Last August, the two brothers were arrested in São Paulo on charges related to fraud in the contracts between the Transpetro subsidiary of state owned petroleum company Petrobras and the Efromovich brothers’ Estaleiro Ilha S.A. (EISA) shipyard in Brazil. The Efromovich brothers were accused of paying bribes and committing “irregularities” in the bidding process to win contracts, costing the government approximately $110 million USD. Ilha S.A. went bankrupt in 2015.

Judge Marcus Vinicius Reis Bastos, of the 12th Federal Court of Brasilia ruled that the prosecution’s case “does not contain a description of the crime and all its circumstances,” as “it does not indicate the antecedent of the crime necessary for the configuration of the crime of money laundering, or because it does not contain a logical narrative of the facts.”

Though briefly arrested, the Efromovich brothers were released to defend themselves. Born in Bolivia and of Polish descent, Germán Efromovich holds multiple citizenship and is well established in the Colombian corporate milieu, most notably as the former controlling shareholder of Avianca Airlines.

According to Brazilian government sources, the Efromovich brothers were arrested today in São Paulo on charges related to fraud in the contracts between the Transpetro subsidiary of state owned petroleum company Petrobras and the Efromovich brother’s Estaleiro Ilha S.A. (EISA) shipyard in Brazil. The Efromovich brothers are accused of paying bribes and committing “irregularities” in the biding process to win contracts, costing the government approximately $110 million USD. Ilha S.A. went bankrupt in 2015.

Also read how Efromovich was ousted from Avianca Airlines (click here)

A court in Curtiba, Brasil ordered prison for the brothers, but that order was modified to house arrest with electronic surveillance due to the Coronavirus COVID-19 Pandemic. 70 year old Germán Efromovich was born in Bolivia to a family of Polish immigrants and holds Brazilian, Colombian & Polish citizenship.

The charges so far do not indicate any criminal wrongdoing related to Avianca Airlines Colombia, or Avianca Airlines Brasil, both formerly controlled by Efromovich & both now bankrupt.

United has given control of Avianca to Roberto Kriete’s Kingsland Holdings, just 3 years after Kriete sued United and Avianca to block them from negotiating a strategic partnership.

When contacted late Friday, a United Airlines spokesperson told Finance Colombia “While Avianca will remain an independent company and continue to run their own airline, United strongly supports their company-wide focus on transformation.  As we move forward with our Joint Business Agreement with Avianca and Copa, which is separate from today’s action, we will see better benefits for our customers and for our company if Avianca is a reliable, successful partner.”

Avianca’s Net Loss for 1Q 2019 was $ -67.9 million, compared to Net Income of $ 3.5 million in 1Q 2018. Net income margin for 1Q 2019 reached -5.9%. Operating income (EBIT) reached $18.5 million, with a 1.6% operating margin. Further, operating revenues reached $1.2 billion for the quarter; a 1.5% year-on-year decrease.

1. Germán Efromovich ousted by United from Avianca board after defaulting on a loan
2. Roberto Kriete appointed to lead Avianca Board by United with the mandate of finding new leadership
3. Efromovich’s Synergy Group defaulted on a $456 million USD loan made in November 2016
4. United has offered Avianca another $150 million in cash to support operations and stabilize finances. Kingsland may add another $100 million USD of liquidity.
5. Ousted from board: Germán Efromovich, (brother) José Efromovich, Rafael Alonso (former Airbus Latin America president)
6. Appointed to board: Roberto Kriete, Fabio Villegas, Juan Emilio Posada (both former Avianca CEOs)

The History

Germán Efromovich, purchased a financially troubled Avianca in 2004 but was able to successfully nurse the airline back to health, and Avianca enjoyed over a decade of growth and prosperity. Apparently some of his other businesses in petroleum, shipyards, and other airlines weren’t doing so well. Still, based on the success of Avianca, he was able to engineer a merger in 2010 with TACA. In the same year, Chilean rival LAN acquired Brasil based TAM to create LATAM, a South American juggernaut. Avianca combined with TACA would give it the scale to compete internationally.

Roberto Kriete Ávila, the 2^nd generation head of TACA agreed to the merger, leaving Kriete with a 22% stake in Avianca. Like many marriages, things that start out well can sour over time. Allegedly due to Efromovich seeking money for his other business interests, Kriete’s Kingsland Holdings sued Avianca in 2017 to block a deal Efromovich was negotiating with United Airlines which would have created a “strategic investment” but according to the lawsuit, contained a “side deal” with Efromovich’s Synergy Group.”

