LATAM Airlines Plan Would Cash Out US Bond Claims, Give New Equity and Convertible Notes Subscription Opportunities to General Unsecured Claimants, Shareholders; Debtors Acknowledge In-Bound Deal Interest from Azul

Relevant Documents:
Plan
Disclosure Statement
DS Approval Motion
Press Release (Initial) / (Subsequent)

Late Friday, Nov. 26, the LATAM Airlines debtors filed their first plan of reorganization and disclosure statement, hours before their exclusive plan filing period was set to expire. The plan calls for $8.192 billion in new capital and is accompanied by a restructuring support agreement with the Kramer Levin-represented parent ad hoc claimant group, which, according to a press release, “is led by” Sixth Street, Strategic Value Partners and Sculptor Capital, and equityholders including Delta Air Lines, Qatar Airways and affiliates of the Cueto Group and Eblen Group. The disclosure statement says the backstop shareholders and the Eblen Group hold 50.95% of outstanding equity; pursuant to the RSA, these equityholders “have committed to vote in favor of the issuance of all Plan Securities contemplated by the Plan.” The DS says the plan construct and RSA resulted from the mediation of “certain shareholder issues and Chilean law issues” with retired Judge Allan Gropper, which began Nov. 1 and continued for “several weeks.”

The DS says that on Nov. 11, counsel for Brazilian airline Azul SA “sent a letter to counsel for the Debtors that proposed a general, non-binding and preliminary overview regarding certain terms relating to a potential transaction [but] [t]he overview did not provide any process or timeline for the transaction and did not address various regulatory concerns or other value and execution risks if such transaction were pursued.” Reorg previously reported that Azul has been working with Houlihan Lokey as financial advisor to evaluate a potential bid for LATAM.

The debtors say the plan construct and rights offerings comply with “both the Bankruptcy Code and applicable Chilean law,” explicitly referencing the pre-emptive rights of equityholders “to subscribe and purchase their pro rata share of any newly issued equity or convertible debt prior to such equity or debt being offered for sale or distributed to any other party.” Multiple unsecured creditor groups - including the official committee of unsecured creditors and the Kramer Levin parent ad hoc claimant group now signed up to the RSA - have suggested previously that honoring Chilean law pre-emptive rights could violate the absolute priority rule if unsecured claims are not fully paid before shareholders receive any recovery.

Upon emergence, LATAM expects to have $7.3 billion of debt and $2.7 billion of liquidity. The debtors’ exit financing envisions $2.25 billion of new secured loans and a $500 million undrawn revolving credit facility. Plan equity value is $7.611 billion. The $7.3 billion of total debt is cited on an “as converted” basis, and it excludes convertible debt. Convertible notes issued pursuant to the plan would be convertible into shares of new LATAM parent common stock.

As noted above, the plan features $8.192 billion of new money, comprising: i) $800 million of equity financing being invested at a subscription price representing a 13.73% discount to plan equity value; ii) $4.642 billion of cash related to convertible notes; and iii) $2.75 billion of exit financing ($2.25 billion new secured term loans, $500 million undrawn revolving credit facility).

The $800 million of equity financing and $4.642 billion of convertible notes would be provided by: i) LATAM eligible shareholders; ii) Costa Verde, Qatar Airways and Delta, and iii) holders of general unsecured claims against LATAM Parent.

Regarding the $4.642 billion of new convertible notes, eligible holders of allowed general unsecured claims against LATAM Parent would have the opportunity to purchase $3.269 billion of new convertible notes Class C. Costa Verde, Delta and Qatar Airways would subscribe to $1.373 billion of new convertible notes Class B.

In total, $9.7 billion of convertible bonds would be offered, with a portion - the remaining amount of $1.467 billion new convertible notes Class A that are not subscribed and purchased by eligible equityholders - of those convertible notes distributed to holders of allowed claims against LATAM parent in settlement of their allowed claims under the plan.

The convertible notes would first be offered to eligible equityholders, pursuant to pre-emptive rights offerings in accordance with Chilean law.

For each series of convertible notes, the conversion ratio is: i) the product of: a) the proportion of reorganized LATAM stock underlying the series of new convertible notes relative to total reorganized LATAM parent stock, assuming full conversion, expressed as a percentage, multiplied by b) plan equity value, divided by: ii) the principal amount of the relevant class of new convertible notes.

Conversion ratios are below:
 

• Convertible notes Class A: $1.467B, 0.193333x
• Convertible notes Class B: $1.373B, 1.159152x
• Convertible notes Class C: $6.861B, 0.705506x

Estimated recoveries for the LATAM 2024 and 2026 bond claims are 100%. Under LATAM’s plan, the LATAM 2024 and 2026 bond claims would be unimpaired and retired with $1.519 billion of cash.

Existing equity interests in LATAM parent would be “substantially diluted by the issuance of ERO New Common Stock and the New Convertible Notes Back-Up Shares pursuant to the Plan, including any conversion of the New Convertible Notes into equity, and by the Management Incentive Plan, such that they hold no more than 0.1% of the common stock in LATAM Parent.”

