Finance Colombia arranged a meeting with key analysts with Standard & Poor’s to understand how this might play out for LATAM and Avianca, the two full service carriers that operate domestic routes in Colombia. Other airlines that operate domestic routes such as Viva Air are privately held and thus not covered by the ratings agencies, and SATENA is government owned.

Finance Colombia’s Executive Editor Loren Moss spoke with key Standard & Poor’s analysts to address the health and survival of these two key Latin American airlines.

Finance Colombia: We know that LATAM of course was losing money already, even though they have had some help with Delta Airlines coming in and I’m sure you’re aware of the interest that Qatar Airways has expressed in them. Obviously with Avianca the situation is a little bit different. We have the situation that they had with United Airlines and Kingsland Holdings and all that, they already were facing challenges and then this pandemic has hit and the airlines of course are all grounded here and pretty much everywhere, so I would like to get your expertise: first if you can introduce our panel of Standard & Poor expert analysts.

Flavia Bedran So we have Amalia, who is the analyst for LATAM. I work as a backup for LATAM Airlines here based in South America and then we have Humberto who covers Avianca, and then we have Fabiola who covers Avianca and Aeromexico for example. I think we can cover any of your questions on the airlines.

Finance Colombia: When you look at the situation here in the northern Andean region, obviously Colombia, what do we know about the relative positions of LATAM and Avianca before this pandemic and then how has this changed the game? obviously it is hard for all the airlines but if we look specifically to their relative position how has this changed their viability in the medium-to-long-term in this pandemic?

Amalia Bulacios: We can start with LATAM. I think you’re most focused on the Colombian market, right? So, just to give you background there, LATAM has a strategy I would say like at least for the past 2 years more or less with a focus on growing all the Spanish speaking countries in South America but I guess particularly the focus was on Peru on the first place and then second place in Colombia. In any case although they have a strategy to bring relatively good growth in the market, the Colombian market was still a very small one for them. When you look at the revenues for LATAM, the major market for them of course is Brazil, which is between 35% and 40% of the revenues, then Chile and then Peru and Colombia is probably less than 5% of the ASK (Available Seat Kilometers, or capacity), so yes, it’s a small country, but yes they had a good growth prospect for Colombia and they work to have greater share in that country.

Amalia Bulacios is associate director of Latam Corporate Ratings with Standard & Poor’s

Just to give you some example, of what the strategy was before this pandemic started, of course as you just said this this expansion of COVID-19 has changed everything for the companies, not just for LATAM, but all of the companies in the region.

I guess South America particularly because probably with the exception of what we have seen in Mexico for instance, but the South American governments were very strict at the beginning and moved very rapidly in terms of closing borders and even not allowing domestic flights at all in any country, the same in Peru and Argentina and even in Colombia. At this point LATAM is only flying, but of course with little frequency with empty aircrafts we would say, just in Chile and in Brazil and basically I think that elsewhere they have most of their aircrafts grounded. So the situation the company has right now, this is a very challenging environment for LATAM–. I sent you our last report last week for LATAM, that we downgraded to B from the double B minus (BB-) and the reason we did this is because of course there will be a much weaker performance for the company this year probably than what we expect for a double B minus (BB-) falling…they’ll probably need new financing so we will probably see by the end of the year and even with an almost…I wouldn’t say full recovery next year but with strong recovery next year we will still see the company more leveraged than what it was in the past right? So, that’s what our rating is reflecting now.

Finance Colombia: Great, thank you, now, if we look at Avianca in the past year they had to renegotiate their financing. They were technically insolvent for a time. They just took on a significant amount of additional debt they’ve got debt coming in from I think Citadel Capital in the US as well as obviously United and Kingsland and some other investors, and not necessarily the best terms, so obviously aside from having to deal with this debt and then this significant event to cash flow structurally my question to analysts like you would be: What resources can they draw upon when we look at their long-term survival?