 “I don’t want to, and I am not going to sell Avianca—“Germán Efromovich in a December 2018 interview with Portafolio (Spanish)

The Kingsland suit was harsh in its criticism of Avianca, saying that Efromovich has “plundered” the airline and wanted to reach a deal with United solely for personal gain. “The United transaction diverts the vast majority of the consideration United is paying for a partnership with Avianca — a valuable asset that may provide United with an estimated annual profit in excess of $75 million USD — to Efromovich’s financially shaky affiliates,” stated the lawsuit, according to Bloomberg. Later that year, Kingsland Holdings and Avianca dropped lawsuits against one another and announced that they had agreed to negotiate privately, though a spokesperson for Kingsland Holdings warned: “If those negotiations cannot be completed successfully, the ‘without prejudice’ dismissal of the litigation allows the parties to bring new actions against each other addressing existing and future disputes.”

As it turns out, while Efromovich was negotiating another “strategic partnership” with United Airlines—he was negotiating another loan with United, but this time not for Avianca, but for his own Synergy Group. Synergy would put up its shares in Avianca as collateral in a holding company, BRW Aviation. If Synergy didn’t pay back the loan as agreed, United Airline would get those shares, which constitute a controlling interest in Avianca.

Avianca Chairman Germán Efromovich (left) and ex CEO Hernán Rincón. Rincon abruptly quit, and Efromovich was ousted as Avianca’s chairman of the board. (photo courtesy of Avianca)

A year earlier, Efromovich and Avianca’s board appointed Hernan Rincón as Avianca’s new CEO. Rincón had been the CEO of Microsoft Latin America before taking the position as the airline’s new leader. The company’s previous CEO was Fabio Villegas, a Colombian economist and politician.

In 2015, when Villegas was still under Efromovich at the airline, Avianca sold a 30% stake in its LifeMiles Loyalty program for $343.7 million USD. (Now, Villegas, along with Avianca former CEO Juan Emilio Posada have been appointed to Avianca’s board of directors after Efromovich’s ouster.)

While all this was happening, in 2017 one of Avianca’s major pilots’ unions, ACDAC, went on strike.  According to the union’s Jamie Hernandez, Avianca’s pilots made 30% to 70% less than Avianca’s pilots in other countries. Avianca Brasil and Avianca Argentina use the Avianca name but are not related to Avianca Colombia beyond licensing the name, and their joint control by Germán Efromovich.

The strike lasted almost 2 months, and was costly both for the airline and the union. The Colombian courts declared the strike illegal and ordered the pilots back to work. Avianca successfully fired some of the pilots who organized the strike, (including Jaime Hernandez) but the airline had lost millions, pilot morale was shattered, and pilots began to leave at a rate faster than Avianca could replace them. Throughout 2018 passengers suffered chaos as flight cancellations and delays were so bad that Avianca had to suspend ticket sales completely at one point.

United Airlines has agreements with its unions that forbid United from operating a foreign airline. There are also agreements in place, such as foreign ownership restrictions that would subject any direct takeover of Avianca by United to regulatory approval in multiple Latin American countries. However, United now seems to have indirect control as a majority shareholder. Right before the notice of default was publicized leading to United’s control of the airline, Rincón abruptly resigned as CEO, saying he wanted to “study astronomy.” This less than a week before it became public in an Avianca SEC filing that on April 10, BRW Aviation informed Avianca that it was in breach of the loan covenants with United. A material change in control such as this affects Avianca’s ability to obtain financing, which resulted in Avianca’s credit rating downgrade by Standard & Poor’s.

“In connection with the delivery by United of a notice of default to BRW, Kingsland Holdings Limited, AVH’s largest minority shareholder, has been granted independent authority to manage BRW, which remains the majority shareholder of AVH,” indicated United Airlines in an SEC filing. United has given control of Avianca to Roberto Kriete’s Kingsland Holdings, just 3 years after Kriete sued United and Avianca to block them from negotiating a strategic partnership.

What happens next?

