The US Bankruptcy Court of the Southern District of New York has denied LATAM’s motion to raise $2.45 billion in financing. In a September 10th ruling, the court raised concerns over certain shareholders receiving more specialized treatment than others in the terms of the facility.
What was the financing plan?
Back in July, LATAM released a debtor-in-possession (DIP) financing proposal to the Bankruptcy Court of the Southern District of New York, where the airline is undergoing a Chapter 11 restructuring. In it, the proposal included up to $2.45 billion in financing separated into a few tranches.
Tranche A consisted of $1.3 billion in financing committed by Oaktree Capital Management L.P. and affiliates. Meanwhile, Tranche C comprised of $900 million coming from Qatar Airways and the Cueto and Amaro families. These Tranche C participants are shareholders of LATAM and committed to the financing back in May when the airline filed for Chapter 11. As part of Tranche C, there is also an upsize of $250 million, which other Chilean shareholders can participate in once the court approves. In total, this comes out to $2.45 billion in financing.
Why did the court reject the plan?
While it is clear that LATAM needs financing to ensure its continued survival, the terms of the financing raised some concerns. First, the Tranche C lenders were two of the airline’s largest shareholders, holding 21% of LATAM’s common stock. Combined with affiliates, it comes out to 32% of the stock.
The Tranche C DIP Facility allows LATAM, at its own choosing, to convert that debt to new shares in the reorganized LATAM at a 20% discount to the plan value. For LATAM, this means that if the airline does not have the cash to pay off the Tranche C DIP Facility, it can instead give these shareholders a sweet deal on stock in the reorganized airline. This Modified Equity Subscription Election was one of the concerns the court held and led to the rejection of the financing.
The court believes that such a financing proposal would “short-circuit” the Chapter 11 process and allocate equity in the reorganized company prematurely to existing shareholders and can be made without the oversight of the bankruptcy court.
What comes next?
The court did not state that LATAM could not seek any external financing. In fact, the carrier will need it to survive the coming few years. The company has a few options. First and foremost, it can continue to modify the Trance C DIP Facility terms to eliminate the court’s concerns. However, it may come at a cost to the airline in the form of a higher interest loan, less funding pledged by investors, or stricter terms. Although, all of that remains to be seen.
What is notable about all of these proceedings is that US-based 20% stakeholder Delta Air Lines is not part of any of the financing. In large part, this is because the carrier is focusing on its own survival, currently. However, the airline did pay LATAM $62 million earlier this year in response to the termination of the purchase agreement for four Airbus A350s. LATAM and Delta still need to get regulatory approval to move forward with the joint venture.
However, for now, the carrier has to find a way to raise some cash and receive approval from the court.
Do you think the court should have approved LATAM’s financing plans? What are your thoughts on this? Let us know in the comments!