Avianca Brasil competitors begin speaking to legal PROPRIETARY advisors Latin America

13 March 2019 | 19:14 BRT Transportation Airlines such as Latam Airlines have started to consult Brazilian law rms in order to potentially question the asset sale agreement between Issuer Azul and Linhas Aereas and AVB Holding, according to two Holdings, S.A. Financial Advisor(S) sources familiar with the matter. At the center of the competitors' Galeazzi & Associados concerns is Azul getting additional slots and causing a massive Lawyer(S) loss of market share for its competitors, the sources said. Cascione, Pulino, Boulos & Santos Advogados Cole Schotz P.C Costa E Tavares Paes Advogados The possible transaction involving the debtors – which do business as Fox Rothschild LLP Avianca Brasil and have the same ultimate ownership as Colombia’s Holland & Knight LLP – and Azul is considered highly questionable, as it Latham & Watkins LLP Machado Meyer Sendacz E Opice involves not only Avianca Brasil’s operating certicate, but the transfer Mattos Filho, Veiga Filho, Marrey Jr. E Quiroga of 70 pairs of slots and 28 Airbus A 320 aircraft. The USD 105m non- Advogados binding agreement was announced 11 March. Quinn Emanuel Urquhart & Sullivan, LLP Sergio Bermudes Smith, Gambrell & Russell LLP However, Avianca Brasil's creditors and lessors argue that the sale of Thomaz Bastos, Waisberg, Kurzweil Advogados slots is not allowed, as the slots are permissions and not assets, as reported. Other Avianca Brasil If Avianca Brasil’s slots were returned to the government, in the event of an insolvency, for example, Brazilian National Civil Aviation Agency Other Efromovich Family (Anac) would have to open a bidding process, the rst source familiar said.

“In this bidding process, preference would be given rst to new entrants or companies with a small portion of slots at the Guarulhos and Congonhas [in Sao Paulo],” a source following the situation said. “After that, the process would be open to the airlines which already operate at those airports,” the source explained.

As Azul has only 5% of the slots in Congonhas, it would obtain the majority of slots, but this does not mean all the current slots held by Avianca Brasil would be transferred to Azul, the same source said. “If Azul obtains the slots according to the agreement, this will be great for Azul, which would then be close to Latam in market share,” the same source said.

The transaction between Azul and the debtors must be concluded by 30 May. In addition to the USD 105m price, Azul estimated that it is necessary to make USD 130m in additional investments, as reported. Azul would also be prepared to provide a debtor-in-possession (DIP) nancing of up to USD 40m, to ensure the regular operation of the debtors.

There are two different previous decisions regarding the sale of airport slots in bankruptcy protection proceedings in Brazil. In 2007, Gol acquired for USD 320m. The transaction was done using the same format Avianca is proposing right now – a new company was created including 120 airport slots.

On the other hand, in 2010, Pantanal Linhas Aereas tried to do the same, but Brazil’s Superior Court of Justice (STJ) denied the company’s request to sell slots as part of its restructuring process.

To make things even more complicated, Resolution 487 from Anac also states slots cannot be sold, and only transferred to companies with the same ownership.

Anac willing to accept the transaction

Despite the fact that Anac prohibits the sale of slots, the regulator may not want to place obstacles in the way of Azul’s acquisition of the Avianca assets, as there are few overlapping routes, a third and a fourth source familiar with the matter said.

On 1 February, the debtors led a restructuring plan focused on the sale of airport slots. The proposal involves the creation of an Isolated Productive Unit (UPI) called Life Air. Life Air will hold stakes in the special-purpose entities (SPEs) for each airport slot granted to Oceanair by Anac.

The creation of a special Avianca Brasil subsidiary, with a different shareholding structure, to hold the assets to be sold, will probably make the regulator approve the transaction, said Guilherme Amaral, a lawyer specialized in aeronautical at ASBZ law rm.

“The regulation prohibits the sale of slots, but not an airline acquisition,” he said.

Anac considers this “market solution” the best scenario, otherwise it will have to deal with millions of people who bought tickets on Avianca Brasil and lose the opportunity to y, the rst source familiar said.

Brazilian antitrust regulator CADE would also be willing to approve the agreement, Bank of America Merrill Lynch analysts said in a report.

Even if the deal between Avianca and Azul is not approved, Azul would probably most benet in the event that the debtors are declared insolvent and Avianca Brasil’s slots are redistributed, as Azul has a lower market share than Gol and Tam, Amaral said.

Considering the acquisition of 70 Avianca slots, Azul market share would increase from 5% to 12% at Congonhas airport, and from 11% to 22% at Guarulhos airport, Bradesco BBI wrote in a report. At , in Rio de Janeiro, the market share would increase to 40% from 27%.

Taking over protable slots at Congonhas and Santos Dumont would minimize the impact on Azul's leverage, the bank wrote. It estimates Azul’s adjusted net debt to EBITDAR for 2019 would remain at a comfortable level of 4.1x, up from 3.8x pre-deal, conservatively assuming there would be no savings from renegotiations of aircraft leases.

Azul would capture about 50% of Avianca's revenue with the deal and would be able to charge higher fares, inating that number by about 30%, Eleven Financial Research wrote in a report.

Azul will probably renegotiate with lessors of the A-320s. According to Amaral, the lessors don’t have the obligation to maintain the terms of the contracts they had with Avianca, and may negotiate with other airlines.

Debtor-in-possession request approved

The judge approved the BRL 31.65m debtor-in-possession (DIP) nancing provided by Azul, according to court documents, in response to a petition led earlier today by Oceanair Linhas Aereas and AVB Holding. The debtors emphasized they have been “facing a serious liquidity crisis.”

The agreement with Azul cancels the one the debtors signed with creditors Manchester Securities, Elliott Associates and Elliot International to obtain up to USD 75m, according to the four sources familiar. The idea was also to obtain enough liquidity to maintain operations and pay upcoming debts. The nancing will be done through an issuance of domestic bonds (debentures).

A Latam spokesperson declined to comment on the matter. A representative from Azul did not respond to a request for comment. by Lucy Monteiro and Silvia Rosa

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