Avianca’s future seems assured for now. It has a new strategic alliance with United Airlines and Copa Airlines, it has United Airlines as a patron, and is probably insulated by regulatory complications from a direct takeover by United. It has new liquidity, and will be unshackled from the drama of Avianca Brasil and Avianca Argentina. There will also be a chance to cleanse any bad blood between the unions, executives, and the previous leadership.

Now Kriete is in control of Avianca, with United’s blessings. Efromovich is having an extremely bad week, losing control of Avianca, and his Brazilian airline shut down by the government. Can the 69 year old industrialist engineer a comeback?

Who is Who

• Kingsland Holdings: Bahamas based investment vehicle of Roberto Kriete
• Roberto Kriete Ávila: El Salvadorean who inherited from his father and controlled TACA Airlines
• TACA Airlines (Transportes Aéreos de Centro America) was the 2nd largest Central American Airline behind Copa until Kriete agreed to a merger with Avianca in 2010, leaving Kriete with a 22% holding in Avianca. Kriete is also a co founder and board member of Mexican airline Volaris.
• Germán Efromovich: Bolivian businessman, son of Polish Nazi Holocaust survivors, naturalized citizen of Brasil and Colombia. Efromovich purchased Avianca in 2004 during a previous era of financial difficulty for the airline. Efromovich also controlled (or still controls; it is unclear) Estaleiro Ilha (EISA) a Brasilian shipbuilder that went bankrupt in 2015, and Estaleiro Mauá shipyard which closed in June of the same year but was able to reopen.
• José Efromovich: Germán Efromovich’s brother and business partner. José Efromovich operated Avianca Brasil and sat on Avianca Holding’s board of directors until last week.
• Synergy Group: Brasil based holding company of Germán Efromovich that held 78% of Avianca Holdings until they were placed into BRW Aviation as collateral for a loan to Synergy, Ostensibly to help save Efromovich’s other airlines such as Avianca Brasil and Avianca Argentina, which while controlled by Synergy and use the Avianca name, are not part of Avianca Holdings and are legally unrelated to the Colombian airline.
• BRW Aviation LLC: A Delaware (USA) holding company set up to hold the Avianca shares as collateral for the United Airlines loan to Efromovich’s Synergy Group. By setting up this entity in the US and Efromovich transferring the shares there beforehand, any legal action in the case of a default would take place in US courts, United Airlines’ home turf.
• Avianca Holdings: The corporate parent of Avianca Airlines, based in Colombia
• Avianca Brasil: Bankrupt Brazilian airline previously called Ocean Air, launched as an air taxi service by Efromovich. The airline publicly had its planes repossessed by lessors last month. On May 24, Brazilian regulators effectively shut the airline down.
• Avianca Argentina: Formally known as Avian Lineas Aéreas, this airline, also controlled by Efromovich is in danger of suffering the same fate as Avianca Brasil, according to reports.
• United Continental Holdings: The holding company of United Airlines, a major US based global carrier. United is a member of the Star Alliance, along with Avianca and Panamá based Copa. United has well known desires to increase its strength in Latin America, though regulatory and contractual hurdles would make a direct takeover of Avianca a complicated undertaking. In any case, it now has a controlling stake in Avianca, due to Efromovich’s default.
• Hernan Rincón: Avianca’s former CEO for the previous three years. He resigned days after his boss Efromovich’s BRW Aviation defaulted on its loan from United Airlines, right before the news became public. According to reports, coming from Microsoft’s toxic culture at the time, he was widely disliked by Avianca executives reporting to him.
• Renato Covelo: Avianca’s current interim CEO. The new board has retained him in that interim position, though the search for a permanent CEO continues.
• Rafael Alonso: Former President of Airbus Latin America, and until last week, board member of Avianca.
• Fabio Villegas: An economist, professor, politician and diplomat, Villegas was appointed by Efromovich to head Avianca from 2005 to 2016. Last week he was appointed to Avianca’s board of directors.
• Juan Emilio Posada: Former CEO of Avianca, then CEO of low-cost competitor Viva Colombia (now Viva Air) from 2014 to 2016. Last week he was appointed to Avianca’s board of directors.
• Advent International: Private Equity firm with experience and specialization in loyalty programs. Avianca sold them a 30% stake in Lifemiles, but a change in control of Avianca could trigger forced buyback provisions.