One of the things that we’re seeing in the market here in Colombia is a large growth in the amount of low-cost carriers coming in. We obviously have home grown Viva Air, that’s not publicly traded, so they are backed by the people behind RyanAir in Europe, they have a lot of planes on order, they seem to be expanding they just opened routes to Cali and they put significant negative pressure on the legacy carriers, especially domestically, they don’t really fly much internationally except for between Colombia and Peru, they do have one route to Miami but now we have JetSmart coming in from Chile, we have Plus Ultra coming in from Spain, Spirit is from the US and expanding here in Colombia and even though they’re not necessarily playing domestic routes, like Viva, this has to be putting pressure on the traditional carriers like LATAM and Avianca, and my question is how does this affect their ability to generate enough margins in cash flow from operations to service their debt?

Humberto Patiño Last year was a rough year for Avianca regarding its financial obligations, as it had limited time to complete its refinancing strategy within the expected timeframes. This environment and this scenario led the company to adjust its operating strategy going forward. In 2019, the company mainly focused in profitable routes, mostly international. The domestic market was being taken a bit by low cost airlines, so the company shifted to increase its trans-border market, mainly through its Bogota hub, to continue increasing its international participation. Therefore, what Avianca was mainly focusing on was in reducing the domestic participation, for example in Peru, where the company reduced significantly its domestic frequencies, as well as between some local Colombian cities. Avianca increased its international participation, for example, increasing frequencies between Colombia and the United States, and if passengers were to fly to a southern American country, they would have first stopped in Bogota and continued the journey to increase load factors and profitability.

Humberto Patiño is an analyst with Standard & Poor’s

By the end of 2019, the company finalized its refinancing strategy. The company received $250 million from Kingsland and United, now the company’s main shareholders, another $125 million dollars from additional investments from multiple Investors as a loan to the company and additional cash inflows from its sale and lease-back agreements; basically entering into this economic downturn with approximately $540 million dollars in cash. Once the company gradually resumes its operations, we expect the company to continue benefiting from its international market presence, gaining higher contribution margins. That is how we believe the company will shift its operating strategy in order to withstand to economic downturns.

Finance Colombia: That’s interesting because reminds me that a long time ago, Copa abandoned its domestic flights that you used to have a model that looks like Avianca with domestic flights and international, then Copa just said look we’re going to move directly to International in and that seems to have worked very well for them, I think if I remember correctly they have a pretty strong balance sheet going into this crisis, at least relatively speaking and they had a very focused strategy: they don’t run any transatlantic routes, they really stick to Northern Andean countries and the Caribbean, they’re dominant here in Central America and that just seems to be their operating model.

With Avianca Express, Avianca kind of shifted some of their domestic operations especially into smaller cities here in Colombia into a subsidiary, and that reminds me a lot of what Telefónica has done when they are obviously preparing to shed off their Latin American operations except for Brazil, they’re starting to separate those operations and I’m speculating and I don’t know if you guys have spoken with Avianca; if that’s something that that maybe is part of their strategy because it does seem that are struggling domestically and so they can focus on their international routes, doing some transatlantic routes that Copa is not doing and is not interested in, and Avianca is obviously key to the United strategy coming here into Latin America.

Delta is moving into the area, American Airlines who knows what’s going to happen with them, they’re kind of left out in the game, but can we speculate and say that Avianca in order to stay profitable, is going to cede a significant amount of market share on the short-haul domestic routes to some of the low-cost carriers?

Humberto Patiño At this point, I’m going to try to say that this operating strategy could result in positive operating results for the company. I just want you to go back to 2019, when the company started shifting to this new operating strategy and basically the company was getting negative contribution on its cash generation for example, and once the company started shifting into the international market decreasing its domestic presence the company started increasing its contribution to the positive side. I do not know what happened to the other airlines coming into this competitive environment, but as of today what we know, is that Avianca has this strong participation on international flights as you were mentioning and continues benefiting from routes that no other airline has right now. Therefore, what we will say is that the company will continue increasing its market share and its International presence deriving in positive results. Due to the economic downturn, it is a little bit hard to say that this will occur in 2020 but we believe that the company not only benefits from Bogota’s hub as a transborder hub but also El Salvador and Panama, so we believe the company will remain profitable if this strategy continues going forward.

