GOL Linhas Aereas has to repay a US$300 million loan on Monday that is guaranteed by the US carrier Delta Air Lines. If the Brazilian airline doesn’t honor its five-year-old agreement, Delta would have to pay the amount. How did it come to this? Let’s investigate further.
Why did Delta agree to guarantee the loan?
Before the pandemic, Delta Air Lines was not shy about investing in some airlines across the world. The carrier has a 49% stake in Aeromexico, a 20% stake in LATAM, and joint venture agreements with Air France-KLM, Korean Air, Virgin Australia, and China Eastern.
In 2015, GOL and Delta had a more in-depth collaboration. They had a strategic partnership, which included a 9% stake owned by the US carrier. Delta eventually sold its stake in 2019, when it signed a joint venture agreement with South American rival LATAM Airlines Group.
In July 2015, Delta said it would boost its stake in GOL through a US$446 million stock and loan arrangement. A few months later, GOL announced a loan with Morgan Stanley Senior Funding for US$300 million. Delta also injected US$56 million in equity.
As a guarantee to the guarantors, GOL left open the possibility for Delta to seize GOL’s stake in its loyalty program, Smiles Fidelidade. Nevertheless, GOL’s stake in Smiles is worth US$170.04 million, and it has zero appeal to Delta.
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Why hasn’t GOL paid?
GOL is currently under extreme financial distress (as are many airlines in the world). During the second quarter of 2020, the low-cost carrier posted a net loss of US$380 million. It also got in trouble in the US after firing its financial auditor, KPMG.
According to the GOL’s financial statement, it ended the second quarter with over 3.3 billion reais (US$593 million) in cash and receivables. Since June 30, GOL has been burning up to US$538,000 a day. If the airline is forced to pay its loan on Monday, it would drastically reduce its funds available at a time when carriers need to maintain liquidity as much as possible.
Before the pandemic, GOL thought it wouldn’t have a problem paying the loan. But then, coronavirus hit the air industry and left it hanging in the balance. For GOL Linhas Aereas, this 2015 loan could be devastating, unless there’s a negotiation at the last minute.
Delta Air Lines declined to comment on the subject. We also looked for a statement from GOL Linhas Aereas. At the time of publication, the Brazilian airline has not answered back.
Would Delta be able to pay the loan?
In an interview with Reuters, Amalia Bulacios, who covers GOL for S&P Global Ratings said,
“We are three business days away from the deadline, and the company has been very silent; it’s not even clear if there is a negotiation underway.”
Meanwhile, Delta Air Lines would not be thrilled to have to pay GOL’s loan. By the end of March, the US airline was burning approximately US$100 million per day.
Unless something happens, GOL and Delta would be in a delicate position starting on Monday. As Ricardo Fenelon, a former head of Brazil’s ANAC said,
“If Delta does that (acquires GOL’s stake in Smiles), it will strangle Gol’s cash position, put Gol’s survival at risk, and become a shareholder of Smiles, a company that itself needs Gol to be successful.”
What do you think is going to happen? Let us know in the comments.