Headline photo credit: Loren Moss

The legal move comes more than a month after Kingsland sued the carrier, controlling shareholder Germán Efromovich, and United Airlines, alleging that the announced negotiations seeking a partnership with United will benefit Efromovich but not the company at large or other shareholders.

Photo: Avianca Chairman Germán Efromovich (left) and top executive Hernán Rincón fired back at Kingsland Holdings and its chief Roberto Kriete in a countersuit this week.

The Kingsland suit was harsh in its criticism of Avianca, saying that Efromovich has “plundered” the airline and wants to reach a deal with United solely for personal gain. It also claimed that “he torpedoed the strategic process by clandestinely negotiating a transaction with United.”

The countersuit hits back with a similar tone. The new filing calls Roberto Kriete of Kingsland, which has a 22% voting position in Avianca, a “disloyal director who has worked actively to undermine the company’s strategic goals.” It also countered the allegations against Efromovich by alleging that the Kingsland suit was filed by Kriete “for his own selfish purposes.”

In a statement, Avianca said the goal of its lawsuit is to “stop the inappropriate actions that he has carried out seeking to prevent progress of the company.” It also appealed to the court to reject the legal claims previously made by Kingsland and issue an order preventing Kingsland from “further disclosing confidential information.”

The heated battle shows no signs of ending soon. Other potential partners that Avianca consulted last year, including Copa Airlines and Delta Air Lines, have reportedly been subpoenaed to help shed light on the nature of any alternative arrangements that the carrier may have been able to reach outside of negotiations with United. Avianca has stressed that no agreement has been reached yet with United and that the two parties have thus far only been engaged in advanced talks.

But as the controversy plays out, Avianca has stated that it hopes that this affair will become a smaller distraction rather than a protracted issue that will continue to cloud its future. “We are looking beyond the litigation,” said Hernán Rincón, chief executive of Avianca in a statement. “Avianca remains committed to achieving its two strategic objectives approved by the board: entering into a commercial alliance with a world-class airline and raising needed new capital.”

In a statement, Kingsland said that the new filing doesn’t change its previous assertions and that Kriete, who gained his shareholder position after his Taca airline merged with Avianca in 2010, has done no wrong. A spokesperson told the Financial Times that Kingsland rejects “any assertion that Mr. Kriete has acted improperly in any way or other than in the best interests of Avianca and its minority shareholders in his role as a company director.”

The agency noted that Avianca Holdings’ liquidity represented only 9.1% of its revenues in 2016, while it will have to confront nearly $800 million USD in debt maturities in 2017 and 2018. Overall, its cash and equivalents at the end of 2016 were just $375 million USD, down from $479 million USD at the end of 2015.

While Fitch expects Avianca Holdings to cover its capital expenditures and debt maturities over the next two years “with a combination of its own cash flow generation and further borrowing,” the agency continues to have concerns given the carrier’s liquidity ratio.

“Fitch views the company’s liquidity as low,” said the agency in a statement. It added that “Avianca Holdings’ pending debt maturities and scheduled capital expenditure levels are viewed as high with respect to its liquidity and expected free cash flow generation during 2017-2018.”

It also noted that the airline’s “cash flow generation to fuel price variations” could become vulnerable on top of the expected risks in the challenging airline industry and the possibility that Avianca could fail to maintain operational margins as the market leader in Colombia and Central America.

On the positive side, Avianca’s 2016 margin (adjusted EBIT) increased last year to 7.2%, improving from 5.7% in 2015. Fitch Ratings is projecting a dip over the next two years, but only slightly to 6.8%, given the likelihood of the carrier still only managing to realize single-digit passenger growth, among other concerns.

Avianca Holdings also cut its on-balance-sheet debt by some $200 million USD last year, improving its financial leverage (total adjusted debt/EBITDAR) to 6.2x at the end of 2016 compared to 7.1x at the close of 2015. This will improve even further in 2017, Fitch has forecasted, to around 6x by the end of December.

The totality of the analysis comes with one large caveat, however: Fitch Ratings has not factored in the potential of Avianca Holdings aligning with strategic partner. The airline has been seeking to join forces with another global airline for much of the past year and announced earlier this year that it was negotiating with United Continental Holdings on a deal. Though that arrangement has been thrown into question amid legal challenges from Avianca minority shareholder Kingsland Holding Ltd., an agreement with United or another carrier could still come to fruition.

