“As a guarantor of consumer rights, we are concerned about the constant complaints that are public knowledge about the lack of quality of the services provided by Avianca” reads the letter (translated). Barreto says that even as a passenger himself, he is upset.

“It is worth mentioning that even I, from my position as a consumer, have seen my rights affected by Avianca’s actions and have filed the relevant complaints by making this situation public,” he writes.

Avianca has been cutting service, removing its business class section on domestic flights, reducing or eliminating perks, removing its in-flight passenger electronics, and replacing its reclining seats with thinner basic seats as found on low-cost carriers. It has moved to a low-cost carrier pricing model as it seeks to compete with aggressive operators like Viva Air, and even upstarts like Ultra Air, that just started operating from Medellín with a single jet. Puerto Rico based Banco Popular announced it is ending its Avianca LifeMiles credit card.

Founded in Barranquilla, Colombia, after bankruptcy, shareholders moved the airline’s legal domicile across the Atlantic to the United Kingdom, though operations are still based in Bogotá. Former CEO Anko Van Der Werff left during bankruptcy, replaced by an investment banker with no airline operational experience. So far, Avianca leadership has been unable to stem the flow of passenger complaints.

Before joining Avianca, Neuhauser was managing director covering Latin American airlines for Credit Suisse and worked as an investment banker for Deutsche Bank, Bank of America, and Merril Lynch. Avianca remains in Chapter 11 bankruptcy protection as it negotiates with creditors hoping to emerge with almost $2 billion USD in new financing.

“Adrian has intimate knowledge of Avianca, a proven track record in overseeing the company’s corporate restructuring and more than two decades of experience in the finance industry and working with transportation companies – all of which make him uniquely qualified to lead Avianca at this critical time said Avianca’s Chairman Roberto Kriete. “On behalf of the Board and major stakeholders, we are confident in Avianca’s path forward with Adrian at the helm, and we look forward to seeing the company reach new levels of success under his leadership.”

Former CEO Anko Van Der Werff will remain connected to Avianca for the time being, as an adviser and as a member of the board of directors. “It has been a great privilege to lead Avianca over the past two years. With global air travel resuming as COVID vaccines are rolled out and significant progress having been made in our corporate restructuring, we are at logical juncture to transition to a new leader who will guide Avianca into its next chapter. I am truly grateful for how everyone at Avianca came together as one team to navigate the effects of the global pandemic, which was the most difficult time in our industry’s history,” said Van Der Werff.

“I am proud of the long-term labor agreements and strengthened relationships with our pilots and other employee groups as well as the work completed to ensure Avianca has the right aircraft fleet to meet the future needs of the business. I will miss working alongside our team every day, but I have made a personal decision to return with my family to Europe. Adrian has made a tremendous impact since joining Avianca and his insights and experience will be instrumental in taking the company forward. I look forward to continuing to support Avianca as a member of the Board,” added Van Der Werff.

Under the new reporting structure, in addition to the finance department, the Company’s Chief Operating Officer and Legal Affairs departments (including Compliance) will report directly to the new Executive Vice President. Richard Galindo will assume the position of Legal Vice President and General Counsel of the airline.

All other executive vice presidents (such as those responsible for commercial affairs, customer experience, network planning, technology, and human resources) will continue to report directly to the CEO.

The airline stated that these changes in the company’s management structure arise, on the one hand, due to the need for a specialized team dedicated to customer service and to facing the challenges of restarting operations and, on the other hand, as part of the company’s organizational restructuring following the airline’s filing for Chapter 11.

Photo courtesy Avianca

This approval comes after Avianca had to scramble to raise additional DIP funding when a widely criticized $370 million USD loan by the Colombian government intended to be part of the DIP financing package was blocked by a Colombian court.

Avianca CFO Adrian Neuhauser said, “The approval of the DIP financing package is a significant milestone and an important step forward for Avianca. We would like to again thank our lenders for their support and confidence in Avianca’s future success. We continue to work on our go-forward operating plan in order to emerge from this process as a stronger and more efficient airline, and look forward to presenting our plan to the U.S Court as we move forward in the Chapter 11 process.”

DIP Financing Package Including US$1.217 billion of New Funds to Support Avianca’s Ongoing Operations and Execution of Reorganization Process

Anko van der Werff, President and Chief Executive Officer of Avianca, added, “With U.S. Court approval to fully access this DIP financing, Avianca has ample liquidity to support our operations as we continue flying and serving customers. As COVID restrictions begin to ease, we are pleased to have safely resumed passenger flights to 21 cities in Colombia and 14 international destinations and look forward to adding more destinations to meet our customers’ travel needs over the coming months. We thank our customers for their loyalty, and we remain steadfast in our commitment to connecting people, families and businesses across Latin America through the Chapter 11 process and beyond.”

As previously announced on September 21, 2020, the Company’s DIP financing totals approximately $2.0 billion, consisting of a $1.27 billion Tranche A senior secured financing and a $722 million Tranche B secured subordinated loan. The DIP financing includes approximately $1.2 billion of new funds ($881 million in Tranche A and $336 million in Tranche B). Funding remains subject to entry of the order by the judge in the U.S. Court and certain conditions precedent, all of which are expected to be satisfied in the coming week.

Seabury Securities LLC is serving as Avianca’s investment bank and financial advisor. Goldman Sachs Lending Partners LLC and JPMorgan Chase Bank, N.A. are serving as co-lead arrangers and joint bookrunners of the Tranche A DIP Loans. Milbank LLP is serving as Avianca’s legal advisor.