A summary of the ad hoc general unsecured claim group holdings, which is provided in the RSA, is below:
 
The hearing for approval of the disclosure statement is scheduled for Jan. 27, 2022, at 11 a.m. ET, with objections due Jan. 7 at 4 p.m. ET.

DS Approval Motion / Confirmation Timeline

The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:
 
Plan of Reorganization

A chart of the plan’s classes, along with their respective impairment statuses and voting rights, highlights that the LATAM 2024/2026 bond claims would be unimpaired and presumed to accept:
 
Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
 

• Class 1 - RCF claims: “[R]efinanced or amended and extended” pursuant to the terms of the revised revolving credit facility, or RCF, agreement.
   
• Class 2 - Spare engine facility claims: Reinstated, refinanced or amended and extended pursuant to the terms of the revised spare engine facility agreement.
   
• Class 3 - Other secured claims: Reinstated as amended and extended.
   
• Class 4 - LATAM 2024/2026 bond claims against LATAM Finance and LATAM Parent: Holders would receive, in cash, their pro rata share of the “LATAM International Bond Claim Amount,” which is defined as the amount outstanding under the LATAM 2024 and LATAM 2026 bonds, or $1.519 billion.
   
• Class 5 - General unsecured claims against LATAM Parent: “Ineligible” holders - defined as any claimant that cannot hold Chilean securities or meet “qualified institutional buyer” or “accredited investor” definitions under U.S. securities laws - would receive distributions solely in cash. “Eligible” holders would be deemed to choose the Class 5a treatment consisting of Class A convertible notes and cash, unless they elect to receive the Class 5b treatment consisting of Class C convertible notes.
   
  • Class 5a treatment: Holders would receive their pro rata share of:
     
    • The $1.467 billion new convertible notes Class A, subject to reduction by any shareholders’ exercise of their pre-emptive right to subscribe to the notes; and
       
    • The cash proceeds generated from shareholders’ subscription to the class A convertible notes, up to a limit based on the conversion ratio of the Class A convertible notes.
       
  • Class 5b treatment: The “new convertible class C backstop parties” - the Kramer Levin group backstop parties - and any eligible holders electing Class 5b treatment would receive the $6.816 billion new convertible notes Class C, subject to reduction by any shareholders’ exercise of their pre-emptive right to subscribe to the notes. Class 5b sets up a two-part waterfall:
     
    • First, 50% of new convertible notes Class C would be allocated to the Class C backstop parties, “to the extent available” after the equity pre-emptive rights period. The backstop parties would receive the 50% allocation of Class C convertible notes on account of “approximately 50% of the allowed claims held by” the backstop parties.
       
    • Second, the remaining “unused allocation amount” would be allocated 70.74% to the backstop parties and 35.37% to other electing eligible Class 5 holders, subject to revisions based on the ongoing claims reconciliation process.
       
• Class 6 - General unsecured claims against debtors other than LATAM Parent, Piquero Leasing Ltd. and LATAM Finance: Holders would receive payment in cash in full or other treatment to render the class unimpaired.
   
• Class 7 - Pre-delivery payment facility claims: Holders would receive the same treatment provided to LATAM Parent claims in Class 5.
   
• Class 8 - Litigation claims: Reinstated “and paid in the ordinary course if and when finally resolved.”
   
• Class 9 - Intercompany claims: Reinstated on the effective date, or if later, the date a claim is subsequently allowed.
   
• Class 10 - Equity interests in LATAM Parent: “[R]etained and reinstated” but “substantially diluted … such that they hold no more than 0.1% of the common stock in LATAM Parent.” Existing equity interests would not receive any distributions under the plan.
   
• Class 11 - Equity interests in debtor other than LATAM Parent: “[P]reserved and Reinstated so as to maintain the organizational structure of the Debtors as such structure exists on the Effective Date.”

RSA Milestones

The restructuring support agreement, which is attached as an exhibit to the DS, includes the following milestones:
 

• Nov. 26: Deadline to file approved plan and DS, subject to additional commitment party comments to be received by Dec. 10.
• Dec. 21: Deadline to execute the backstop commitment agreements.
• Jan. 30, 2022 (40 days after backstop commitment agreement execution): Outside date to hold a hearing on the backstop agreements; debtors’ must use “commercially reasonable efforts” to obtain a hearing date before the Jan. 27, 2022, hearing.
• Jan. 27: DS hearing commencement; debtors may extend the period by 14 days.
• Feb. 10 (14 days after DS hearing commencement): DS approval.
• April 11 (60 days from DS order): Confirmation hearing commencement.
• May 11 (30 days after confirmation hearing commencement): Confirmation order entered.
• Sept. 8 (120 days after confirmation order): Effective date.

Other Plan Provisions

The plan contemplates a to-be-quantified management incentive plan, or MIP, acceptable to the commitment creditors and the backstop shareholders “and consistent with market terms for a company the size and complexity of LATAM and the markets in which it operates.” The MIP placeholder paragraph in the plan also says that upon execution of the backstop agreements, the debtors will seek to amend and assume up to approximately 40 executives’ existing employment agreements, which amended agreements would include “management protection provisions” “in the amount of no less than $35 million in the aggregate.”