The analysis also does not provide for the possibility of Avianca otherwise receiving an equity injection or finalizing a “merger and acquisition activity-related operations” in the Brazilian market.

“Fitch considers there to be limited visibility at this point as to final outcomes and timing of each of these events, but that in general the incorporation of a global carrier as a strategic partner could be a positive development,” said the agency. “The move would allow Avianca Holdings to strengthen key areas such as market position and corporate governance.”

In its ratings assessment, Fitch Ratings also included ratings for Avianca Holdings subsidiaries.

Avianca Holdings S.A. (Avianca Holdings)

Long-Term Issuer Default Rating (IDR): B

Long-Term Local Currency Issuer Default Rating (IDR): B

$550 million USD unsecured notes due in 2020: B-/RR5

Aerovias del Continente Americano S.A. (Avianca)

Long-Term Issuer Default Rating (IDR): B

Long-Term Local Currency Issuer Default Rating (IDR): B

Grupo Taca Holdings Limited (Grupo Taca)

Long-Term Issuer Default Rating (IDR): B

Photo Credit: Avianca

Offers are due by November 9, and the notion that a majority share may be on the table conflicts with a recent report in Colombian media. Local magazine Semana reported last week that the controlling stakeholders, brothers Germán and José Efromovich, were only looking for a partner and would in no case sell control.  They have reportedly been receiving pressure to improve financial results and cut debt from Elliott Management Corporation, the hedge fund management firm of billionaire Paul Singer that is involved in other ventures with the Efromovich brothers.

All three of the airlines — Delta, United Continental, and Copa — previously have been rumored to have interest in becoming the strategic partner that Avianca has been seeking for months.

In August, Bancolombia, the largest bank in Colombia, said that Avianca’s first-half financial results outperformed its expectations. Cost-cutting initiatives and a contraction in fuel consumption were among the positive factors, and the Medellín-based financial services giant projected that the strategic partnership would be coming “sooner than later.”

In a note to investors, the bank said that it believed completing a deal would “help to improve not only the long-term strategy but also to make an accelerated deleverage of the balance sheet, in our view one of the main risks the company is currently facing.”

While Avianca has spent the year amid a rough operating environment in South America and ongoing rumors swirling around a capital injection, it has seen an increase in passengers. So far in 2016, through September, the airline and its subsidiaries have carried 21.8 million passengers, up 3.6% year-to-date compared to 2015. It’s revenue passenger kilometers are up 7.0% this year.

The Financial Times has reported that the pressure on Avianca Brasil to sell is coming from Elliott Management. The fund is already notorious in South America due to its status as a holdout bond holder of Argentinean debt, and it currently serves as a major lender to Bolivian-born mogul Germán Efromovich, the controlling shareholder and chairman of the board of Avianca Holdings and owner of the Synergy Group Corp. congomerate that controls Avianca Brasil. His brother, José Efromaovich, is also a key figure in ownership of Avianca Holdings and sits on the board.

The Financial Times reported that this financing arrangement is linked to the company’s share price. This means that if the carrier sells or forms a strategic partnership that improves market confidence for an airline operating in a very difficult climate, then Elliott Management stands to profit.

Avianca Brasil has some attractive selling points. In addition to having a 11% domestic market share and a new fleet of 41 Airbus jets, it increased its revenue — per seat flown per kilometer — in the first six months of 2016 by 21%, per Bloomberg. It did lose nearly $300 million USD in 2015, however, in a continuation of what is now a five-year losing trend.

As for the future of Avianca Holdings, several airlines have been rumored to have interest in becoming a strategic partner. U.S. carriers Delta Air Lines and United Continental Holdings, as well as Copa Airlines of Panama, have each reportedly shown interest with bids this year. The Financial Times reported that Delta’s top executive, Ed Bastian, claims to have not made a “committed bid.”

In July, Bancolombia, the largest bank in Colombia, looked to Qatar Airlines’ $613 million USD investment into Chilean carrier LATAM as a good omen for Avianca’s search for a partner. “In our opinion, the transaction — still pending approval — demonstrates the interest of large global players to get market exposure to Latin America, where in recent years the airline industry has grown substantially,” wrote Bancolombia analysts about the LATAM deal in a note to investors.

The analysts added, in July, that, “we believe that Avianca’s stock still shows a fairly significant discount vs. our fundamental valuation and relative valuation.”