All figures in this article USD.

The debt includes $220 million of existing notes, with secured note holders adding $290 million in new loans. Total financing including existing debt is expected to be approximately US$ 2.0 billion, consisting of a US$ 1.27 billion Tranche A senior loan and a US$722 million Tranche B subordinated loan. The DIP financing includes approximately US$ 1.217 billion of new funds consisting of US$881 million in Tranche A and US$336 million in Tranche B.

The $722 million Tranche B DIP (Debtor in Possession) loan includes $336 million of new money, and a $386 million refinancing of existing debt. While Kingsland Holdings participated in the new financing, Avianca says that United Airlines only participated in the refinancing of its existing debt.

United Airlines took control of the majority of Avianca stock after former controlling shareholder & chairman Germán Efromovich defaulted on a $456 million USD loan last year. United’s Latin American strategy depends largely on Avianca’s route network, so the airline’s recovery is critically important for the US carrier. Beyond taking control of the stock, United, along with Kingsland Holdings made an additional $250 million convertible loan to Avianca in November of last year.

Kingsland Holdings is the 2^nd largest shareholder behind BRW Aviation, the investment vehicle controlled by United Airlines (UAL). Kingsland Holdings is the investment entity controlled by Roberto Kriete, arch-nemesis of former chairman Efromovich. Kriete was the former chairman of El Salvador-based TACA Airlines which Avianca acquired in a stock-swap, completing the merger in 2013. That merger made Kriete the second largest shareholder in Avianca. Three years later, Kriete sued Efromovich for mismanagement and “plundering” the airline. Kriete also sought to block Avianca’s strategic alliance with United.

Last year, Kriete’s relationship with United took a turn for the better, with United Airlines, after taking control of Avianca, ousted Efromovich and installed Kriete as Avianca’s new chairman of the board. The two parties collaborated on additional financing for Avianca, by then struggling under crippling debt, dismal labor relations and increased competition,, They installed Anko Van Der Werff as CEO, but their fragile plans for recovery were laid waste by the Coronavirus COVID-19 Pandemic. The company filed for bankruptcy in May of this year after the Colombian government grounded all passenger flights to prevent the viral contagion.

“We are extremely pleased with the support received from a large number of third-party institutional investors and our existing lenders. We believe this demonstrates the market’s confidence in Avianca’s future as a strong, competitive, and profitable airline. Securing these financing commitments is another concrete step forward in our Chapter 11 reorganization process and we look forward to the U.S. Court approval of our proposed DIP financing package. We have resumed operations in most domestic markets and plan to add more domestic and international destinations in the coming weeks, while we remain focused on refining our reorganization plan to fully address the current industry landscape and the effects of COVID-19, enabling our team to continue driving efficiency and margin expansion and positioning Avianca to successfully serve Latin America’s air travel needs for many years to come,” said CEO Anko van der Werff.

The DIP loans are secured by Avianca’s key assets (including the airline’s ownership stakes in its LifeMiles and cargo subsidiaries, as well as by its key brands and cash accounts). Both tranches are secured by a lien on all available collateral, with Tranche B subordinated in right of repayment to Tranche A. The collateral pool for these DIP financings was recently substantially increased via a series of agreements previously announced by Avianca.

The financing is subject to U.S. Court approval, with a hearing scheduled for October 5, 2020, and other customary conditions.

Seabury Securities LLC is serving as Avianca’s investment bank and financial advisor. Goldman Sachs Lending Partners LLC and JPMorgan Chase Bank, N.A. are serving as co-lead arrangers and joint bookrunners of the Tranche A DIP Loans. Milbank LLP is serving as Avianca’s legal advisor.

Colombian President Ivan Duque announced a $370 million USD loan to Avianca, where his sister Maria Paula Duque is a top executive, a move protested by other Colombian airlines, who said the preferential treatment was unwarranted. A Colombian citizen filed a lawsuit and managed to obtain an injunction, temporarily blocking the loan, saying it improperly put at risk public funds without adequate guarantees. Avianca has indicated that it is preparing an appeal, and that without the bailout, it likely won’t survive.

Avianca CEO Anko Van Der Werff received almost half of the $10 million USD in insider bonuses.

Avianca in its court filings admits to paying millions in bonuses to seven top Avianca executives while simultaneously furloughing or firing thousands of Avianca employees. Former Avianca pilots in Peru meanwhile, have legal proceedings against the airline for violating early retirement pledges. Spreadsheets of the payments made are shown below.

In a written statement, Avianca responded to Finance Colombia’s inquiry regarding the payments:

As Avianca (AVH) reported within the documents presented in the process of Chapter 11, at the beginning of this year the company made certain payments to its executives. Part of these payments is related to labor obligations corresponding to the year 2019 and with the results obtained in the process of debt reprofiling in 2019.

On the other hand, before Avianca Holdings S.A. (“AVH”) and its subsidiaries will start the Chapter 11 process, the company’s Board of Directors approved retention plans as part of the ordinary course of business and authorized other payments related to a retention that was developed to seek that the company’s management team remain with AVH throughout the Chapter 11 process. Based on the advisors of the company, these plans are best practices for companies that are in the Chapter 11 process and were developed with the assistance of a consultant from independent compensation and by evaluating companies with comparable income.

