Like so many other airlines around the global today LATAM is in a world of hurt. To help address the financial challenges the South American carrier flied for Chapter 11 bankruptcy protection in the US courts earlier this year, hoping to restructure the business, renegotiate some contracts and generally buy some time towards a global economic and aerospace recovery. Key to success in the Chapter 11 process is the availability of Debtor-in-Possession (DIP) financing. This comes in the form of new money invested after the filing, shifting the ownership structure of the company and must be approved by the US courts overseeing the restructuring process.
Right now LATAM has two competing DIP proposals in front of the bankruptcy court, and one reportedly contains a spectacularly unexpected arrangement between vicious competitors.
Oaktree Capital Management put up $1.3 billion to support the Tranche A DIP funding round. Tranche B is a theoretical $750 million government position that may never materialize. The $900 million of Tranche C is where things get interesting.
The leading proposal comes from the existing owners including the Cueto family via its Costa Verde company and Lozuy S.A., contributing a combined $300 million. These two companies represent approximately 26% of the current LATAM ownership today. Another $600 million would come from Qatar Airways which holds a 10% stake in the airline. That’s an outsized investment given the current ownership position.
But reports suggest that Qatar is playing as a proxy in the transaction for a different major shareholder: Delta Air Lines.
Can Qatar Airways proxy for Delta?
The proposed DIP plan is structured such that any of the new investors can assign the rights of their position to another company, so long as that company is a 10% shareholder at the time of the DIP approval. There is only one company that fits that description: Delta Air Lines. Thanks to the $1.9 billion deal signed late last year, Delta owns 20% of the carrier.
Moreover, Qatar Airways is structuring its $600 million DIP investment into two corporate vehicles, QA Investments Limited and QA Investments 2 Limited, both based in the Jersey Islands. There isn’t much reason to split the position into separate entities like this unless there’s a plan to eventually treat them differently.
Missing from the filings, however, is any formal indication that an agreement has been reached between Delta and Qatar Airways to assign the investment at some future point in time in exchange for consideration. Which doesn’t mean that agreement doesn’t exist. But we don’t know what it looks like if it does.
But will it actually happen?
While this plan is favored by the existing management – mostly because it better preserves their ownership stakes – a competing option also exists. The unsecured creditors, led by Knighthead Capital Management, want an option with outsiders at Jefferies Finance LLC funding the deal, not the existing owners. Knighthead filed multiple objections to the primary DIP plan, calling it unlawful and noting that when faced with a competing option somehow millions upon millions of dollars in costs were eliminated.
A decision on which DIP plan moves forward must come from the judge overseeing the case.
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