Finance Colombia: We don’t know obviously what’s going to happen with this pandemic, we don’t know what the mechanics of this recession are going to be. Goldman Sachs has estimated a 24% decline at least for the US, negative growth in the second quarter I don’t know if Standard & Poor’s has any projections that they would like to share but let’s suppose that we are in a no-growth or negative growth atmosphere for the remainder of the year, slightly longer than expected but certainly in the realm of possibility and we don’t know of course how long the airlines are going to be grounded either, nobody knows. But I would ask who is in the better position to weather this, I guess who has the most cash and is in the best position to weather the storm?

And then number two, if we look at a lower slow growth environment going into 2021 what are things going to look like for LATAM and Avianca in the next year? Are they going to be able to survive? Do we expect to see potential mergers with foreign carriers or what would a worst-case scenario look like? I know I’m asking you to speculate but if you could give me some conceivable outcomes?

Flavia Bedran All the companies that currently are credit watch negative, which means that at least a 50% chance of a downgrade in the next I don’t know, 3 months, 6 months, depending on how we see this recovery coming in the second half of the year and for 2021…well this industry is already highly volatile so we usually determine our forecast for the next 12 to 24 months, not much more than that because it’s too volatile. We have been analyzing airlines in this scenario of uncertainty, we are looking at it short term, so as Amalia said in the beginning, we put basically everyone in credit watch in the first week after the barriers in terms of flights had started to be closed in South America and then two weeks after that the downgrade is it by two notches go into the quarantine, each of them, all of them keep continuing in credit watch so we might continue to revise it every two weeks every month, depending on new information flow.

Amalia Bulacios: Just to complement briefly, I’m probably not going to tell you anything new but particularly if you if you were asking between LATAM and Avianca, LATAM was standing, at least from our credit perspective on a stronger position right? It was rated higher, it was rated stronger and had a healthier balance sheet, it had gone through a period of good cashflow…very slightly but at least slightly reducing debt that’s so they were something relatively strong but I would say this has changed everything, and like you said and we will continue reviewing them constantly, I think they kind of brought all of the airlines closer to each other (in terms of circumstances), we would probably have seen much more difference between the airlines a few months ago and they think this has kind of weaken the whole market and bringing them all to a much weaker position.

Also Read: Avianca Says It May Not Survive

Humberto Patiño In terms of Avianca, after the refinancing strategy back in November 2019, the company still had $60 million approximately in US dollars that has to be paid in May 2020, and we believe that right now the company is in a weaker position than LATAM. This is also due to higher debt service from lease payments expected in 2020. Considering that the company had $540 million dollars in cash, and expected contracting strategy to allow cost reductions to preserve as much cash as possible, we believe the company will be able to fulfill its $60 million maturity of unsecured notes in May 2020, around $60 million in lease payments each month, and in some extent, the remaining fixed costs for the period the company remains with no operations (administrative, aircraft maintenance, among others for example). We believe Avianca’s liquidity position is somehow weaker than LATAM, as Amalia was mentioning, therefore the rating for Avianca is CCC suggesting that the company faces a possible downfall scenario within the next six months.

Finance Colombia: Yes, I do think it is going to be tough. If we look at it and you guys have done the math, I haven’t—but I can just say intuitively that even if this didn’t happen if you look at for example the debt service was and what the payments were that were coming due and as the regular periodic debt service it was I think they were something like six times (debt to cash), but now we’re looking at a lower demand even if we come into a recovery but that’s still there in and probably this situation puts them even behind, they have already announced that they’re deferring payments with their long-term real estate leases so I would imagine facilities or offices or hangars that kind of thing, so I would imagine that’s going to even complicate things going further. They just finished getting a loan from United Airlines (UAL), so I don’t know if that means you’re getting another round of funding, because United is going to have their own struggles in the US and globally dealing with this as well. But I think what you all have told me and the consensus here is that there is a lot of uncertainty which is negative, but we don’t know what’s going to happen and it will be good to have Standard & Poor’s doing the research so that investors and journalists like me can continue to monitor the situation and gain insight over the coming quarters. I’m appreciative of what you all are doing.