The Board of Directors considers that AVH employees who are included in these plans are critical to completing the Chapter 11 process and ensuring that AVH continue to operate profitably and safely at the end of this process. All this The information was made public a few weeks ago when it was presented to the Court of New York, where the Chapter 11 process is taking place, and from the beginning of this process, AVH has been open and has complied with the standards, processes and requirements provided in Chapter 11 on these plans.

Filings (see below) show that CFO Adrian Neuhauser Berlin and CEO Anko Van Der Werff both received over $4 million in bonuses, with the rest distributed among EVP of Sales & Marketing Silvia Mosquera Gonzalez, General Counsel Renato Covelo Frutos, CIO Michael Ruplitsch, Chief Planning & Strategy Officer Michael Anthony Swiatek, and SVP of Operations Eduardo Mendoza De La Torre. President Ivan Duque’s sister, Maria Paula Duque who is listed as Avianca’s Senior Vice President of Strategic Relations & Customer Experience does not appear on the insider bonus roster, nor do Senior Vice President of Purchasing Diana Calixto, or Engineering & Maintenance Senior Vice President José Luis Quiros. As of publication, Finance Colombia has not been able to ascertain whether these individuals were paid from a separate operating subsidiary. Many financial disclosures for Avianca’s operating and investment subsidiaries were submitted separately.

Below are three pages from Case # 20-11134 filed with the United States Bankruptcy Court for the Southern District of New York titled: “Payments or other transfers of property made within 1 year before filing this case that benefitted any insider.”

Click on any image below to enlarge for reading.

Above photo courtesy Avianca Holdings

A citizen’s lawsuit was filed by a Jonathan Ruíz Tobon to block the loan as a threat to public resources, and that the government’s hasty loan to a bankrupt entity with those bankrupt proceedings taking place in a foreign country do not provide adequate guarantees to safeguard public assets. As of press time, Finance Colombia has been unable to ascertain the identity or background of Mr. Ruiz.

Avianca officials refused comment when contacted Saturday by Finance Colombia

The lawsuit also sought to compel the government to disclose proof that there was no conflict of interest due to the fact that Colombian President Ivan Duque ordered the loan, while his own sister, María Paula Duque is Avianca’s “Senior Vice President of Strategic Relations and Customer Experience.” The suit additionally sought documentation on the due diligence performed in light of the revelations that the firm hired to conduct such studies on behalf of the government was only hired the night before President Duque announced the financing.

The lawsuit said that because Avianca was already in trouble before the Coronavirus COVID-19 Pandemic, the pandemic cannot be used to justify the financing, especially has it treats Avianca preferentially to other airlines also seeking aid.

The magistrates admitted the lawsuit, and granted the injunction against the loan to Avianca, while denying a motion to require the Ministry of Finance and Public Credit to report on objective analysis that led to the approval of the loan. The denial of this motion, indicated the court is not ruling that such information should not be provided, only that it is not included in the emergency injunction.  Furthermore the court did not include a justification of possible conflict of interest between President Duque and his sister. Such proof may be necessary, but would not be injunctive in nature, or in other words, lifting the injunction would not depend on such justifications.

See Also: Declan Ryan Says Viva Air Not Being Treated Fairly By Colombian Government: Exclusive Interview

The likely next step would be an appeal, either by the Colombian government, Avianca or both. No matter, this is a grave blow for the airline, and for Duque’s credibility. The announcement of the loan to Avianca drew widespread disapproval on the grounds that it gave preferential treatment to Avianca over other airlines, including genuinely Colombian airlines such as Viva Air and bankrupt EasyFly, or to multinational carrier LATAM’s Colombian subsidiary. LATAM is also in bankruptcy, and like Avianca, is a foreign carrier with a Colombian subsidiary. LATAM lacks the family connections to the President that Avianca enjoys, however. In addition, rather than taking place in Colombian courts like EasyFly, Avianca’s bankruptcy was filed in US federal courts, where the Colombian government enjoys no special standing. Third, and the primary justification of the lawsuit, is that Avianca is in such dire financial shape, the government has failed to demonstrate adequate guarantees or even a probability of a return on its principal.

Above photo: Colombian President Ivan Duque with Avianca CEO Anko Van Der Werff (Courtesy Presidencia de la República)

The translated court order follows below.

CUNDINAMARCA ADMINISTRATIVE COURT

FIRST SECTION

SUBSECTION “A”

Bogota D.C., ten (10) September of two thousand twenty (2020)

Judge Speaker: Dr. LUIS MANUEL LASSO LOZANO

Reference: Exp. # 250002341000202000584-00

Plaintiff: JONATAN RUÍZ TOBÓN

Defendant: MINISTERIO DE HACIENDA AND OTHERS

MEANS OF PROTECTING COLLECTIVE RIGHTS AND INTERESTS

Subject: Admit lawsuit and take emergency precautionary action.

Mr. Jonatan Ruíz Tobón, acting on his own behalf, brought an action in the exercise of the Means of Control for the Protection of Collective Rights and Interests, provided for by Laws 472 of 1998 and 1437 of 2011, against the Presidency of the Republic, the Ministry of Finance and Public Credit and Avianca Holdings S.A.

The plaintiff argues that the defendants pose a threat and/or violation of collective rights to administrative morality, public heritage and  “social security, as far as sustainability is reflected,” due to the approval and disbursement of a loan to Avianca Holdings S.A. worth US$370 million by the National Government.

In that regard, they claim that the defendants refrain from allocating the emergency mitigation fund (hereinafter the FOME) in the sum of US$370 million to Avianca Holdings S.A.

