Azul’s Creditors Prepare Team to Renegotiate US$400 Million Debt
RIO DE JANEIRO, BRAZIL – Following the banks and the aircraft lessors that own the planes leased by the airlines, Azul will need to face a discussion with the international creditors that bought its bonds issued in the foreign market.
The total liabilities with these bonds amount to US$400 million (R$2 billion) and mature in 2024. However, in October, another six-monthly interest payment is expected. Given the crisis in the sector worldwide caused by the novel coronavirus pandemic, it is unclear whether this disbursement will take place. The last payment occurred in April, in full.
A group of bondholders has already engaged their representatives in these talks: Moelis & Company Advisory and White & Case attorneys. But for the time being it is only preparation and negotiations have not yet begun. In any event, it is logical to expect a discussion following the reorganizations conducted with bank creditors and aircraft lessors.
Since April, Azul has been advised by a team of experts on all fronts:law firms Galeazzi, Thomas Bastos, Waisberg, Kurweil Attorneys (TWK) and Pinheiro Neto, as well as Plane View Partners, specialized in the relationship with lessors.
In late March, the company had approximately R$23 billion in total debt, of which over R$16 billion was aircraft-related. The company’s bonds are currently traded on the secondary market at a discount of 51 percent. The price points to perceived credit risk. But at this level, it has not yet become a bond attractive to the so-called “vulture” funds.
In the case of LATAM, which is under bankruptcy protection, prices include discounts of over 70 percent for both 2024 and 2026 maturities. The Avianca Holdings position is even worse: at 20 percent of face value, prices are at levels equivalent to default. Despite the high discount, Gol has a slightly better credit perception – discounts range between 38 and 42 percent. The company recently closed a commercial agreement of mileage programs with its subsidiary Smiles, to sell the equivalent of R$1.2 billion in airline tickets in advance, which guaranteed it some financial flexibility.
Under the agreements that Azul is finalizing with lessors and banks, the company has secured 18-month terms and is phasing payments according to the pace of flight resumption and, consequently, cash generation. The company is also in talks with BNDES (National Bank for Economic and Social Development) in order to structure a funding of up to R$2 billion, using a R$1.2 billion line from the institution. However, the market has been waiting for months for this structure to be finalized before being launched – including debt and bonds convertible into shares.
Investor sentiments towards Azul are quite varied. Although Azul has a bigger cash crunch than Gol, the company founded by David Neeleman is expected to recover more rapidly, because it operates regional routes and, for the most part, does not face competition. Among the three, it has less exposure to international flights – which should be restarted at slower rates, according to experts.
Two remain
A number of reports are starting to emerge that consider a possible merger or acquisition by Azul of the former TAM (now LATAM), after the debt negotiations of both. It is perceived that it will take time for the Brazilian market to reach a size that justifies the presence of three domestic airline operations.
In June, both LATAM and Azul surprised the market with a code-sharing agreement for 50 flights in Brazil. For Bradesco BBI, the two airlines have many opportunities to explore together. The bank believes that the expansion of this partnership into the domestic market, and even to international flights, are opportunities that can be seized.
“A full merger between LATAM and Azul seems unlikely, but as part of its restructuring plans LATAM Brasil could be sold to Azul,” says the bank in a report. A merger between LATAM and Azul would be complex, due to the many conflicting interests of the airlines’ shareholders – Azul’s David Neeleman would have to split the new company with the Cueto family, LATAM’s largest single shareholder.
Selling only the Brazilian division, on the other hand, would be a simpler solution, believes the bank. The figure would be approximately US$1.9 billion, according to Bradesco’s team of specialists. Should this transaction occur, Azul would hold a 62 percent share of the domestic market, compared to its current 25 percent, and would have an even greater presence in the most popular airports such as Congonhas, in São Paulo, and Santos Dumont, in Rio de Janeiro.
Neeleman
Azul’s controlling shareholder and founder, David Neeleman, is preparing the launching of Breeze Airlines, a low-cost, regional operating company in the United States. Flights are expected to start in 2021. There are rumors that he has given up leasing 28 EMBRAER planes from his Brazilian subsidiary. However, so far there has been no official announcement from Azul, which suggests that the issue is not closed.
Source: Exame
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