Terms & Conditions:

$250 Million Senior Secured Convertible Loan (subject to mandatory conversion features)

• Use of Proceeds – General corporate purposes after repaying all obligations under Avianca’s existing $50 million loan from Kingsland Holdings
• Conversion Price – $4.6217 per ADS, representing a 35% premium to the 90-day volume-weighted average price, through October 3, 2019, of $3.4235
• Maturity – Four years from the funding of the Convertible Loan (currently anticipated to be November 2023).
• Interest – 3% per annum PIK to maturity date; with no upfront fees.
• Security – Secured by pledge of stock in Avianca’s major subsidiaries; provided, that Avianca may sell and retain net proceeds from certain non-strategic business operations.

Avianca may convert all of the outstanding principal amount of the convertible loan upon the satisfaction of the following conditions:

• Avianca’s ADS trading at or above $7.00 on a volume-weighted average price basis for 112 of 150 consecutive business days (if such conversion is to occur on or prior to the first anniversary of the funding of the Convertible Loan) or
• Avianca’s ADS trading at or above $7.00 on a volume-weighted average price basis for 90 of 120 consecutive business days (if such conversion is to occur after the first anniversary of the funding of the Convertible Loan);
• Avianca’s consolidated total cash averaging equal to or greater than $700 million over the immediately preceding six-month period;
• The non-existence of defaults or events of default under the Convertible Loan documentation; and
• The non-existence of material litigation.

Conditions Precedent to Funding: Including, but not limited to:

1. Obtaining necessary consents for granting collateral interests;
2. Successfully completing Avianca’s previously announced re-profiling plan, including obtaining all necessary waivers and consents, as an integral part of Avianca’s previously announced $2.6 billion liquidity program and profit turnaround (the “Avianca 2021 Plan”);
3. Reducing Avianca’s fleet and new aircraft orders (and major maintenance agreements) compatible with Avianca 2021 Plan;
4. Successfully completing Avianca’s previously announced exchange offer for its 8.375% Senior Notes due May 2020 for new 8.375% Senior Secured Notes due 2020 with participation therein of at least 85% of the outstanding aggregate principal amount of Avianca’s currently issued and outstanding 8.375% Senior Notes;
5. Adopting and implementing substantial changes in Avianca’s revenue and cost initiatives designed to meet the profit targets embedded in the Avianca 2021 Plan; and
6. Having a total cash balance of $550 million after giving effect to the first $250 million of Convertible Loan and the repayment of the Kingsland Loan, and taking into account any funds that will be released to Avianca upon closing of the Convertible Loan.

$125 Million Senior Secured Convertible Bonds (subject to mandatory conversion features):

• Form – The Incremental Debt is contemplated to be structured as tradeable mandatorily convertible bonds on terms and conditions set by Avianca in order to ensure all $125 million of funds will be received by Avianca; however, the term, collateralization and mandatory conversion features of the Incremental Debt, among other provisions, must be the same as the Convertible Loan.
• Allocation – The Incremental Debt is expected to be allocated: first, on a pro rata basis to Preferred Holders pursuant to their respective subscription rights, which are anticipated to be transferrable; and second, to the extent that all of the Incremental Debt has not been allocated pursuant to the foregoing allocation, the remaining portion shall be offered to any persons and in any manner determined by Avianca and its board of directors in accordance with applicable law and rules of the applicable exchange.
• Timing – Upon compliance with all applicable securities laws and completion of funding of the Convertible Loan.

Exchange Offer Collateral Condition

The Company is currently finalizing the documentation necessary for closing its previously announced offer to exchange any and all of its 8.375% Senior Notes due 2020 for newly issued 8.375% Senior Secured Notes due 2020, including the documents necessary to create and perfect the security interests in the Collateral, as defined in Avianca’s Exchange Offer Memorandum and Consent Solicitation Statement, dated August 14, 2019, as supplemented (the “Exchange Offer Memorandum”).