In the alternative, it requests that the defendants be ordered to provide real, material and valuable guarantees for the payment of the eventual credit that is disbursed by the FOME Committee with their respective interest, higher than those payable by the State when indebted.

1. Procedural requirement

After reviewing the application, the shareholder states that it dispenses with the procedural requirement of the constitution in reluctance covered by the article 144(3) of Law 1437 of 2011, since it expressly authorizes “this requirement may be dispensed with, where there is an imminent danger of irretrievable harm against rights and collective interest, a situation which must be based on demand. ”

Plaintiff argues that “in this case the imminent danger is established on the basis that the FOME Committee has already approved the disbursement of credit and it is absolutely imperative, minimally, to require the National Government, as narrated in the previous fact, that obliges the debtor to constitute REAL, MATERIAL AND ABOVE ALL, VALUABLE GUARANTEES to support the debt before it is delivered to Avianca Holdings S.A., which gives account of the haste that exists in order to avoid irretrievable damage and, therefore, the impossibility of exhausting the prior requirement that the ibid. standard addresses, given that once a credit has been disbursed without guarantees little or nothing can be guaranteed.”

In that regard, the Court considers the following.

Article 144(3) of Law 1437 of 2011 provides.

“(…) Before filing the application for the protection of collective rights and interests, the complainant must request the authority or individual in administrative functions to take the necessary measures to protect the threatened or violated collective right or interest. If the authority does not address such a complaint within fifteen

• days after the application is filed or refuses to do so, it may be brought before the judge. Exceptionally, this requirement may be dispensed with, where there is an imminent danger of irretrievable harm against collective rights and interests, a situation which must be based on the ” (Highlighted by the Court).

In accordance with the facts and the presentation of the grounds of law submitted by the shareholder with respect to the collective rights it considers to be infringing, the Court finds that the possibility of disbursement of the claim to Avianca Holdings S.A. is imminent, which would mean, in the argument of the acting party, the specificity in the impact of the collective rights invoked.

Under such conditions, waiting for the President of the Republic, the Ministry of Finance and Public Credit to be relucted and Avianca Holdings S.A., would make harmless the capacity for protection offered by this means of control and, in particular, that of the precautionary measure that is “to protect and   guarantee provisionally, the object of the process and the effectiveness of the judgment.” (Article 229(1), Law 1437 of 2011), which will be addressed below.

In that regard, there is a place to accept the application without the prerequisite laid down in Article 144(3) of Law 1437 of 2011, previously noted.

2. Admission of demand

To meet the requirements of Articles 18 of Law 472 of 1998, 144 and 160, numeral 4, of Law 1437 of 2011, the application established by Mr. Jonatan Ruíz Tobón in exercise of the Means of Control of Protection of Collective Rights and Interests against the Presidency of the Republic, the Ministry of Finance and Public Credit and Avianca Holdings S.A. is ALLOWED.

3. Emergency Precautionary Measure

In the application, the acting party requests, in accordance with article 25(a) and (b) of Law 472 of 1998, the decree of the following precautionary measures to avoid the result of irretrievable prejudice to collective rights to social security and public heritage.

“FIRST: ORDER the Ministry of Hacienda directly or through the FOME, the Presidency of the Republic or, in general, the person who corresponds by functional competence, REFRAIN from disbursing the approved credit to Avianca Holdings S.A up to US370 million,  until possible debtor is provides real, material, valuable and objectively verifiable guarantees, which support the payment of the credit with their respective interest which in any case must be greater than those paid by the State when indebted, for the purposes  of maintaining the normal return on public capital.

SECOND: ORDER the Ministry of Finance directly or through the FOME, to the Presidency of the Republic or, in general, to whom it corresponds by functional competence, to publicly inform what is the objective analysis that led to the approval of the credit in mention and, contrary to this, which prevented the resources from being allocated for the purposes provided for in Decree 444 of 2020 and, in any event, in the economic revival of traders, small and  medium-sized enterprises, in addition to the basic needs of the “most vulnerable population.”

This implies that the defendants are ordered to publish: (i) the request for credit made by Avianca Holdings S.A with its means; (ii) the minutes where the FOME’s reasoning for the approval decision rests; (iii) the contract, agreement, or any document stating Avianca Holdings S.A.’s eventual agreement with the Government, with specification of the conditions, guarantees, method of payment and other minors. This is a measure to protect transparency and administrative morality.

THIRD: ORDER the respected President of the Republic, prior to any disbursement of money in favor of Avianca Holdings S.A.,  to report possible conflicts of interest  in compliance with the 2013 Law of 2019, and as stated in Articles (sic) 40 of Law 734 of 2002 and 11 of Law 1437 of 2011 (now Law 1952 of 2019), or, if not, the reasons on which it is based so as not to do so or to understand it to be overdone, on the occasion of his sister, Mrs. María Paula Duque, she serves as Senior Vice President of Strategic Relations and Customer Experience at Avianca Holdings S.A.”.

Article 17 of Law 472 of 1998 empowers the court responsible for adopting the precautionary measures it deems necessary in order to prevent irretrievable and irreparable harm or to suspend the facts a resulting from the threat of collective rights and interests.

For its part, Article 25(a) and (b) of Law 472 of 1998 provide that before the application is notified, the court of its own motion or at the request of a separate person may properly decree the prior measures it deems relevant to prevent imminent damage or to cease what has been caused.  

