Colombia’s finance ministry over the weekend announced that it would provide an 18 month loan of up to $370 million USD to Avianca Airlines, currently in Chapter 11 proceedings in US courts. The financing would be provided under Avianca’s proposed Debtor In Possession (DIP) financing, securing the loan with a lien that takes priority over current creditors.
The $370 million would make up part of the entire $2 billion DIP package the airline is attempting to arrange. Today, September 1, Avianca and other Colombian airlines began passenger flights after being grounded since March. Avianca was already in serious financial trouble before the Coronavirus COVID-19 Pandemic.
Before being grounded due to the pandemic, Avianca, legally domiciled in Panamá, held the largest market share of airlines operating in Colombia, with 45.5% of passenger traffic, flying to 75 destinations, and 31.6% of cargo traffic.
The Colombian national government justified the financing, claiming that the airline contributes 1.4% of the country’s gross domestic product (GDP). However, the move is not without controversy within Colombia. Avianca, branded as a Colombian airline, is domiciled legally in Panamá. Viva Air, which though majority owned by Irelandia Aviation, actually is a Colombian airline (Fast Colombia S.A.S.), founded in Colombia. Viva has asked the government for a much smaller amount (less tha $60 million USD) to alleviate the effects of the pandemic. Viva is not bankrupt and in much better shape. The airline has been in expansion mode, announcing new routes and taking delivery of over 20 new Airbus A320s.
LATAM Airlines is also bankrupt. Its Colombian subsidiary is the number 2 legacy carrier in the country. Easyfly, a local carrier that specializes in connecting Colombia’s smaller cities, is also bankrupt.
The mayor of Bogotá, Claudia Lopez strongly condemned the move. “Millions of unemployed, small businesses, vendors, mass transport systems, and territories have gone months presenting proposals for loans and rescue without receiving any response. Strike the corruption and self dealing that Avianca is privileged with!” she tweeted. The sister of Colombian President Ivan Duque, María Paula Duque is Avianca’s Senior Vice President of Strategic Relations & Customer Experience.
Millones de desempleados, microempresas, comerciantes, los sistemas de transporte masivo y los entes territoriales llevamos meses presentando propuestas de préstamos y salvamento sin recibir ninguna respuesta.
Raya con la corrupción y el auto préstamo que se privilegie a Avianca!
— Claudia López 👍 (@ClaudiaLopez) August 31, 2020
Sunday, Avianca issued a statement in a SEC 6-K Filing regarding the government’s move:
“We are pleased that the Government of the Republic of Colombia will participate in the Company’s DIP financing and express our gratitude for the confidence and support this commitment demonstrates.
As we previously disclosed on August 13, 2020, Avianca’s DIP loan financing is expected to consist of two tranches that include approximately US$ 1.2 billion of new funds as part of a US$ 2.0 billion overall financing facility (including rollups of existing debt and purchase consideration) which will allow the Company to finance its operations during the pendency of its Chapter 11 reorganization. In addition to the Colombian government committing to participate in the DIP loan -by providing approximately 30% of the new funds, or 20% of the total DIP financing- we are also very pleased with the positive reception the DIP loan structure has received from third-party institutional investors that, along with existing lenders, are expected to provide a substantial majority of the DIP loan financing.
Based upon the substantial indications of interest received to date, we are confident in our ability to complete the syndication process and finalize documentation within the next week. We look forward to filing shortly thereafter a motion to approve the financing with the U.S. Bankruptcy Court, which motion will set forth our full DIP financing package, with approval expected during the month of September. The DIP loan, which will be secured by Avianca’s key assets (including the Company’s ownership stakes in its LifeMiles and cargo subsidiaries, as well as by its key brands and cash accounts) will contain certain conditions precedent to be satisfied prior to drawing those funds.”