Clear skies ahead
LatAm Airlines crash landed into US bankruptcy courts in 2020 after the pandemic effectively shuttered the global economy and most airline travel.
Government support kept many other airlines around the globe aloft but LatAm found itself without a tether in its home country Chile, meaning Latin America’s largest carrier was forced to struggle through a one-of-a-kind restructuring.
LatAm’s Chapter 11 process involved more than US$16bn in liabilities owed by 38 debtors.
Almost as soon as it filed the airline had to battle creditors. The US$900m debtor-in-possession lifeline crafted to give the carrier a shot of liquidity faced heavy objections owing to the ability to convert the debt into equity, at what creditors called an "outrageous" implied 32% discount.
Knighthead Capital led the winning battle for creditors. The company then had to sign a new US$2.45bn DIP facility with no conversion feature. US$1.125bn of the loan came from Oaktree Capital and US$175m from Knighthead.
Existing shareholders put up US$750m in a C tranche of the loan with Knighthead taking US$250m of that tranche. Another US$150m of the loan was offered to minority shareholders backstopped by tranche C lenders.
LatAm looked to reorganise in the US to access financing, but the cross-border filing pitted creditors, who normally have an iron fist in Chapter 11 proceedings, against shareholders. They rank near last among stakeholders in the US but that is not the case in Chile. Under its rules, LatAm required 51% of shareholders by value to back a capital raise.
“It gives tremendous leverage to shareholders” said Brent Herlihy, managing director at PJT Partners, which represented LatAm. “They also have pre-emptive rights on any equity issuance. And in order to convert debt to equity you need two-thirds support.
“We couldn’t do a debt-to-equity conversion or frankly raise new money with creditors providing a backstop unless we found some really creative solutions."
Despite this difficulty, LatAm pulled off a US$9bn capital raise with a series of bespoke convertible bonds and an US$800m equity rights issue, the fifth largest ever in Chile.
The convertible notes were structured to appeal to different groups. One was tailored to shareholders happy with a long-term lockup. Another was offered to shareholders who had to subscribe with cash and existing claims.
The structures were designed to corral specific groups and craft a winning coalition that also overcame the Chilean law impediments.
“Running that type of offering out of bankruptcy had never been done,” said Facundo Vazquez, head of Latin America equity capital markets at Goldman Sachs, which led the rights issue. After it was priced, as part of the reorganisation plan, LatAm was able to exit Chapter 11 on November 3 2022.
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