“ARTICLE 25. CAUTELAR MEASURES. Before the application is notified and in any state of the process, the judge  may,  ex officio or at the request of a party, decree, duly reasoned, the prior measures it deems  relevant to prevent immutable damage or to cease the damage that has been caused. In particular, it may decree the following:

1. Order the immediate cessation of activities that may cause the damage, which have caused or continue to cause it;
2. Order that the necessary acts be executed, where the potentially harmful or harmful conduct is a consequence of the defendant’s omission; (…).” (Highlighted by the Court).

Article 229, paragraph, of Law 1437 of 2011, for its part, provides that measures in processes intended for the defense and protection of collective rights and interests shall be governed by the provisions of that law.

In line with the above, Article 234 of Law 1437 of 2011 provides:

“Since the submission of the application and without prior notification to the other party, the Judge or Judge-Rapporteur may take an injunction, when you meet the requirements for its adoption, it is shown that due to its urgency, it is not possible to exhaust the procedure provided for in the previous article. “.

In accordance with the prescribed rules, without prior notification to the other party the judge or judge-rapporteur may take an injunction when they meet the conditions for their adoption, as referred to in Article 231 of Law 1437 of 2011, it is clear that due to their urgency it is not possible to exhaust the process of transfer to the counterparty provided for in article 233 of the same law.

As stated in the lawsuit, it is certain about the loan that the National Government granted in favor of Avianca Holdings S.A. for US370 million; but information is lacking on the conditions under which it has been granted and, in particular, on the guarantees that support it, one of the central claims of the popular actor.

In such circumstances, due to the imminence of disbursement and the consent that once done it loses meaning, to a very large extent, the means of monitoring the popular action in question; the process of transferring Article 233 of Law 1437 of 2011 will not be exhausted and, consequently, the procedure or the emergency precautionary measure provided for in Article 234 of that law shall be adopted.

Likewise, two aspects stand out.

The first is that this emergency precautionary decision shall be taken by Decision-making Chamber. Although Article 234 of Law 1437 of 2011 provides that such a measure shall be adopted by “the Judge or Judge-Rapporteur,” it is no less true that Articles 125 and 243(2) of the aforementioned law provide, without distinguishing between ordinary and emergency precautionary measures, that the decree of those measures shall correspond to “the chamber.”

The second, which was dismissed by the subscribed magistrates, was refusing the possibility of declaring an impediment, which could arise in the fact that the remedies paid by them as a COVID-19 Solidarity Tax also feed the FOME; because they left the personal estate to move to that of the State and, consequently, constitute foreign property which, for that reason, do not generate direct or indirect interest with respect to the officials who take this decision.

The Chamber will then go on to set out the reasons why it considers that the requirements laid down in Law 1437 of 2011, Article 231(2) for the decree of this emergency precautionary measure, are fulfilled.

The lawsuit is reasonably well founded in law. It sustains claims and requests for injunction and information that accounts for the granting of the US$370 million loan to Avianca Holdings S.A. and, likewise,  sufficient with regards to the absence of sufficient public information on the subject (numeral 1, article 231, Law 1437 of 2011).

The applicant is entitled by the standing as an active person conferred by Article 12(1) of Law 472 of 1998 (any natural or legal person) for the exercise of popular actions for the protection of collective rights and interests (numeral 2, Article 231, Law 1437 of 2011).

The plaintiff submitted “documents, information, arguments and justifications” which make it possible to conclude, through an interest-weighting trial, that it would be more burdensome for the public interest to deny the precautionary measure than to grant it (numeral 3, Article 231, Law 1437 of 2011).

The plaintiff has reported on the financial situation facing Avianca Holdings S.A., which is reflected in Financial Statements the annex to the electronic file “03 Test 1” of the lawsuit called “ “Unaudited Interim Condensed Consolidated Financial Statements” of Avianca Holdings S.A. and subsidiaries as of “June 30, 2020 and December 31, 2019 and for the six month periods ended June 30, 2020 and 2019. ” of the document named “Report of the Independent Auditor on the Intermediate Financial Review,” surrendered by the audit firm KPMG S.A.S.

That document states that according to the consolidated financial information condensed as of June 30, 2020, the Party (Avianca) in question has losses of US$353 million, negative equity of US$355 million equity and working capital differences of US$4.027 million (page 22 of the audit report).

Likewise, it points out (page 69) that the situation of Avianca Holdings S.A. is pre-existing to the pandemic situation generated by COVID-19, since in 2019 it did not pay dividends to its defendants due to difficulties due to the financial situation it had faced since then (“losses withheld as of December 31, 2019″).

Also that to address the effects generated by the COVID-19 pandemic, on 10 May 2020 the Panel referred to submitted voluntary petitions to the Bankruptcy Court of the Southern District of New York, for protection under Chapter 11 of the United States Bankruptcy Code (page 23 of the audit report).

It concludes this report by noting that “These conditions indicate the existence of material uncertainty that may raise significant doubts about the Group’s ability to continue as a running business. Our conclusion is not changed in relation to this matter.”

Taking into account that this means of control is formulated for the purpose of taking the safeguards for the protection of public assets following the credit granted to a company that, despite its strategic status in the performance of the Colombian economy, it is in a situation such as that described; the Court considers that there are sufficient reasons to consider that in the interest-weighting trial referred to in article 231(3) of Law 1437 of 2011, the conditions for asserting that it is “more burdensome for the public interest to deny the measure conceding it to be” are established” (page  2).

It is a US$370 million loan approved with public equity resources that are part of the Emergency Mitigation Fund, in relationship with which there is no clarity about the conditions of grant or the actual guarantees verified for their endorsement.

