Latam Airlines judge to allow creditor vote on bankruptcy exit

Latam Airlines Group SA can send its $5.4 billion bankruptcy-exit plan to creditors for a vote, a judge said Tuesday, handing the airline a partial victory over debtholders who want to pursue alternatives, including a takeover by rival Azul SA.

The decision means the company can seek final court approval for its reorganization plan in April and possibly exit bankruptcy several months after that, should it get support from securities regulators in Chile, where Latam is based.

U.S. Bankruptcy Judge James Garrity rejected arguments that Latam’s proposal is so obviously flawed that it could never win final court approval. Garrity’s decision still allows holdout creditors, including Avenue Capital Management and Pentwater Capital Management, to bring up their objections again when the reorganization comes back to the judge for a final decision.

Several obstacles remain before Latam can ask Garrity to bless the reorganization. Later this month, the judge has scheduled a hearing on whether to approve a restructuring support agreement. That deal would help Latam gets its plan approved by guaranteeing support from key creditors, but has drawn scrutiny because it calls for paying those creditors hefty fees.

The company must also either refinance, or get an extension of a loan that it took out to help pay for its reorganization. That so-called debtor in possession loan matures in April, company attorney Lisa M. Schweitzer said during a virtual court hearing.

Creditor Agreement

Santiago-based Latam spent weeks in mediation with creditors before coming to a deal with a group including the airline’s major shareholders, Schweitzer said.

Latam plans to raise around $5 billion by issuing shares and convertible notes to current stockholders and creditors as it exits Chapter 11 bankruptcy. The deal allows a group of creditors—led by Sixth Street Partners, Sculptor Capital and SVPGlobal—to take control of the company and receive a hefty fee for supporting the plan.

Dissenting creditors had been working on an alternative proposal, according to court papers. But the company has refused to engage with Azul, said Allan S. Brilliant, an attorney for an official committee of unsecured creditors.

Creditors had promised to bring in committed financing for an alternative by the end of January, but failed, Schweitzer told Garrity.

The case is LATAM Airlines Group SA et al., 20-11254, U.S. Bankruptcy Court for the Southern District of New York (Manhattan). To view the docket on Bloomberg Law, click here.