SAS, Latam, Other Foreign Carriers Find Restructuring Haven in US

Struggling foreign airlines that serve US cities have increasingly fled to American bankruptcy courts, finding friendly Chapter 11 features for reconfiguring crippling debt loads and burdensome aircraft deals.

Distressed multinational corporations have often favored Chapter 11’s predictability and the international breadth of a US federal court order. But facing pandemic-related financial difficulties, foreign airlines in particular are spurning their home country’s insolvency courts and using links to US property—however attenuated—to establish jurisdiction and initiate restructuring.

Over the last two years, major air carriers based in Latin America, Europe and Asia, including SAS AB, Avianca SA and Latam Airlines Group SA, have all filed Chapter 11 cases in the US, using the proceedings to raise billions in new investments and rework their aircraft deals, employee costs and operations.

Foreign carriers’ Chapter 11 cases have underscored US bankruptcy law’s attractive features for international debtors. Despite travelers’ return to flying, pervasive instability in the airline business could force other carriers to scour for restructuring opportunities in the US.

These cases show that “the US is a really hospitable restructuring environment,” said Katie Coleman, co-chair of the corporate reorganization and bankruptcy practice at Hughes Hubbard & Reed LLP. Corporate restructuring laws in most countries “are geared towards getting creditors repaid” but the US “is geared toward restructuring a company and giving it a fresh start.”

SAS is now restructuring in New York to resize its fleet and address a pilot strike that disrupted its summer travel season.

Grupo Aeromexico SAB used bankruptcy in the US to attain $1 billion in financing, and is looking to either reject costly aircraft leases or renegotiate leasing deals.

“Doing that, they substantially increased the value of the company,” said Coleman, who advised Delta Air Lines Inc. as it invested in Aeromexico’s restructuring process and became a 20% owner.

‘Breathing Space’

When Colombia’s Avianca filed for bankruptcy in early May 2020, it said in court filings that it needed Chapter 11 protection “for one principal reason: the COVID-19 pandemic, which has affected the world’s population and economies in ways that have never been experienced.”

Chile’s Latam Airlines, the largest airline group in Latin America, filed Chapter 11 just two weeks later, telling the US Bankruptcy Court for the Southern District of New York that it had been seeing net profits for four straight years before the pandemic suddenly reduced 95% of its passenger service.

Upon filing, both airlines sought protection from foreign creditors who might assert claims abroad or try to seize assets.

Chapter 11 provides what’s known as the “automatic stay,” shielding debtors from legal entanglements over repayment obligations domestically and abroad. It gives bankrupt companies an indefinite amount of time to address liabilities on the books and determine how to reshape the business after emerging from Chapter 11.

“The fact that it applies globally is a really powerful tool to give them breathing space,” said Latam bankruptcy attorney Richard Cooper of Cleary Gottlieb Steen & Hamilton LLP. “That’s unusual in a lot of insolvency regimes.”

Because major creditors often operate or do business in the US, they’re typically inclined to observe and obey a Chapter 11 court order, he noted.

Establishing jurisdiction also doesn’t require much of a company that primarily operates overseas, so long as it shows valid reason to file in the US.

The US has a very simple jurisdictional test that asks debtors whether they have any property in the US, said Andrew Dietderich, co-head of the global finance & restructuring group at Sullivan & Cromwell LLP. “It’s just a peppercorn, as we say in the law,” he said.

The international airlines that filed in the US established jurisdiction with ease, citing their operations in the US and loans that were governed by New York state laws.

International debtors and their creditors in a Chapter 11 case operate with a level of comfort, knowing “that the judicial part of the process is going to be fair, transparent and more predictable,” Cooper said.

New Money

In the wake of the pandemic, several large airlines were clamoring for refinancing opportunities to get them through an extended lull in business.

For struggling airlines with a viable future, Chapter 11 presents a unique opportunity to raise new money. Secured lenders that put money into a bankrupt company are the first in line to get paid back and have an outsize voice in the negotiation of a restructuring plan.

“It’s a very nice way to raise competitively priced capital,” said Dietderich.

In Mexico, for instance, it’s hard for bankrupt companies to get financing, but US laws make it attractive for lenders to take part in restructuring, said Coleman.

During its bankruptcy, Aeromexico was approved to borrow $1 billion from Apollo Global Management Inc., which took a 22% stake in the airline’s new equity.

Latam used Chapter 11 to borrow about $2.45 billion in initial bankruptcy financing. The Chilean airline also won court approval of a restructuring plan earlier this year that calls for raising some $5 billion by issuing convertible notes and shares to creditors and shareholders.

Philippine Airlines Inc. borrowed $505 million late last year to fund its bankruptcy proceedings in New York, and won approval to tap another $150 million in debt financing upon exiting Chapter 11.

As of last week, SAS now has access to a $700 million financing package from Apollo that could allow the lender to convert the debt into stock or participate in an equity offering tied to the airline’s eventual exit from Chapter 11.

‘Fleet Rationalization’

Foreign airlines in the last two years also have used Chapter 11 to eliminate billions in funded pre-bankruptcy debt.

Using the bankruptcy process, Philippine Airlines cut $2 billion of debt, Avianca reduced its pre-bankruptcy loan obligations by $3 billion, and Latam lightened its funded liabilities by nearly $4 billion.

US bankruptcy laws also have allowed carriers to trim operating costs.

Under US law, debtors can review their contracts and reject those that may be dragging down the company. For airlines, bankruptcy is an opportunity to assess the “fleet rationalization needs,” said bankruptcy attorney Debra Grassgreen of Pachulski Stang Ziehl & Jones LLP, referring to aircraft leases that airlines have with leasing companies.

“Airline fleets age and often airlines have excess aircraft and engines that they are not flying or that need maintenance,” she said.

A unique feature in Chapter 11 is vendor contracts that debtors reject—such as rental agreements and aircraft leases—become unsecured claims. That gives the debtor leverage to renegotiate deal terms with a landlord or lessor.

The process has allowed airlines like Latam to become “more flexible” by shedding “significant amounts of liabilities,” Cooper said.

Latam reduced its fleet from 340 to 302 aircraft by rejecting various leasing arrangements and selling some of its planes.

Bankruptcy also empowered foreign airlines to retool their employee costs by laying off workers and renegotiating collective bargaining agreements with employee unions. Latam said last year that it reduced its workforce from about 43,000 employees prior to the pandemic to about 28,700 as of October 2021.

Renegotiating or rejecting union contracts isn’t as simple as it is with commercial contracts, but it’s still an option in Chapter 11, said Coleman.

SAS will use its bankruptcy case to assess many of its trade agreements and try to obtain concessions from labor unions and vendors, she added.

“Airlines tend to be so contract-dependent,” Coleman said. “I think the strength of the US system is that it doesn’t give outsize power to any one constituency.”