The plan provides for releases of the debtors, the official committee of unsecured creditors, the DIP parties, each of the backstop and commitment parties and a variety of related parties. In addition, the plan includes an exculpation provision in favor of a similar list as the released parties.

Under the plan, the commitment creditors and backstop shareholders would agree to vote, during the two years following the effective date, to fill a nine-member new board for reorganized LATAM. “[I]n accordance with Chilean law,” five directors, “including the vice-chair of the Reorganized LATAM Parent Board,” would be nominated by the commitment creditors, and the remaining four directors, “including the chair of the Reorganized LATAM Parent Board (who shall be a Chilean national),” would be nominated by the backstop shareholders. According to the plan, the officers and directors of the new board for reorganized LATAM will be identified in a forthcoming plan supplement.
The financial projections, liquidation analysis and a valuation analysis - including cash sources and uses - of the reorganized entity have not been provided and remain bracketed in the DS on file.

Exit Financing

The debtors’ exit financing consists of the convertible notes and equity rights offerings detailed below, about $2.3 billion in secured notes or term loans and a $500 million secured revolving credit facility, undrawn as of the effective date.

Equity Rights Offering

LATAM Parent, the plan filing explains, would conduct an equity rights offering, or “ERO rights offering” as defined in the plan, which will be open to all eligible equityholders and “shall comply with all Chilean law requirements, including the provision of preemptive rights.” The subscription price would be a 13.73% discount to LATAM Parent’s plan equity value.

Eligible equityholders are defined as “all Holders of Equity Interests registered on the shareholders’ registry of LATAM Parent as of midnight on the Equity Record Date, excluding any Holders of Existing ADS Interests, who will be entitled to exercise preemptive rights under applicable laws with respect to the ERO New Common Stock and the New Convertible Notes during the ERO Preemptive Rights Offering Period and the New Convertible Notes Preemptive Rights Offering Period, respectively.”

Pursuant to the rights offering, LATAM Parent would issue $800 million of ERO new common stock, with 50% of the amount - $400 million - backstopped by the commitment creditors in their capacity as ERO new common stock backstop parties, in exchange for an aggregate 20% backstop payment payable in cash on effective date. The remaining $400 million would be backstopped by Costa Verde, Delta and Qatar Airways, up to the backstop shareholders’ cap described below, without payment of a fee.

The backstop shareholders would use their pre-emptive rights to subscribe to the new ERO common stock up to the full amount of such pre-emptive rights, provided that the total number of reorganized LATAM parent stock issued to the backstop shareholders - inclusive of the backstop shareholders’ equity ownership in reorganized LATAM on an as-converted basis with regard to the new convertible notes Class B - is no greater than 27% of the total amount of the reorganized LATAM parent stock (the backstop shareholders’ cap).

If not all of the ERO new common stock is subscribed and purchased during the ERO pre-emptive rights offering period, there would be a second, “substantially concurrent,” round of subscription and purchase, in which eligible equityholders - including the backstop shareholders and non-backstop shareholders - that subscribed to the ERO new common stock during the ERO pre-emptive rights offering period would have the option of subscribing and purchasing any unsubscribed ERO new common stock on a pro rata basis (based on the amount subscribed by such subscribing holders).

If any shares of ERO new common stock remain unsubscribed after the second round, the ERO new common stock backstop parties - the parent claimants signed up to the RSA - would subscribe and purchase any remaining unsubscribed ERO new common stock.

New Convertible Notes

LATAM Parent would conduct an offering of new convertible notes Class A, new convertible notes Class B and new convertible notes Class C, in compliance with all Chilean law requirements, the plan of reorganization says, explaining that the new convertible notes would first be offered to eligible equityholders, pursuant to pre-emptive rights offerings in accordance with Chilean law.

To the extent not subscribed and purchased by eligible equityholders during the new convertible notes pre-emptive rights offering period, new convertible notes Class A would be distributed to holders of general unsecured claims against LATAM Parent as detailed in the plan treatment section above.

New convertible notes Class C, to the extent not subscribed and purchased by eligible equity during the new convertible notes pre-emptive rights offering period, would be distributed to the new convertible notes Class C backstop parties and other participating holders of general unsecured claims as provided under Class 5 with regard to Class 5b treatment. Holders of allowed general unsecured claims against LATAM Parent that agree to be participating holders of general unsecured claims would be eligible to purchase their pro rata share of $3.269 billion in new convertible notes Class C, subject to the pre-emptive rights of eligible equityholders, and provided that each holder of an allowed general unsecured claim against LATAM Parent would only be able to subscribe and purchase new convertible notes Class C by providing consideration of $0.921692 of new money for every $1 of allowed general unsecured claims held against LATAM Parent.

The new convertible notes Class B would be subject to shareholders’ pre-emptive rights and backstopped by Costa Verde Aeronáutica, Delta and Qatar Airways.

A summary of the new convertible notes is below:
    Term sheets for the new convertible notes are attached as exhibits to the RSA.