District of New York denied LATAM’s US$2.45 billion financing plan, the airline group presented a modified debtor-in-possession (DIP) financing proposal. In many ways, the new request is consistent with the original DIP financing structure. What are the differences?
Why did the US court reject the first proposal?
LATAM Airlines Group is the biggest airline in South America. It operates in many countries like Chile, Brazil, Colombia, and Peru. It also used to fly in Argentina. When COVID-19 struck in Latin America, LATAM lost 95% of its commercial activity in a matter of weeks. Therefore, it wasn’t a surprise when it filed for a Chapter 11 bankruptcy in the US. The reorganization allowed the airline to ensure the financing it needed for its survival.
To do it, LATAM presented a financing plan composed of two tranches. Tranche A consisted of US$1.3 billion committed by Oaktree Capital Management. Tranche C came from Qatar Airways and the Cueto and Amaro families and was worth US$900 million, with an upsize of an additional US$250 million. It seemed like a good plan. Nevertheless, it was a surprise when the Court rejected the plan.
The terms of the Tranche C raised some concerns. LATAM could convert that debt to new shares after reorganizing at a 20% discount to the plan value. That meant, as Simple Flying journalist Jay Singh pointed out, that LATAM could give shareholders a deal on stock in the reorganized airline if it didn’t have the cash to pay off the Tranche C DIP Facility. The Court wasn’t going to allow this, so it rejected the plan.
What’s the new plan?
The new plan also consists of access to US$2.45 billion required to tackle the impact of COVID-19, said the airline. Nevertheless, LATAM added,
“The proposal submitted does not contemplate the equity conversion option for Tranche C, responding to the objection made by the honorable Judge James L. Garrity Jr. In addition, it incorporates several of the lenders interested in participating in the group’s financing.”
Let’s take a look at the main differences:
- Tranche A. Oaktree Capital Management will continue to lead the financing in this Tranche. But, instead of providing US$1.3 billion in financing, it will give US$1.125 billion. Meanwhile, Knighthead Capital will finance US$175 million.
- Tranche C. Qatar Airways, the Cueto Group, and the Eblen Group will provide US$750 million. Knighthead will finance US$250 million. LATAM minority shareholders will be able to invest up to US$150 million. But, if the US$150 million are not fully funded, “the differential will be provided by the creditors of Tranche C,” said LATAM.
What happens now?
The rejection of the original plan paused LATAM’s reorganization process. The airline needs liquidity, but it has to wait until the Court analyzes the modified DIP financing proposal.
In the meantime, LATAM has taken other measures to continue its reorganization process. Last week, the airline filed a petition to reject 19 Airbus A320 family airplanes’ leasing contracts.
The carrier is expecting to reduce its fleet to 292 airplanes. It also left open the possibility of rejecting more aircraft in the future.
Recently, LATAM also signed a new Chief Commercial Officer in Marty St. George. He was the CCO of JetBlue and worked in the US carrier for 13 years before becoming the interim CCO of Norwegian.
What do you think of LATAM’s new financing proposal? Let us know in the comments.