On the Settlement Date, as defined in the Exchange Offer Memorandum, Avianca will have all security agreements with respect to the granting of security interests in the Collateral, including applicable airplanes and residual interest in airplanes Collateral and intellectual property Collateral in final and agreed form; provided, that due to various local law requirements in the approximately 19 countries in which Avianca intends to file such applicable Collateral documentation, some signatures, formality requirements and filings of collateral instruments will be made as soon as possible after the Settlement Date, and perfection will not occur until such applicable filing is made and, in some jurisdictions, perfection may be deemed not to have occurred until the applicable filing is additionally registered or similarly acknowledged in such jurisdictions, which is subject to local government processes and procedures and in some cases could take several weeks or months after the Settlement Date.

The Company’s having all such documentation with respect to the Collateral in final and agreed form on the Settlement Date shall be deemed to satisfy the Collateral Condition (as defined in the Exchange Offer Memorandum), notwithstanding that the filing and perfection of the security interests will take place following the Settlement Date, as described above.

Key Rating Drivers

Change in Shareholder Structure:

If executed as planned, the new shareholder structure at Avianca could be supportive to its refinancing strategy as well as to support its transformational plan. Fitch assesses Avianca on stand-alone basis, with no link to United’s ratings, but the presence of United as a strategic partner and the USD $150 million loan are credit positive. Avianca needs to amend contracts and request waivers from several ECAs (Export Credit Agency) that are the creditors on around USD $1.1 billion of Avianca’s debt (total of USD4 billion as of Dec. 31 2018).

The amendments and waivers refer to changes in the shareholder structure. They would add United as permitted holder of Avianca’ shares and removal of Synergy Group from being a guarantor in the ECAs
contracts.

Strong Regional Market Position:

Avianca’s business model combines operations in Colombia, Central and South America, allowing it to rotate capacity according to market conditions. Its geographic diversification allows the company to maintain consistently solid average load factors of 82% during 2015-2018. The company’s business diversification is viewed as adequate with international passengers, domestic passengers, cargo operations, and the loyalty program and other segments representing approximately 42%, 41%, 13%, and 4% of its total revenues.

Avianca’s dominant position in the Colombian market is positively incorporated into the ratings. The
announcement of a joint business agreement with United and Copa Airlines (not rated) should only
benefit Avianca’s competitive business position in the medium to long term. Regulatory approval
for this transaction is expected to take approximately 12 to 18 months.

Challenge to Improve EBIT Margins:

Fitch expects Avianca’s EBIT margin decrease about 5.5%-7.0% during 2019 and 2020, driven primarily by rationalization of its route network and several costs cutting initiatives. This compares with the 6.0% adjusted EBIT margin of 2018.
Avianca has announced the removal of E190 aircraft and elimination of unprofitable routes, mainly in Peru and in selected regional markets in Colombia, while focusing on its points of network strength. Higher fuel prices and currency devaluation remain as ongoing concerns. The scenario of increasing competition from smaller players in Avianca’s main markets is a concern and may pressure the company’s solid load factor and yields levels, as observed during 1Q19.

Fleet Management Key to Restore FCF:

Avianca’s strategy to rightsizing its fleet delivery plan is key to improving its cash flow generation. The high capex level of USD $659 million in 2018 was a major driver for the negative FCF of USD $248 million during 2018. The company announced the revision of its aircraft backlog, aiming to defer up to 35 narrow-body aircraft while cancelling the delivery of another 17. In its base case scenario, Fitch forecasts Avianca’s FCF to be neutral to slightly negative during 2019 and 2020, up to USD50 million negative. Capex for 2019 and 2020 is expected to be USD $441 million and USD $500 million, respectively. Fitch also expects Avianca to remain disciplined on its dividend distributions, maintaining minimum level payouts to avoid further leverage deterioration.

