International debt holders are divided amid negotiations for additional funds

09/13/2024

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Airline has begun discussions with lessors and bondholders to find solution to its current financial situation — Foto: Leo Pinheiro/Valor

Groups holding Azul’s international debt bonds are at odds amid negotiations for the airline to raise additional capital, sources informed Valor.

The airline, undergoing a fresh financial restructuring, is seeking to raise between $300 million and $400 million from these creditors by using its logistics arm, Azul Cargo, as collateral.

The primary issue is the discrepancy in the collateral received by various creditors for their past bonds and how these differences might be reconciled to facilitate new capital for the airline.

“Azul has issued multiple bonds with varying maturities and collateral. Some creditors believe these negotiations must take this into account,” an insider revealed. This has led to disagreements within the group, which needs to make a decision regarding the additional funds for the airline.

A report by Debtwire on Wednesday (11) indicated that some creditors had split from the main group and were seeking an advisor, including Oaktree Capital Management.

In a market statement, this group of creditors denied any split but did not detail the internal disagreements regarding the collateral.

“The Ad Hoc Group of Azul Noteholders remains united and intends to engage constructively with Azul,” the group stated. This faction represents about 90% of the senior secured notes maturing in 2028, 2029, and 2030. They also hold 90% of the outstanding convertible notes due in 2028. Cleary Gottlieb Steen & Hamilton LLP and Mattos Filho have been hired as legal advisors, while PJT Partners is serving as the financial advisor.

Azul has started discussions with both lessors and bondholders to find a solution to its current financial situation and to avoid a more extensive restructuring through a Chapter 11 bankruptcy filing. Meetings were held last week in New York.

Valued at approximately $800 million, Azul Cargo is expected to be the main asset used as collateral to raise funds and avoid Chapter 11. This operation would follow the same strategy employed with TudoAzul, the airline’s loyalty program, which was used as collateral for a loan last year.

A source familiar with the talks mentioned that Azul needs an influx of funds this year to gain financial breathing room, and it is most likely that this money will come from its current creditors.

The airline sought its bondholders to raise between $300 million and $400 million.

Joana Bontempo, a consultant and head of corporate restructuring at CSMV Advogados, noted that securing new money from creditors holding different bond issues is typically complex, as the bonds need to be renegotiated to allow new collateral and align divergent interests.

“The different payment priorities and creditor rights need to be accommodated to reach a swift and consensual solution,” she said.

According to sources, negotiations with bondholders are closely tied to discussions with aircraft lessors. This is because the holders of international debt have shown interest in providing more resources to Azul, but this new money cannot be used to pay lessors. Therefore, the debt with the lessors must be settled before new funds can be raised.

As for the lessors, total debts amounted to approximately R$18 billion by the end of the second quarter. Current talks involve five major lessors, who hold over 90% of this debt: AerCap, Avolon, Azorra, NAC, and Falko.

Last year, Azul reached an agreement to renegotiate its debt with aircraft lessors, involving the issuance of $370.5 million in unsecured debt maturing in 2030 at a cost of 7.5%, with an option to receive an additional $570 million in Azul preferred shares, priced at R$36 per share.

As the airline’s stock has underperformed due to exchange rate fluctuations and the crisis in Rio Grande do Sul, Azul has initiated a new round of talks to avoid significant dilution.

Sources indicate that current discussions with lessors involve offering a fixed portion of the company in exchange for converting the debt into equity. The dilution is expected to be around 25%.

Behind the scenes, Azul sees a favorable negotiation window. On one hand, the company is not in default on its bonds, which allows for more amicable discussions. Default situations typically force companies into adversarial positions, giving creditors the power to enforce debts—often leading to Chapter 11 protection filings.

On the other hand, Azul will also benefit from the Brazilian government’s release of the National Civil Aviation Fund (FNAC) as collateral for loans. However, the market expects airlines to officially access these funds only next year.

Azul and Oaktree Capital Management declined to comment.

*Por Cristian Favaro, Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/