A group of Chilean creditors from the LATAM Group have filed a petition with a U.S. bankruptcy court to include two Cayman financing subsidiaries in the process of reorganizing South America’s largest airline.
The creditors claim in their request that the consolidation of LATAM Finance Ltd. and Peuco Finance Ltd. would have “a huge impact” on how much they can recover and whether they would vote in favor of LATAM’s restructuring plan.
LATAM filed for bankruptcy in the United States in May last year after the airline was hit by the air travel collapse in response to the coronavirus pandemic.
Earlier this month, the group asked the bankruptcy court for an extension until September for the presentation of its restructuring plan, saying it would not interfere with its intention to exit Chapter 11 by the end of this year.
The creditors, who hold $ 490.5 million in bonds issued by the airline locally in Chile, said there were “serious concerns” about certain intercompany transactions between the LATAM group and its Cayman subsidiaries.
The petition was filed by Banco del Estado de Chile in its capacity as contract trustee of several of the airline’s Chilean local bond series.
The file indicated that LATAM Finance and Peuco had been created as part of the issuance of $ 1.5 billion of international bonds, but the subsidiaries had no operations or assets and were relying on the parent group to reimburse investors. international bonds.
The creditors claim that after issuing the international bonds, the LATAM group, without notice, “entered into certain transactions which led Peuco to hold $ 1.3 billion in intercompany claims against certain operating companies, siphoning off thus hundreds of millions of dollars in value “to local bondholders. and the other creditors of LATAM.
The creditors have said they aim to file a more substantial consolidation motion to ensure that they and other creditors “are not unfairly deprived of $ 1.3 billion worth” and that holders of international bonds, “who never expected to have access to separate assets at Peuco or LATAM Finances, do not receive an unwarranted windfall of the same amount”.
The request is for the case to be heard in court before the company presents its reorganization plan.
On May 27, LATAM filed an application to liquidate LATAM Finance in the Grand Court of Cayman on the grounds that the parent company had passed a special resolution and that LATAM Finance was unable to pay its debt.
In the petition, LATAM Finance was described as a financing vehicle which “other than the issuance and payment of the notes that it has issued, its ability to pay principal, interest and other amounts due on the notes that it has issued. ‘it issued depends on the financial situation of LATAM and the income generated by its operations ”.
According to a September 2020 table of assets and liabilities filed with the bankruptcy court, LATAM Finance had unsecured liabilities of $ 1.5 billion, representing the principal amount of international bonds outstanding, and $ 1.3 billion. assets in the form of an intercompany debt due. by Peuco.
Peuco, in turn, declared this amount as its entire debt which was fully offset by the money owed to it by LATAM’s operating companies.
The creditors’ court request cited a report published by a corporate restructuring media Reorganization on January 12, 2021, which noted that “the holders of unsecured bonds issued by the ad hoc LATAM Finance vehicle could recover value from certain operating companies of the group due to $ 1.3 billion in intercompany receivables due to the SPV transmitter ”.
Chilean local bondholders suggest that since then, the prices of international and local bonds, which “had been essentially the same”, began to diverge, with international bond prices increasing significantly in value relative to the prices of international bonds. local obligations and the value of other claims of unsecured creditors.
Court documents show that an ad hoc group, which claims to represent more than 70% of international bond holders, has said it considers its members’ claims to be “structurally senior.”
A committee of unsecured creditors filed a limited objection to the local bondholders’ demand, saying the issues raised and the validity of intercompany claims should be resolved quickly through mediation and negotiation rather than litigation.
The LATAM group opposed the request, arguing that litigation on these issues would be premature and would infringe its exclusive right to develop and propose a plan.
In a court filing, the group said the consolidation request was intended to quickly resolve substantive consolidation issues before engaging with other bondholders to explore those issues “as part of the broader conversations about the plan”.
Such “litigation first tactics” should not be rewarded, LATAM said, as they would induce other parties to negotiate through aggressive litigation tactics which would result in higher costs and “distract management from the consensus plan. wider “.
LATAM added that it “takes umbrage” with the qualification of transactions involving LATAM Finance and Peuco “insofar as BancoEstado even indirectly raises questions concerning the object of these intercompany transactions or the sufficiency of any information relating thereto”.
In a letter to the Chilean newspaper La Segunda, Juan José Tohá, director of corporate affairs for the LATAM group, denied allegations in a press article that funds had been transferred to the Cayman Islands or that the transactions had anything to do with reducing the tax burden of the ‘business.
He specified that all the financing operations had taken place between 2017 and 2019, before the group initiated proceedings under Chapter 11.