Avianca Brasil files for bankruptcy protection

February 2019 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

February 2019 Issue

Avianca Brasil, the fourth largest airline in Brazil, filed for bankruptcy protection in the first São Paulo Commercial Court in December, in preparation for the impending loss of 20 percent of its aircraft.

The motion grants the company judicial and extrajudicial recovery procedures which closely resemble the US Chapter 11 reorganisation scheme. The Brazilian judicial reorganisation process allows parties to find solutions to their financial problems and continue operating. If the court accepts the request to open the file, Avianca Brasil will have a deadline to present a plan to pay its debts to creditors.

The filing came following the announcement that the US-based lessor Aircastle had moved to repossess 10 A320-200s and one A330-200 aircraft from Avianca Brasil. The lessor moved to repossess the aircraft following persistent delinquent lease payments. BOC Aviation also won a preliminary injunction in a Brazilian court ordering the release of its two A320neo aircraft. The company was also accused by Irish company Constitution Aircraft Leasing of not paying instalments on 11 aircraft.

“Due to resistance from the lessors (of their aircraft) to reaching a friendly settlement, we have filed seeking protection from creditors, to protect clients and passengers,” a company statement said. Despite the filing, the company does not expect its operations to be unduly affected and “Passengers can have complete peace of mind to make reservations and buy tickets, since all sales will be honoured and flights will be operating”. However, the airline added that Brazil’s aviation regulator, ANAC, could force it to stop issuing tickets to passengers while it resolves its woes, a measure that “would dramatically affect (our) cash flow”. In its filing, Avianca Brasil asked “all actions and executions in progress against it be suspended”.

Avianca Brasil, which operates independently of Colombia’s Avianca Holding, though both companies are owned by the Synergy Group, claimed that high fuel prices, the strong dollar and the depressed Brazilian economy have contributed to its financial difficulties.

Latin American airlines are required to pay a large part of their expenses in dollars while billing their customers in more volatile currencies such as Brazil’s real and Argentina’s peso. Though the company’s bankruptcy filing did not give information regarding Avianca Brasil’s assets and liabilities, it did note that the carrier faces three lawsuits from aircraft lessors concerning 14 planes. According to local media reports, however, the company is believed to have debts of around $127m with multiple creditors, including state oil giant Petrobras and Sao Paulo’s Guarulhos airport.

Prior to the filing, Avianca Brasil had decided to reduce the number of aircraft in its fleet by eight and had begun to negotiate the return of the craft to the relevant lessors. The airline recorded net losses in the first half of the year of 175.6m reais, up 24.4 percent from the same period last year.

Avianca Holding remains unaffected by Avianca Brasil’s filing, though the Colombian company is also believed to be heavily indebted. Synergy Group’s German-Bolivian investor German Efromovich recently agreed a $456m loan from United Airlines which could see the company take control of Avianca Holding – the loan was secured by Mr Efromovich’s shares in the Colombian company. Mr Efromovich had been negotiating with United for some time and the agreed loan was reportedly used to repay another credit from investment firm Elliott Management.

In early December, United announced that it had entered a joint business agreement with Avianca Holding and Copa Airlines. The agreement, which is subject to regulatory approval, would drive significant traffic growth at major gateway cities across the Americas and is also expected to help bring new investment and create more economic development opportunities, the carriers said.

Avianca Brasil has expanded rapidly in recent years. In January 2016, it had 10.5 percent of the domestic market and less than 1 percent of the international market. By December 2018, its share of the national market had reached 13.65 percent and 7.72 percent of the international market. Though revenue has grown in recent years, it has been insufficient to cover the company’s rising debt.

Richard Summerfield