In re Latam Airlines Grp. S.A.

• Decision Date: 10 September 2020
• Docket Number: Case No. 20-11254 (JLG) (Jointly Administered)
• Citation: 620 B.R. 722
• Parties: IN RE LATAM AIRLINES GROUP S.A., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

620 B.R. 722

IN RE LATAM AIRLINES GROUP S.A., et al., Debtors.¹

Case No. 20-11254 (JLG) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed September 10, 2020

CLEARY GOTTLIEB STEN & HAMILTON LLP, One Liberty Plaza, New York, New York 10006 By: Lisa M. Schweitzer, Esq., Jeffrey A. Rosenthal, Esq., Andrew Weaver, Esq., Thomas S. Kessler, Esq., Luke A. Barefoot, Esq. Lina Bensman, Esq., Attorneys for the Debtors.

DAVIS POLK & WARDWELL LLP, 450 Lexington Avenue, New York, New York 10017 By: Marshall S. Huebner, Esq., Lara Samet Buchwald, Esq., Attorneys for Delta Airlines, Inc..

DECHERT LLP, Three Bryant Park, 1095 Avenue of the Americas, New York, New York 10036 By: Allan S. Brilliant, Esq., Craig P. Druehl, Esq., Gary J. Mennitt, Esq., 2929 Arch Street, Philadelphia, PA 19104 By: Michael S. Doluisio, Esq., Attorneys for the Official Creditors' Committee.

QUINN EMANUEL URQUHART & SULLIVAN LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010 By: Susheel Kirpalani, Esq., Victor Noskov, Esq., Attorneys for Knighthead Capital Management.

WHITE & CASE LLP, 1221 Avenue of the Americas, New York, New York 10020 By: John K. Cunningham, Esq., Gregory M. Starner, Esq., Joshua Weedman, Esq. and 200 South Biscayne Blvd., Suite 4900, Miami, Florida 33131 By: Richard S. Kebrdle, Esq., (admitted pro hac vice), Attorneys for the Ad Hoc Group of LATAM Bondholders.

HOLWELL SHUSTER & GOLDBERG LLP, 425 Lexington Avenue, New York, NY 10017 By: Daniel P. Goldberg, Esq., Scott Danner, Esq., Attorneys for the Ad Hoc Group of LATAM Bondholders.

WHITE & CASE LLP, 1221 Avenue of the Americas, New York, New York 10020 By: Kimberly A. Havlin, Esq. and Southeast Financial Center, 200 South Biscayne Boulevard, Suite 4900, Miami, Florida 33131 By: Thomas Lauria, Esq., (admitted pro hac vice), Attorneys for the Oaktree Capital Management.

ORRICK HERRINGTON & SUTCLIFFE LLP, 51 West 52nd Street, New York, New York 10019 By: Raniero D'Aversa, Jr. Esq., Evan C. Hollander, Esq., Attorneys for Scotiabank Chile

ALSTON & BIRD LLP, 90 Park Avenue, 15th Floor, New York, New York 10016 By: Gerard S. Catalanello, Esq., Attorneys for Qatar Airways Investments (UK) Ltd.

BALLARD SPAHR LLP, 919 N. Market Street, 11th Floor, Wilmington, DE 19801 By: Leslie C. Heilman, Esq., Laurel D. Roglen, Esq., and 1735 Market Street, 51st Floor, Philadelphia, PA, 19103-7599 By: Lindsey Zionts, Esq., Attorneys for Aero Miami I, LLC

PAUL HASTINGS LLP, 200 Park Avenue, New York, New York 10166 By: Pedro A. Jimenez, Esq., Attorneys to Banco del Estado de Chile, in its capacity as indenture trustee under the Chilean Local Bonds Series A through E issued by LATAM Airlines Group S.A.

WONG FLEMING, P.C., 821 Alexander Road, Suite 200, Princeton, NJ 08540 By: Dafney Dubuisson Stokes, Attorneys for Zendesk, Inc.

WONG FLEMING, P.C., 821 Alexander Road, Suite 200, Princeton, NJ 08540 By: Dafney Dubuisson Stokes, Office of the United States Trustee

MEMORANDUM DECISION ON DEBTORS' MOTION FOR AN ORDER (I) AUTHORIZING THE DEBTORS TO (A) OBTAIN POST-PETITION FINANCING AND (B) GRANT SUPERPRIORITY ADMINISTRATIVE EXPENSE CLAIMS AND (II) GRANTING RELATED RELIEF

HONORABLE JAMES L. GARRITY, JR., UNITED STATES BANKRUPTCY JUDGE:

INTRODUCTION

The Debtors collectively are Latin America's leading airline group. The impact of the COVID-19 pandemic on their business was immediate and devastating. In a matter of weeks they suffered the loss of 95% of their passenger business in the wake of COVID-related restrictions on flying throughout Latin America. They commenced their Chapter 11 cases in late May. The matter before the Court are the Debtors' Motions for approval of a $2.45 billion DIP Credit Agreement provided by Oaktree Capital Management Inc. ("Oaktree"), as Tranche A Lender,² and Qatar Airways Investments (U.K.) Ltd and Costa Verde Aeronautica S.A., as Tranche C Lenders. Oaktree had no relationship with the Debtors prior to signing onto the Tranche A Loan. Its involvement in this matter is non-controversial. It has agreed to make a $1.3 billion senior secured loan as part of the proposed DIP Facility. The Tranche C Lenders are two of the Debtors' largest shareholders. Together they hold approximately 21% of the Debtors' common stock. When the holdings of their affiliates are accounted for, they hold over 32% of the stock. The Tranche C loan is a $900 million first loss, undercollateralized junior loan.

