US court rejects LATAM’s $2.45bn financing deal

The US Bankruptcy Court for the Southern District of New York has rejected USD2.45 billion debtor-in-possession (DIP) financing secured by LATAM Airlines Group over concerns that USD900 million due to be provided by shareholders Qatar Airways and Costa Verde Aeronáutica could resulted in these entities increasing their stakes in the firm on unfair terms. Acting on a complaint filed by LATAM’s creditor committee, a group of bondholders, and Knighthead Capital Management LLC, Judge James L. Garrity ruled that the terms of the loan could see existing shareholders increasing their ownership of the airline consortium but on unfair terms. According to the conditions of the USD900 million loan, Qatar Airways and Costa Verde Aeronáutica (an investment vehicle for the Cueto and Amaro families) would be able to convert debt into new shares in LATAM at a 20% discount in the event the holding is not able to repay its dues. “The Court finds that Modified Equity Subscription Election gives rise to improper sub rosa plan treatment of the Tranche C Lenders and the Debtors’ equity holders. For that reason, the Court will not approve the DIP Financing,” the judge ruled. Directly and indirectly, Costa Verde Aeronáutica holds a 23.5% stake in LATAM while Qatar owns 10%. The Latin American group’s other major shareholder is Delta Air Lines with a 19.99% stake. The DIP financing package also consists of a USD1.3 billion loan from Oaktree Capital Management and an additional USD250 million as a potential loan from Chilean shareholders on the same terms as the USD900 million secured from Qatar and Costa Verde Aeronáutica. While the court took no issue with the up to USD1.55 billion from Oaktree and smaller shareholders, the package will have to be approved as a whole. Partial approval is therefore not an option. “The Company, together with its legal and financial advisers, is analyzing the Court’s decision and its scope to define a course of action,” LATAM Chief Executive Roberto Alvo said in a stock market filing. However, the court rejected other objections raised by certain creditors, including their assessment that the loan was priced unfairly. “The Court finds that the price and terms of the Revised Credit Agreement, including the Tranche A DIP Facility and Tranche C DIP Facility, are entirely fair, and there are grounds under section 364(c) of the Bankruptcy Code to authorize the Debtors to enter into the DIP Credit Agreement. Further, the DIP Lenders are entitled to a good faith finding under section 364(e) of the Bankruptcy Code,” the judge said.