Latam Brasil files for bankruptcy in the US. Latam Brasil filed for bankruptcy protection in the United States this morning. It is the first Brazilian company to resort to the so-called Chapter 11, American legislation that guarantees temporary protection against creditors to allow the company’s restructuring.
At the end of May, the Latam group had already resorted to this legal mechanism to protect the operations of the holding and subsidiaries in Chile, Colombia, Peru and Ecuador. The Brazilian company, which represents 50% of the group’s operations and 14% of the total liabilities, had been left out of this order. The company’s assessment at the time is that this would facilitate negotiations for a relief line with the BNDES.
Latam Brasil files for bankruptcy in the US
Forty days later, however, negotiations with the BNDES have not progressed, as have expectations for the resumption. On the contrary, projections for the international flights market – the base of Latam’s operations – deteriorated. The sector was one of the most affected by the new coronavirus crisis and depends on pandemic control to start a recovery path.
American law has some advantages over Brazilian law, and they were decisive for Latam to choose Chapter 11 – in addition to the fact that there is already a group process abroad. In the US, judicial protection includes debts with airline leasing companies – which is not the case in Brazil. There, there is also the figure of the DIP loan (Debtor in Possession), which gives potential new investors full guarantee of priority in receiving credits in case of bankruptcy. In other words, whoever gives credit to the company in this model during the crisis goes ahead of the other creditors.
Latam Brasil files for bankruptcy in the US
History also weighed on the decision. Several American companies turned to Chapter 11 and managed to restructure. In Brazil, however, most airline lawsuits have resulted in bankruptcy. The most recent case was that of Avianca, which filed for bankruptcy this week. Varig had part of its operations sold to Gol, but the remaining part of the company, which carried the debts, went bankrupt in 2010.
Flexible trading
American law is considered more flexible because it facilitates negotiation between debtor and creditors – including consumers and workers. When submitting its request to join the group’s lawsuit, the Brazilian company included a request for it to honor the payment of labor terminations and past and future obligations to consumers. The request will have to be approved by the recovery judge – who has already approved a similar request for the other companies in the group.
Latam Brasil files for bankruptcy in the US
The process should not change Latam’s layoff plan, which expects to shut down about 1,000 land employees in Brazil by the end of the month.
The entry of Latam Brasil in Chapter 11 should not interfere with the operation of flights or with the rules of loyalty programs or ticket rescheduling. The subsidiaries of Colombia, Peru and Ecuador, which started to recover in the USA, continue to fly – albeit in a very reduced way due to the drop in demand.
Latam Brasil has a debt of R $ 7 billion, mainly with leasing companies and banks. Considering credit on paid but not flown tickets, and other provisions, the account rises to R $ 13 billion. The entire group’s indebtedness is US $ 10 billion. Including future provisions, the debt jumps to $ 17.9 billion.