The Committee, the Ad Hoc Group of bondholders, and Knighthead (all as those terms are defined below) object to the Tranche C DIP Facility. In substance, they assert that the shareholders are getting a "sweet" deal because they are the Debtors' largest shareholders and that the Court should deny the motion on the grounds that the Debtors have not demonstrated the "entire fairness" of the Tranche C "insider" loan. They say that the loan is overpriced and that it is not the product of good faith, arm's length negotiations. Part of their concern is that the Tranche C DIP Facility provides the Debtors – at their option – with the right to compel the Tranche C Lenders to subscribe to restricted equity in the reorganized Debtor at a 20% discount to plan value. The Debtors say that this Modified Equity Subscription Election (as defined below) is a valuable asset for them, especially if they do not have the cash to pay off the Tranche C DIP Facility at the end of the case. The Objectors (defined below) contend that the election is really a means for the Debtors' major shareholders to ensure that they will retain their equity interests in the reorganized Debtors at the potential expense of unsecured creditors. They also assert, in any event, that the Court should reject the DIP Credit Agreement as running afoul of the absolute priority rule and the bar to "sub rosa" plans.

In late July, the Court conducted a two-day evidentiary hearing on the Motions. In early August, the Court heard argument on the motion. For the reasons set forth herein, the Court finds that the Debtors have met their burden of proving that the DIP Financing satisfies the "entire fairness" test and that there are grounds under section 364(c) to authorize the Debtors to enter into the DIP Credit Agreement. Further, they have demonstrated that the Tranche A and Tranche C Lenders are entitled to a "good faith" finding under section 364(e) of the Bankruptcy Code. However, the Court finds that Modified Equity Subscription Election gives rise to improper sub rosa plan treatment of the Tranche C Lenders and the Debtors' equity holders. For that reason, the Court will not approve the DIP Financing.

JURISDICTION

This Court has jurisdiction to consider this matter pursuant to sections 1334(a) and 157(a) of title 28 of the United States Code, and the Amended Standing Order of Reference M-431, dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b).

FACTS

Background

LATAM Airlines Group, S.A. ("LATAM Parent" or the "Company") is a publicly traded company in Chile. See Trial Ex. 141 (First Alfonsín Decl.) ¶¶ 5, 14.³ On May 26, 2020 (the "Initial Petition Date"), LATAM Parent and certain of its affiliates (the "Initial Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code in this Court (the "Initial Chapter 11 Cases"). On July 7, 2020 and July 9, 2020 (as applicable to each Subsequent Debtor, the "Subsequent Petition Date" and, together with the Initial Petition Date, as applicable to each Debtor, the "Petition Date"), additional LATAM affiliates (the "Subsequent Debtors" and with the Initial Debtors, the "Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code (the "Subsequent Chapter 11 Cases" and together with the Initial Chapter 11 Cases, the "Chapter 11 Cases").⁴ The Debtors continue to operate their businesses and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.⁵ On June 5, 2020, the United States Trustee for Region 2 appointed an official committee of unsecured creditors (the "Committee"). No trustee or examiner has been appointed in these Chapter 11 Cases.

LATAM⁶ is primarily involved in the air transportation of passengers and cargo. See Trial Ex. 141 (First Alfonsín Decl.) ¶ 5. It is Latin America's leading airline group, with a history extending back ninety years, and boasting one of the largest route networks in the world. Id. ¶ 2. It is the largest passenger airline carrier group in South America, and, measured by passengers carried, it is the fourteenth-largest airline group in the world. Id. ¶¶ 2, 5.⁷ Prior to flight disruptions occasioned by the COVID-19 pandemic, LATAM had a total fleet of 340 aircraft (comprised of aircraft operated by LATAM and aircraft that are leased to third parties), and offered passenger transportation services to 145 different destinations in twenty-six countries, including domestic flights in Argentina, Brazil, Chile, Colombia, Ecuador and Perú and international services within Latin America as well as to the United States, Europe, the Caribbean, Oceania, Asia and Africa. Id. ¶¶ 3, 16-17.⁸

Prepetition Capital Structure

The Debtors' capital structure includes a secured revolving credit facility, a series of local unsecured bank loans, series of unsecured international bonds,⁹ series of domestic Chilean bonds,¹⁰ and a series of financings related to the acquisition of the Debtors' fleet. See id. ¶¶ 42, 51-56; Trial Ex. 267 (Second Alfonsín Decl.) ¶¶ 12-21. As of the Petition Date, LATAM had a total of $7,637 million in financial debt obligations. See Trial Ex. 267 (Second Alfonsín Decl.) ¶ 12. In addition, as of the Petition Date, the Debtors had letters of credit outstanding of approximately $562 million. See Trial Ex. 141 (First Alfonsín Decl.) ¶ 57; Trial Ex. 267 (Second Alfonsín Decl.) ¶ 21.

Equity Structure

The Cueto family is the Company's largest shareholder. It beneficially owns 21.46% of the common shares through a series of companies ...