Relevant Document:Memorandum Decision
In a memorandum decision issued this afternoon, Judge James Garrity Jr. granted the LATAM Airlines debtors’
motion to approve
contested backstop fees and other consideration for the creditors and equityholders that would collectively provide up to approximately $5.4 billion in new capital under the debtors’
proposed plan of reorganization. Judge Garrity finds that the
backstop parties (including the Kramer Levin/Evercore creditor group and equityholders Qatar Airways, Delta Air Lines and Cueto affiliate Costa Verde Aeronautica) “are providing necessary funding to the Debtors on terms that are fair and reasonable” and “authorization of the Debtors to enter into and perform under the Backstop Agreements is integral to the Debtors’ pursuit of the Plan.”
Backstop approval also clears the way for the court to enter an order approving the debtors’ disclosure statement. After three days of hearings on the contested DS approval motion, Judge Garrity said at a
Feb. 1 hearing that the court was “prepared to approve” the DS subject to resolution of objections to the then yet-to-be-heard backstop motion. The court heard argument on the backstop motion on
Feb. 10 and
Feb. 11.
The official committee of unsecured creditors, indenture trustee Banco Estado, the Arnold & Porter ad hoc unsecured group and minority equity holder Columbus Hill Capital Management
opposed the backstop motion, calling a $734 million commitment fee due to the Evercore group “egregious” and suggesting the fee violates Chilean law, among other issues.
Judge Garrity sets the backstop agreements in the context of the debtors’ plan process and mediation, finding that:
“The record shows that to date, the Backstop Parties (along with the lenders providing the Exit Financing) are the only parties that have proposed any reorganization transaction, plan and exit proposal, that have any realistic prospect of consummation, and which enjoy the creditor and shareholder support necessary to confirm and implement an otherwise confirmable plan of reorganization that complies with applicable foreign law in the United States and the other jurisdictions where the Debtors operate, including Chile” (emphasis added).
The court agrees with the debtors’ evaluation that the Jan. 26 alternative financing
proposal from the Arnold & Porter and Ducera-represented ad hoc group of unsecured claimants “falls short of a viable alternative or substitute for the Backstop Agreements.” The court also credits the debtors’ portrayal of their plan sponsor marketing process as robust, which the UCC had challenged, and notes that “this process occurred against the backdrop of a vigorous, hard-fought and lengthy mediation overseen by Judge Gropper, which produced the Backstop Agreements and the RSA.” The opinion also says the objectors “fail to acknowledge” the importance of the resolution in mediation of “issues of Chilean securities law and Chilean shareholder rights.”
Addressing the UCC’s argument that the backstop agreements should be subject to the entire fairness standard rather than business judgment, the court finds that business judgment is the correct standard. However, the debtors would meet their burden even under heightened entire fairness scrutiny, the opinion concludes.
As to the backstop shareholders, the court observes in a footnote on fair process that their board appointees did not vote on the shareholder backstop agreement, which was instead “subject to the independent review of,” and approval by, the independent directors serving on the audit committee. On the fair price prong of the entire fairness standard, the footnote says the terms of the shareholders backstop agreement represent “a substantial economic benefit to the Debtors” given the approximately $1.77 billion financing commitment “for up to ten months without demanding any backstop fee in return.”
Judge Garrity also states that the commitment creditors from the Evercore group “are not ‘insiders’ of the Debtors” to whom entire fairness would apply, citing to the court’s Jan. 28 fleet claims settlement
opinion.
Although the court rules that the backstop agreement fees are all reasonable, Judge Garrity sides with the objectors on certain fee calculation issues. For example, the court rejects the debtors’ proffered “Implied Discount Methodology,” observing that it “can be manipulated and does not provide the true cost of the backstop to the Debtors because it does not isolate the fees being paid to the Backstop Parties on account of the Backstop Agreements, but instead includes the benefit they receive by being permitted to purchase shares at the discount on account of being a creditor.” The court also “gives no merit to” the debtors’ presentation of the commitment creditor fees on a blended basis with the equityholders, who are not receiving any backstop fee, “as it distorts the true cost to the Debtors’ estate.”
Ultimately, the court uses the “All-In Backstop Fee at Plan Value” to evaluate the reasonableness of the commitment creditors’ backstop fees on the Class C convertible notes commitment. The opinion acknowledges that the fee “exceeds the 75th percent[ile] backstop fee of 21.2%” on the debtors’ precedent transactions analysis and “is plainly among the highest fees on the Chart.” However, the opinion goes on to rationalize the reasonableness of the high fees by pointing to the commitment creditors’ up to 10 month commitment to backstop $3.669 billion of plan securities “in a volatile industry.”
The court also notes that the debtors have demonstrated that they “have sought out, but not located any other financing sources” and “engaged in arm’s-length negotiations with the Commitment Creditors over the terms of the financing.” “Under the circumstances of this case, the Court finds that the Backstop Payment is reasonable,” the court concludes. The court also individually analyzes and approves termination payments, expense reimbursement provisions, the narrow fiduciary-out and indemnification obligations.
The opinion also addresses and dismisses a variety of specific objections:
- The debtors’ investment banker, Brent Herlihy of PJT Partners, provided a reasonable basis for excluding South American airline Avianca from his precedent transactions analysis. The objectors argued that Avianca was clearly a comparable company and should have been included.
- The “Forward Net Booking” and “Minimum Liquidity” conditions and Covid “variant of concern”-triggered “COVID Suspension Period” in the commitment creditors backstop do not, as the objectors argued, minimize risk for the creditors such that their fees are unreasonable. “[T]he Objectors have not demonstrated that those conditions insulate the Commitment Creditors from risk of loss,” the court says, finding “[m]oreover… the Debtors have demonstrated that there is a significant likelihood that they will be able to meet the conditions precedent necessary to hold the Commitment Creditors to the funding requirements under the agreement.”
- The court also rejects the objectors’ contention that the backstop payment to the commitment creditors on the new convertible Class C notes is “unreasonable and unnecessary” because the economics of the plan guarantee full participation of the Class C Notes. Therefore, the objectors argued, the fee should be measured on a percentage basis relative to what the UCC calls the “at risk” portion of the offerings. The commitment creditors “are assuming the risk that they will be called upon to purchase the entire $3.669 billion in securities that they have agreed to backstop; not merely the new money that would be provided by other investors if the Commitment Creditors elected their Direct Allocation and pro rata share of the Class C Notes,” the court says.