Avianca flies light: what it means to have filed for bankruptcy

Last Sunday, Avianca Holdings and some of its subsidiaries and affiliates announced that they will file for bankruptcy in the United States due to the effects that the expansion of the coronavirus has on their business. What does this decision mean and how could it benefit the company and its creditors?

What the so-called “Chapter 11” of the United States Bankruptcy Code seeks is to allow a company that is having financial difficulties to reorganize its liabilities, restructuring its debts, to make its business viable in the future. General Motors, Toys-R-Us, K-Mart and Chrysler are just some of the big companies that have benefited from the benefit in recent years.

In Colombia, the same process is in Law 1116, which established the corporate insolvency regime 14 years ago to allow the reorganization of companies that cannot pay their obligations. And here is an important clarification: complying with the law does not mean that a company has gone bankrupt or is going to end.

Fernando Bustos, director of Bustos y Cía. Consultants and expert in insolvency and business recovery processes at the Universidad de los Andes, assured that companies use bankruptcy law to avoid being sued and persecuted by creditors when they cannot pay their debts on time: “They do it to protect themselves and be able to continue operating, otherwise they would lose their productive assets and their economic rights; no company that initiates such a process has gone bankrupt and it is not a path to go bankrupt, but quite the contrary ”.

In fact, it is the second time that Avianca has done so, since in 2003 it had already filed for bankruptcy in the USA. USA The airline said in a statement that this decision “allowed it to strengthen itself for its subsequent expansion in Latin America.”

Before the COVID-19 pandemic, Avianca’s financial situation had already deteriorated somewhat. The company’s current ills can well be traced to the strike by pilots of the Colombian Association of Civil Aviators (Acdac) that decimated its operations for 51 days in 2017 (between September and November) and left a balance of 10,000 canceled flights, more 300,000 passengers affected and a serious economic impact on industries such as commerce and tourism.

This created future financial difficulties for the company, which ended up changing its leadership structure and acquiring a new loan with United Airlines in 2019. Despite this, Avianca registered losses in 2019 of US $ 893 million. For this reason, in early January 2020, the airline reported that it will reduce its plans to acquire the air fleet in order to improve its financial statements.

The holding company now has a debt of US $ 5 billion that has weighed on it at this juncture in which the dollar has exceeded $ 4,100 and due to a worldwide uncertainty about the coronavirus that has restricted flights. Because of this, the airline’s share in the Colombian Stock Exchange (BVC) has lost more than 65% in 2020 and is below $ 500. A dramatic situation for a share that entered the BVC in 2013 with a price of $ 5,000, that is, it is now worth a tenth of its initial price.

The Chapter 11 process begins with the filing of a bankruptcy petition and a series of supporting documents that demonstrate that the company is experiencing financial difficulties. Once this initial step is completed, all creditors identified by the debtor receive bankruptcy notification from the judge and all proceedings against them automatically cease.

A creditors committee is formed in a hearing to discuss the process and make the inquiries they deem necessary. The debtor, in this case Avianca, must submit a reorganization plan to the United States authorities, specifically to the Bankruptcy Court of the Southern District of New York, which must study the viability of the same and decide its approval with the support of creditors to meet long-term obligations.

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The advantage that Avianca would have by availing itself of the bankruptcy law is that legally there would be no debt executions and no breaches of its financial commitments would be declared. In addition, the airline would enjoy special protection for having made the request, so that the lawsuits against it would be temporarily suspended. In addition, the measure allows it to continue its operations under the leadership of its board of directors and with the supervision of the US judicial system. USA while negotiating. What it cannot do, because it is beyond the scope of the law, is to fire workers or fail to honor its commitments to them.

The agreement also defines who is given priority in payments, according to what is established by law, although this does not mean that they can fail to honor work commitments such as the payment of payroll or pensions, items that represent an expense important to the company.

Luis Alberto Benítez, director of Insolvency Colombia, explained that insolvencies are cross-border, this means that the countries where the airline has operations must respect what is decided in the process begun in the United States. “The one that enters the process is the company, especially when it comes to a multinational like Avianca, the countries, by instruction of international treaties, must accept it. The same would have happened even if the request had been based in Colombia, ”he said.

However, for Avianca it was more opportune to do it in the USA. Because the majority of its creditors are there and moving to its territory of jurisdiction facilitates negotiation, regardless of whether the bulk of its operation is in Colombia (70%). According to Benítez, Avianca’s financial operations are carried out with US banks due to the size of the company: “Colombian banks do not have that capacity, it is the sixth company that sells the most in the country,” he stressed. For his part, Bustos considered that since Avianca is listed on the United States stock market, it may have more procedural guarantees and greater chances of success in that country.

It should be remembered that Avianca and the Colombian Government are discussing the possibility of the State granting a loan to the airline in the form of financial support so that it can survive the emergency and have liquidity. According to the experts consulted, this would not affect the reorganization process, on the contrary, it would give it a boost. “If Colombia announces that it is going to help Avianca through a shareholding or a guaranteed loan, that could allow the firm to have a greater probability of success, to be able to reorganize itself and to be a sustainable company for the future,” said Benítez.

The truth is that the success or failure of this initiative in the medium term will depend on the terms agreed and on the revival of the airline industry. For now, there are no more details of the negotiation or how advanced it is, but Avianca will only be able to meet the agreed payments if air operations are resumed and they reach the level they were before the crisis fairly early, otherwise their 132 aircraft will remain on the ground and there will be no income to continue fueling the company’s engine.

The crisis in Avianca is not new

After the strike of almost two months by the airline’s pilots in 2017, things got complicated for Avianca; this year the company managed to record a net profit of US $ 82 million. In 2018 the situation had a mixed behavior. According to the airline, the change in model it implemented, from one of growth to one of profitability, allowed it to increase its operating income from US $ 4,442 million (registered in 2017) to US $ 4,891 million. But it had practically no net profit, it only registered US $ 1.1 million. And the airline’s debt of more than $ 4 billion became increasingly worrying.

In 2019 the political power in Avianca underwent great changes. Germán Efomovich, the airline’s main partner, lost the political right to his actions because he failed to comply with the conditions of a US $ 475 million loan he acquired with United Airlines. So since May of this year United claimed the right to 51% of Avianca’s shares that Efromovich had, and named Kingsland (owner of 22% of avianca) as the representative of its interests.

In fact, on May 25, 2019 Roberto Kriete, the president of Kingsland, was appointed as chairman of the Avianca board of directors. And in June 2019, President Anko Van Der Werff was appointed as the new President of Avianca.

But at this point the airline’s financial status was already very complex. Since August 2019, it was clear that the airline could not pay the US $ 500 million bond that expired in May 2020, so it began an intense renegotiation with its creditors to manage to exchange (defer) the titles.

For several weeks, this operation was feared, as creditors would access the exchange only if United Airlines gave Avianca a loan of US $ 250 million from United. And the US airline (United) also imposed the condition that it would only give its credit if the percentage of the exchange was high.

Finally, on December 9, the airline confirmed that it had exchanged US $ 484 million of the bonds that matured in May 2020, for guaranteed bonds maturing in May 2023. And United Airlines agreed to lend the airline US $ 250 millions.