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Latam couldn’t take it anymore on May 26. That day, the company announced that its board of directors had decided to file the airline under Chapter 11 of the United States Bankruptcy Law, which allows a firm in difficulty to freeze the payment of its debts while it reorganizes its finances and its operations.
With financial liabilities of US $ 10,500 million and income on the ground due to the hit of a global pandemic, Latam Airlines urgently required to suspend the service of its debt and obtain extraordinary financing to survive during the 18 months that the process could be extended. On that date, his administration estimated that he required at least $ 2 billion. The plan that it presented shortly after totaled US $ 2.45 billion, with a tranche A subscribed by the global giant Oaktree and a tranche C contributed by the main shareholders of Latam.
The A is paid first; the C had a higher return. All through the so-called DIP (Debtor in Possession). That program collapsed this week, after the rejection of Judge James L. Garrity Jr., who questioned privileges that current Latam shareholders would have in that formula, in section C: to convert their debts into future shares of the new company . In fact, that plan was presented by Latam and was approved by a board of nine members in which only two voted. The others had some connection with future creditors. It is the company – the debtor in the reorganization process – that must re-propose a financial plan to the bankruptcy court of the Southern District of New York.
Latam woke up on Friday without the resources it imagined having almost four months ago. Without certainties. Without a DIP in hand. That was discussed Friday throughout the morning in an extraordinary board meeting, where the new Latam scenario was analyzed and in which the American lawyers of Cleary Gottlieb Steen & Hamilton LLP also participated, who explained the scope of the ruling.
The board of directors immediately commissioned, then, to look for new and urgent financing alternatives. With the same bidders as before -including shareholders-, with their competitors or with new players who wish to participate. The work will be led around the world by your financial advisors from PJT Partners. Everything begins again. To do this, however, Latam has some time. The company has a cash box of just over US $ 900 million, which gives it an operational slack of close to two months before requiring emergency financing. And although much slower than expected, it has already recovered about 12% of its regular operations.
It is a triple alliance that today has two main pillars: the Cueto family – who managed to raise US $ 300 million together with the Amaros and the Eblens – and Qatar Airways, owner of 10% of Latam, which committed another US $ 600 million. They would be joined, in the future, by the American Delta, owner of 20% of Latam, which plans to replace half of the funds that the Qatari airline subscribed, subrogating it in part of the DIP. Together, all of them account for 55% of Latam’s property. The Cuetos are the main ones, with 21.46%.
The loan included two payment options, which, during the hearings in New York, underwent some modifications: a payment close to 27% of the total amount as a total rate; or the option to convert that money into Latam shares, granting a discount close to 20% of the value of the shares and a final return close to 34%. The payment alternative would be decided by Latam and not, as it was in the beginning, by the lenders. But that conversion option was the stopping stone in the ruling of Garrity, who considered the financial conditions of the loan fair, but inappropriate the exchange of debt for shares. Without that alternative, which in some way guaranteed to maintain a privileged position in the shareholding of the airline that leaves Chapter 11, the partners must decide how they act now. On Friday, say several involved, it was still too early to decide: They were still digesting a ruling that took 42 days to leave Judge Garrity’s office.
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One way is to persevere with the loan, but without the option of converting your credits into shares. That path, they believe, would have no objections from Judge Garrity. With this, they would receive in return a total rate of 27% for the loan (a profit of about US $ 250 million) and could use the money for the same initial objective, but for a longer way: to subscribe new shares that, almost with security, it will have to issue Latam in the future, to come out of its reorganization. The question is whether that is equally attractive to all shareholder-lenders. Converting this now into a financial investment that does not secure their position as future controllers of Latam, the bet turns out to be more risky than before. Above all, in a company without a clear recovery horizon: the pandemic has hit harder than was estimated in May, when it reached the US courts.
The resistance to insist on that formula comes mainly from the Cuetos’ great associates. Qatar and Delta are airlines that, above all, cared about the option of preserving their participation in the ownership structure, via convertibility, rather than a financial gain. “We are not a bank. For a hedge fund or JP Morgan this would make more sense, ”says a person linked to one of those parts of the triangle. Foreign airlines have less incentive to pursue an investment formula that does not guarantee a future position. Less in a bet that becomes more speculative than strategic, without guarantees and where segment C is paid after segment A. For an exercise like that, they say, there are many more bidders willing to act as Latam lenders, than an airline whose business is flying. “There is no low probability that Qatar will withdraw from financing under these new conditions,” interprets one of the various market players trying to elucidate this new crossroads. In addition, they add, Qatar and Delta will be able to subscribe shares in the future – exercising their preferential right in a new capital increase – without having to lend money now. Under these circumstances, the most interested in persevering in this formula is the Cueto group, which founded and grew the airline.
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Thus, the scenario could be complicated for the Cuetos if their partners decide to withdraw from the DIP. And, in that case, nobody rules out that the Chilean family opts to ally itself with other financiers. Even those who until recently were his adversaries. Until Friday night, when there were new telematic negotiations between the parties, the way was still open. Deliberating. Analyzing. Only from tomorrow will the moment of decisions come.
Given the still uncertain decision of the Cuetos and their partners to promote a new proposal, Latam must be open to listening to any other financing offer and evaluating its suitability. This is where the hedge fund Knighthead Capital Management and the fund structuring company Jefferies would enter the bidding again. Both firms led the proposal that competed with Oaktree Capital for section A, for US $ 1.3 billion, and which also tried to fight for section C of the Cueto and Qatar. “Everything went back to the beginning,” says one actor in the negotiation.
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Connoisseurs of Knighthead, the firm that led the competing proposal, assure that the manager valued the judge’s ruling and that they remain interested in competing for the financing of the airline. In this sense, the disposition of the hedge fund would be to start negotiations via Zoom with the Cuetos and Qatar these days, to try to promote a proposal that benefits both shareholders and creditors. “If Latam in this past decided not to take into account Knighthead’s proposal, it will have to have very good reasons to do so, otherwise, it would not be acting in accordance with the law,” says a source linked to creditors.
The return of the process to zero pages delays Latam’s aspiration to have more liquidity at a time when the cash register becomes increasingly narrow. Faced with this challenge, sources in the process emphasize that Knighthead would continue to be willing to immediately put US $ 400 million, as they said in past hearings.
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From the Ad-hoc Committee of Creditors, which has among its members the AFP and Chilean insurance companies, they celebrated the recent pronouncement of the judge, because they say that with the convertibility proposed by the shareholders – and that they estimate that it was promoted by Delta to protect his position at the firm – he was breaking the creditors’ priority rule to recover his debts.
These days, some of these institutional actors, such as Penta Vida, Confuturo, Bice Vida and Vida Security will have to evaluate whether they revalidate their support for a new proposal made by Jefferies, which will have new conditions -for example, in interest rates or money orders. of money – which may eventually compete with the offer raised by the triple alliance, but this time without the option to convert shares. Or maybe they all come together in a single financial plan. Including shareholders and creditors.
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