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LATAM rejects Azul's acquisition bid, files exit plan



The LATAM Airlines Group has rejected an expression of interest received from Brazilian rival Azul Linhas Aéreas Brasileiras (AD, Sao Paulo Viracopos) in favour of a USD10.456 billion rescue plan put together by key stakeholders that may see the group's exit from bankruptcy protection by March 2022.


This was revealed by Chief Executive Officer Roberto Alvo at a news conference on November 27 after the Latam Airlines Group and its affiliates in Brazil, Chile, Colombia, Ecuador, Peru, and the USA on November 26 announced they had reached an agreement with key stakeholders on a reorganisation plan. "While our process is not yet over, we have reached a critical milestone in the path to a stronger financial future,” Alvo said in a statement. He said the exit plan was achieved through “robust mediation” and provided “meaningful consideration to all stakeholders and a structure that adheres to both US and Chilean law”.


Alvo disclosed that Azul’s proposal never progressed to become official after its initial statement of interest was rejected. He said the Brazilian carrier’s bid had been “incomplete, inapplicable, and insufficient, so we immediately discarded this possible proposal,” he said.


Bloomberg reported that Azul had been working with a smaller group of creditors on an alternative bankruptcy exit plan. The proposal would have resulted in the formation of a new company owned by LATAM creditors and Azul shareholders. Combining two of the largest carriers in the Brazilian domestic market would have created a more efficient company and cut operating costs, Bloomberg's unnamed source said. However, under US bankruptcy rules, because LATAM filed its plan within a court-specified deadline, Azul and other creditors’ ability to float their own plans was severely curtailed. LATAM has the sole right to pitch a restructuring proposal until that right is terminated.


Azul has since gone on the record and confirmed that its non-binding proposal, confidentially submitted together with select LATAM creditors, would have put forward around USD5 billion of equity financing backstopped by certain members of the ad-hoc group of LATAM creditors comprised of several prominent financial institutions. However, LATAM's overvaluation was the deal breaker.


"The standalone plan presented by LATAM is, by definition, unable to generate synergies from a combination. Additionally, at this moment the stated valuation that has been put forth in LATAM’s standalone plan is higher than Azul believes to be credible given the continued uncertainties in the aviation industry, especially in the international long-haul markets," it said.

According to a SEC filing, highlights of LATAM's reorganisation plan are that:

  • LATAM Airlines Group will raise USD10.456 billion from a current amount of USD3.146 billion to USD13.602 billion divided into about 606,407,693,000 common shares. This will be done through a mix of new equity, convertible notes, and debt in terms of a restructuring support agreement (RSA) reached with the so-called parent ad hoc group and shareholders, which will enable the group to exit Chapter 11 with appropriate capitalisation. The parent ad hoc group is the largest unsecured creditor group and is represented by Evercore. The agreement is being supported and guaranteed by shareholders Delta Air Lines, Qatar Airways, and the Cueto and Eblen family groups.

  • This will give the group USD2.67 billion in liquidity and total debt of USD7.26 billion, which the company determined was a “conservative debt and appropriate liquidity in a period of continued uncertainty for global aviation”, and which would better position the group going forward”.

  • The new money that will be obtained through the placement of the new convertible notes and new common stock will amount to USD5.442 billion. This includes USD800 million worth of new common stock, open to all its shareholders, which will be backstopped up to USD400 million by the RSA parties. The remaining USD400 million will be subscribed by the Evercore represented creditors.

  • Two classes of convertible notes (Classes B and C) will be issued in exchange for an injection of about USD4.64 billion, fully backstopped by the RSA parties.

  • In addition, LATAM will raise a USD500 million new revolving credit facility and about USD2.25 billion in total new money debt financing, consisting of either a new term loan or new bonds. It will also refinance or amend the group’s pre-petition leases, revolving credit facility, and spare engine facility.

The next steps forward will include an extraordinary shareholders’ meeting on December 23, 2021; and a court hearing in January 2022 to approve the Chapter 11 disclosure statement and voting procedures. If the disclosure statement is approved, the group will start soliciting creditors’ votes for the exit plan. LATAM is requesting that a court hearing to confirm the plan be held in March 2022.


As they have throughout the process, all of the companies in the group are continuing to operate as travel conditions and demand permits.


LATAM used the Chapter 11 process to trim its fleet, renegotiate aircraft leases, and reduce its workforce to 29,000 from 43,000 previously, but travel demand is not expected to recover to pre-pandemic levels until 2024 despite some recovery in key markets including Brazil, Colombia, and Chile, Alvo told Bloomberg in an interview. He said the company had cut operating costs to compete with ultra-low-cost carriers and was in the final stages of gaining regulatory approval for a joint venture with Delta that would boost its international flight options.


S: CH Aviation


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