Latam presents recovery plan of more than $8 billion in time to avoid Azul’s hostile bid

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Latam Airlines has submitted to the US Bankruptcy Court in New York its bankruptcy reorganization plan, which provides for an injection of US$ 8.19 billion.

The announcement, made in the last hours of the deadline, at 00:11 on Saturday (27) in Brazil (22:11 on Friday in NY), is a relief for Chile’s main shareholders and managers.

With it, Latam maintains exclusivity in the negotiation of debts, without having to compete, at the same time, with potential interested parties in making an offer to take command of the group. Azul is at the top of this line.

If Latam had not presented the plan this Friday night, Azul would have been free to approach creditors with its strategy to buy the Chilean group.

But the ordeal is not over yet. The court must approve the plan by January and creditors by March 2022.

In an interview this Saturday morning, the president of Latam, Roberto Alvo, stated that he already has the support of a majority of creditors for approval. “The company, today, already has the support of 71% of creditors, and, to be approved by American law, it needs two-thirds.”

Also according to the executive, Azul expressed interest in purchasing the operations, but the proposal was “insufficient and inapplicable” and, therefore, was discarded.

Latam adhered to the United States bankruptcy law (Chapter 11, a kind of judicial reorganization) in May 2020, followed two months later by its subsidiary, Latam Brasil. The group needed to present a restructuring plan that contemplated the financing of its debt, which amounts to almost US$ 18 billion (approximately R$ 100 billion).

The announced plan is accompanied by a Restructuring Support Agreement (RSA) with the “Ad Hoc Matrix Creditors Group”, which is the largest group of unsecured creditors in these Chapter 11 cases, and certain shareholders of Can.

“The plan proposes to inject $8.19 billion into the group through a combination of new equity, convertibles and debt, which will allow the group to exit Chapter 11 with adequate capitalization to execute its business plan. Upon exit, Latam should have a total debt of approximately US$ 7.26 billion and liquidity of approximately US$ 2.67 billion”, says the statement released by Latam.

The airline group claims that this is a “conservative level of indebtedness and adequate liquidity” at a time of uncertainty for world aviation, which will allow the company to better position itself for future operations.

Upon confirmation of the plan, the group intends to launch an equity rights offering through the issuance of common shares in the amount of US$800 million, which will be open to all Latam shareholders.

Latam will also raise $500 million in a new revolving credit facility and approximately $2.25 billion in debt financing through new resources, either via a new term loan or with new bonds.

“We would like to thank those who participated in the robust mediation process to reach this result, which considerably includes all interested parties and presents a structure adjusted to US and Chilean legislation,” said Roberto Alvo, president of the group, in a statement. Can.

“The significant injection of new capital into our business is proof of their support and confidence in our long-term prospects,” he said.

Azul maintains interest in buying the group

In the opinion of André Castellini, a partner at the consulting firm Bain & Company, an eventual acquisition of Latam by Azul would bring many synergies, even with a concentration of just over two-thirds of the national market.

Throughout 2021, from January to October, Azul reached the first place among the airlines in terms of passengers per kilometer paid (RPK), which measures demand: 34.48% share of the domestic market. Next come Latam Brasil (32.99%) and Gol (31.81%). Passaredo, Itapemirim and MAP each have shares of less than 0.5%.

For Castellini, in a moment of crisis like the one experienced today by airlines — of a high dollar (which increases costs, especially of fuel) and a pandemic (which still limits travel) —, a merger becomes viable. “The difference is that Latam has the autonomy to remain independent in the market, it is the largest airline group in Latin America,” he says.

Azul, on the other hand, if it managed to take the entire Latam, could raise much more ambitious flights in the regional market and become a relevant player in the world air scenario.

At first, the president of Azul, John Rodgerson, said that the plan was to take Latam Brasil. But this month, in an interview with Chilean newspaper Diario Financiero, Azul founder David Neeleman said he was ready to make an offer for the entire group and would not slice it. In other words, it would maintain operations in Brazil, Chile, Colombia, Ecuador and Peru.

A sheet found that, in this case, Azul would be trying to bring together large global investors to fund the acquisition.

“The problem is that, with this level of concentration, I don’t know if creditors would agree to wait for Cade’s approval [Conselho Administrativo de Defesa Econômica], which may, eventually, not even happen,” says Castellini.

For passengers, an eventual merger between the airlines would make the tickets become more expensive, said Jerome Cadier, president of Latam Brasil.

“Not necessarily,” says Castellini. “Brazil has never seen a tariff war as intense as when there was a duopoly between Latam and Gol,” he says.

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