Finally, it should be noted that not granting the measure would cause irretrievable harm to public assets (literal a, numeral 4, article 231, Law 1437 of 2011); in particular, because once the disbursement has occurred, the possibilities available to the State entities concerned to reduce or control the risks of loss of the public resources concerned are significantly reduced.

In this context, there are serious grounds for considering that if the measure were not granted, the effects of the judgment would be nugatory (literal b, numeral 4, Article 231, Law 1437 of 2011), therefore the subject-matter of the process or the effectiveness of the judgment of the means of control of protection of collective rights and interests would not be guaranteed.

4. Decree of test methods

In order to guarantee the right to defend the shareholdings and to have sufficient evidence of judgment in the present precautionary procedure, which permits the lifting or continuity of the provisional measure in question, the following means of proof are decreed to be close within three (3) days of notification of this Providence.

To the Ministry of Finance and Public Credit.

1. The regulation on the basis of which appropriations are granted by the FOME.
2. Technical motivations for the granting of credit as a regulatory measure. In this section, consideration should be given to: the selection of options or alternatives, the justification of the measure (social inclusion, environment, taxation and national interest), the analysis of the impacts of the measure and the way in which its implementation and monitoring is planned. In particular, the analysis of impact on the conditions of free competition in the Detailed credit conditions.
3. The documentation that served as the basis for its grant: application for credit, documentation accompanied for the purpose (conditions of return of credit, business plan that supports it, guarantees offered and value therein) and documents that prove the development of the administrative action deployed by the FOME for the granting of the credit.
4. Considerations on the establishment of a foreign jurisdiction for the provision of the courses constituting the loan.
5. The existence of similar applications and formalities by other airlines based on the national territory.
6. Amount of resources currently available to the FOME and what is the estimated projection over the next 18 months.
7. The contract for the provision of services with code No.13.009-2020, signed on August 28, 2020 between the Nation-Ministry of Finance and Public Credit and the law firm Arnold & Porter Kaye Schiller LLP. As well as the reasons for it and the essential purpose for which it was subscribed, in the context of the credit in question.

To the Ministry of Transport.

The studies and connectivity reasons for air transport that justify credit. The study of alternatives and the justification of each of them. As well as the reasons for choosing the chosen one, that is, the granting of the credit alluded to, to Avianca Holdings S.A.

To the National Agency for the Legal Defense of the State.

The considerations on establishing a foreign jurisdiction for the provision of the resources constituting the US$370 million loan approved to Avianca Holdings S.A., arising from the possibility of participation in the insolvency process under Chapter 11 of the Bankruptcy Act of the United States (Chapter11 of Title 11 of the United States Code) of that company and, in that sense, the protection of Colombian public heritage in the context of the aforementioned judicial process before the foreign court.

The previous authorities shall indicate the information, which is reserved, in order for the Court to confer the appropriate treatment.

Conclusion

The Minister of Finance and Public Credit shall be ordered as an emergency precautionary measure to take the necessary administrative steps to ensure that the Emergency Mitigation Fund refrains from disbursing the credit approved to Avianca Holdings S.A. worth US$370 million.

It will be denied as an emergency precautionary measure that the Minister of Finance and Public Credit publicly reports on the objective analysis that led to the approval of the appropriation in mention. The reason for this is that it does not have a direct relationship with the imminence of disbursements or credit. However, it will be the subject of the evidentiary debate that will take place in the main notebook of this process of popular action.

The request for a precautionary measure shall be denied that the President of the Republic prior to any disbursement of the credit referred to in that report on any possible conflict of interest on the fact that his sister, Mrs. María Paula Duque Samper, serves as Senior Vice President of Strategic Relations and customer experience of Avianca Holdings S.A.

This application will be denied because it has no direct relationship with the emergency precautionary measure aimed at suspending the disbursement of the US$370 million loan approved by the FOME to Avianca Holdings S.A. However, this issue will be addressed within the framework of the popular means of action control (Numeral ninth of the facts of the lawsuit).

On the merits of the foregoing, the Administrative Court of Cundinamarca, Section First, Subsection “A”,

Resolved:

FIRST. – ADMITTED the lawsuit established in the exercise of the Means of Control of Protection of Collective Rights and Interests by Mr. Jonatan Ruíz Tobón against the President of the Republic, the Ministry of Finance and Public Credit and Avianca Holdings S.A.

SECOND. – PERSONALLY NOTIFY the content of this decision  to the PRESIDENT OF THE REPUBLIC, MINISTER OF FINANCE AND  PUBLIC CREDIT and PRESIDENT OF AVIANCA HOLDINGS S.A.,  or to whom they have delegated the power to receive notifications, in accordance with article 199 of the Code of Administrative Procedure and administrative litigation, applicable by reference to Article 21(3) of Law 472 of 1998.

THIRD. – INFORM THE PRESIDENT OF THE REPUBLIC, MINISTER OF HACIENDA Y CRÉDITO PÚBLICO and  PRESIDENT OF AVIANCA HOLDINGS S.A., which in accordance with the provisions of article 22 of Law 472 of 1998, are granted a term of ten (10) days to respond to the request and request the practice of evidence, counted from the day following that of the respective documentation.

FOURTH. – In view of the provisions of the final section of article 21 of Law  472 of 1998,  CONTACT, by Secretariat of the Section, the Attorney General of the Nation, Comptroller General of the Republic and Director of the National Agency for the Legal Defense of the State, on the admission of the application.

FIFTH. – Refer to the Ombudsman a copy of the application and this order for registration covered by Article 80 of Law 472 of 1998.

SIXTH. – At the expense of the acting party,  DIFUSE to the members of the community through a media or mass communication (press or radio) that in the Administrative Court of Cundinamarca, Section First, Subsection “A”, File No. 2500023410002020-00584-00, the Means of Control for the Protection of Collective Rights and Interests is advanced as imposed by Mr. Jonatan Ruíz Tobón who considers collective rights violated and/or threatened social security (as far as its sustainability is concerned), public heritage and administrative morality for the approval and imminent disbursement of a loan granted by the National Government – Emergency Mitigation Fund to Avianca Holdings S.A. worth US$370 million.

SEVENTH. –  ADOPT THE EMERGENCY CAUTELAR MEASURE consisting of suspending the disbursement of the credit to Avianca Holdings S.A. by the Emergency Mitigation Fund worth US370 million. For this purpose, the Minister of Finance and Public Credit shall, within twenty-four (24) hours after the communication of this measure, advance all necessary administrative actions in order to comply with the order given and inform this Court of such determination, accompanying the relevant support. This decision on caution does not imply pre-adjudication under article 229 (final) of Law 1437 of 2011.

EIGHTH. – DENIES THE EMERGENCY CAUTELAR MEASURE consisting of the Minister of Finance and Public Credit publicly reporting what is the objective analysis that led to the approval in favor of Avianca Holdings S.A. of the credit worth US370 million. This decision on the precautionary measure does not imply pre-adjudication under article 229 (final) of Law 1437 of 2011.

NINTH. –  DENIES  the precautionary measure consisting in the fact that the President of the Republic, prior to any disbursement of the credit referred to, reports on any possible conflict of interest on the fact that his sister, Mrs. María P Aula Duque Samper, serves as Senior Vice President of Strategic Relations and Customer Experience of Avianca Holdings S.A. This decision on the precautionary measure does not imply pre-adjudication under article 229 (final)  of Law 1437 of 2011.

TENTH. – DECREE the means of proof indicated in numeral 4. of the reasoning part of this providence, for the notebook of the precautionary measure and the main notebook of this popular action. By the officiating Section Secretariat.

NOTIFY AND COMPLY

Approved in the courtroom and executed on the date.

LUIS MANUEL LASSO LOZANO

Magistrate

CLAUDIA ELIZABETH LOZZI MORENO

Magistrate

FELIPE ALIRIO SOLARTE MAYA

Magistrate

L.C.C.G.

The airline already stopped paying debt and certain expenses and had warned that it did not have enough cash on hand to continue making payroll. Pilots in Peru have already initiated labor actions against the airline, and the carrier faces public opposition in Colombia to a direct government rescue.

Those with claims against Avianca may contact Avianca’s claims agent, Kurtzman Carson Consultants, at www.kccllc.net/avianca. Information is also available by calling (866) 967-1780 (U.S./Canada) or +1 (310) 751-2680 (International), as well as by email at www.kccllc.net/avianca/inquiry.

“Avianca is facing the most challenging crisis in our 100-year history as we navigate the effects of the COVID-19 pandemic,” said CEO Anko van der Werff. “Despite the positive results yielded by our ‘Avianca 2021’ plan, we believe that, in the face of a complete grounding of our passenger fleet and a recovery that will be gradual, entering into this process is a necessary step to address our financial challenges.”

The airline will abandon Peru

In a press release issued Sunday, Avianca revealed that “In parallel to its Chapter 11 filing in the U.S., Avianca intends to commence a wind-down of its operations in Peru pursuant to local laws. This decision supports essential right-sizing efforts and will allow Avianca to renew its focus on core markets upon emergence from its court-supervised reorganization.”

Expats, Visitors Stuck Inside (or outside) Colombia? Here Is What You Should Do Now

Avianca has filed motions with the US bankruptcy court to pay certain prepetition employee wages, compensation and benefit obligations owed from before the filing date, as well as a request to continue paying wages and honoring employee benefit programs in normal day-to-day operations. Avianca has also requested authority to honor various prepetition obligations owed to certain of its travel agency partners, vendors and suppliers from before the filing date. The airline says that it intends to pay vendors and suppliers, as well as travel agency partners in the ordinary course for goods and services provided on or after the filing date during its Chapter 11 process.

LifeMiles redemptions continue

Avianca states that passengers can expect to use tickets, vouchers and gift cards purchased before Avianca initiated this process. Avianca customers will continue to accrue miles when they fly with Avianca and can continue to redeem miles earned through LifeMiles to purchase tickets with Avianca during this process. Additional frequent flyer benefits remain active, including access to VIP Lounges, priority check-in, upgrades, and other benefits. Avianca also expects to continue to issue ticket refunds and honor travel coupons and payments or credits associated with baggage or service claims in adherence with its current policies. Lifemiles is a separate legal company from Avianca, and is not included in the bankruptcy filing.

Avianca has created an information site, aviancawillkeeponflying.com to provide the company’s position on the bankruptcy filing.

See Also: What might happen to Avianca? Will Copa purchase the Airline? (click)

Avianca stock has fallen over 90% in the past month.

Avianca also indicated to passengers that the flight schedule may change daily and passengers will be informed when this happens. Avianca will report the changes through its Coronavirus Covid-19 website (click here)

Fleet grounding: From operating 142 aircraft to 10

The airline, already under significant financial duress, announced that it is forced to ground 132 aircraft: 22 wide-body, 100 narrow-body and 10 ATR turboprop regional craft. It will keep 5 Airbus 320 and 5 ATRs active, destined for domestic operation.

The airline has also implemented a hiring freeze, voluntary unpaid leave, layoffs, and seeks to renegotiate terms with suppliers. Additional measures include the deferral of non-essential costs and capital expenses, cost control, savings and suspension of “any investment, expense or project that is not closely related to domestic maintenance and operation, as well as travel and events.”

“This is without a doubt the biggest crisis in the airline industry in history. The decisions we are making, they hurt, they are extremely difficult, but we must be flexible and face the situation. The total suspension of our international operation and the strong contraction of the domestic one force us to the majority of our employees go home. It is time for the governments of the region to take exceptional measures that mitigate the social and economic impact that affects hundreds of industries. If we want to reconnect Latin America and preserve the more than 20,000 jobs that we generate we need the cooperation and collaboration of all industry players and especially the support and cooperation of governments,” said Anko van der Werff, president and CEO of Avianca Holdings.

Today the government announced the first Coronavirus COVID-19 infection in the tourism-driven city of Cartagena. The patient, an 95 year old American woman arrived on a British operated cruise line. The Interamerican Development Bank this afternoon cancelled their international gathering scheduled for next week in Barranquilla. The annual Feria de las 2 Ruedas held in Medellín’s Plaza Mayor convention center is on for now but has cancelled its pavilion of Chinese exporters.

Colombian airline Avianca (NYSE: AVH), facing trouble on multiple fronts with scandals and operational issues, is down by more than half, to $2.44 at today’s close compared to $5.00 on February 20. The price fell over 17% the last day alone.

All charts in this article from Google

The company was in technical default a year ago, and its offices were raided by Colombian regulators last month. Now, with the pandemic and tourism drop off, passenger load factors are destined to decrease. Also, a large part of the company’s business is done in Colombian pesos, but must pay dollar denominated debt to creditors like United Airlines (NASDAQ: UAL) and Citadel Advisors.

Colombia’s state controlled petroleum company Ecopetrol also trades on the New York Stock Exchange (NYSE: EC). The generally well run company has recently diversified into holdings in Texas and the US gulf coast. Colombia is facing diminishing natural gas reserves even though that gas is in the ground. Hydraulic fracturing is politically controversial and opposition may hinder the company from using unconventional methods to efficiently extract enough resources to service domestic demand, much less export—a traditional source of foreign reserves for the South American country.

On March 9 when Saudi Arabia initiated a petroleum trade war with Russia, prices fell 30% after crude prices fell over the weekend by over 60%, from $51.99 to $34.71 USD (OPEC basket). This destroyed expectations by the Colombian government for dividends it was planning to receive from Ecopetrol. The petroleum company will now find it challenging to maintain positive margin between production costs and crude pricing.

Ecopetrol’s challenges reverberate throughout the Colombian economy. The government depends on petroleum revenues to feed national spending. As the Colombian peso correlates with petroleum, the plunge in oil prices saw a commensurate plunge in the Colombian peso (COP) that now is at record lows against the dollar.

Today, one Colombian peso is only worth 0.026 US cents, so the smallest denomination Colombian coin, a 50 peso piece, is worth 1.3 US cents. The peso has also fallen off a cliff, going from under 3,400 pesos per dollar to over 3,800 pesos per dollar this week—record levels.

Normally, a weak peso increases tourism and demand for Colombian products and services, typically outsourced services such as IT and Customer Contact. This time it may be different though, as tourism has been all but shut down, and recession fears see north American companies, Colombia’s natural market, playing defense.

What’s next?

One bright spot may be Colombia’s mining sector. Gold does well in recessions, and Colombia has an active, growing precious metals mining sector. The unpopular administration of Ivan Duque took a billion dollar special dividend out of Ecopetrol in December to fund political promises and a budget deficit but now the economy’s troubles will likely overcome any effects that short term cash injection may have had.

External factors in the short term will dictate events on the ground. The two external variables are:

1. How long will the OPEC-Russia trade war last?
2. How long and how severe will the Coronavirus pandemic be?

The current president, scandal plagued and with a sub-30% approval rating has two years left in his administration. The impending recession will likely play out the rest of this year, and it is not known what the fallout in 2021 will be.  Colombia has never elected a far-left president, but with a declining economy, political and human rights scandals, it is hard to predict if the president can survive to a second term, and if not, who the alternative might be. In a runoff last election, President Ivan Duque defeated left-wing radical and former revolutionary militant Gustavo Petro, now serving in the Colombian Senate. Petro has defined himself as an enemy of mining and petroleum, and generally anticapitalist.

Ecopetrol has deep enough pockets, credit, government backing and operations to weather the coming uncertainty. The peso may rebound, but will at least stabilize, as the government isn’t printing money or borrowing beyond reason.

Growth may slow; the country is well along in its 4G highway project, but investors are wary of currency risk. The government has backed investments and co-signed to cover a fall in currency, but this will affect public coffers, and now it remains to be seen how the rapidly evolving environment will affect the appetite of foreign institutional investors for Colombian debt.

Avianca? It remains uncertain. How far is United Airlines willing to go to “protect its asset?” Can the airline withstand an almost certain drop in traffic, considering its heavy debt load that it just renegotiated? And with the CEO, Anko Van Der Werff taking steps that may alienate some passengers, when the economy rebounds, will the passengers return?

Time will tell.