Leverage to Decline By 2020:

Avianca’s high leverage has pressured its ratings, and the challenging operating environment in 2019 should delay any deleveraging to 2020. Fitch expects Avianca’s total adjusted leverage to improve to around 6.3x by 2020 from 6.7x in 2019. Avianca’s total adjusted debt/EBITDAR was 6.6x during 2018 and 7.5x in 2017. Fitch base case does not incorporate any major non-core assets sales besides those already announced, including the Embraer fleet.

High Refinancing Risks:

Avianca’s ability to proceed with their refinancing plan is crucial to avoid an additional downgrade. As of March 31, 2019, the company had USD $357 million in cash. USD $626 million of debt will come due in the short term (excluding operating leases), and USD $568 million of its unsecured notes are due in May 2020. Excluding the bonds, the majority of its obligations are aircraft related, which the company is expected to refinance with ongoing secured loans. Fitch considers that the company has some financial flexibility to raise additional cash using part of its unencumbered aircraft fleet. Nonetheless, ongoing discussion at the shareholder level has led to some uncertainties and concerns that the company’s debt will be impacted by changes of control clauses.

Credit Linkages and Notes’ Guarantees Structure Incorporated:

The ratings also reflect Avianca’s corporate structure and credit linkage with its subsidiaries, Aerovias del Continente Americano S.A. (Avianca) and Grupo Taca. Combined, these two operating companies represent the main source of cash flow generation for the holding company. The significant legal and operational linkages between the two operating companies are reflected in the existence of cross-guarantee and cross-default clauses relating to the financing of aircraft acquisitions for both companies.

Summary

Avianca is well positioned in the ‘B’ rating category relative to its regional peers based on its network, route diversification and important regional market position. Nevertheless, these factors are tempered by the company’s higher gross adjusted leverage and refinancing risks, weaker liquidity and financial flexibility relative to peers. Avianca’s ‘B-‘ rating is below LATAM Airlines S.A. (LATAM, B+/Positive) and GOL Linhas Aereas Inteligentes S.A. (GOL, B/Stable), which have recently showed improvements in credit metrics. The ratings distinction among the three airlines reflects differences in the financial strategies, credit access, operational performance volatility and business diversification.

Avianca’s 2018 adjusted EBIT margin of 6% compares poorly to 9% and 7% for GOL and LATAM, respectively. Fitch expects Avianca to maintain operational margins in the 5.5% to 7.0% range during 2019-2020. These levels are below those expected for LATAM and GOL during the same period. Avianca’s ratings are constrained by its high gross adjusted leverage (6.6x), which is at the high end of its peer group. LATAM and GOL ended 2018 with gross adjusted leverage metrics of 5.0x and 5.8x, respectively.
Avianca has maintained a low cash position relative to its annual revenues. Given the company’s limited financial flexibility at the moment, the percentage has declined to 7%. This level is below Fitch’s previous expectation of 12% for 2019. This liquidity position is lower than those levels expected by LATAM (18%) and GOL (15%) during the same period. Due to its debt payment schedule and currently limited access to capital market, Fitch views Avianca Holdings’ financial flexibility as weaker than LATAM and GOL.

Key Assumptions:
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
·Neutral to low single-digit yield growth;
·Load factor in the 80%-82% range;
·2019-2020 EBIT margin moving around 5.5%-7.0%;
·Capex of USD $441 million in 2019 and USD $500million in 2020

Key Recovery Rating Assumptions:
-The recovery analysis is based on a liquidation approach given the high value of its aircraft fleet, which positively compares to the going concern approach.
-Fitch has assumed a 10% administrative claim.

Liquidation Approach:
-The liquidation estimate reflects Fitch’s view of the value of aircraft and other assets that can be realized in advance rate of 70%, 75% accounts receivables due high percentage of credit card receivables and 50% inventories.
– These assumptions result in a recovery rate for the unsecured bonds within the ‘RR5’ range, which generates a one-notch downgrade to the debt rating from the IDR.

Ratings Sensitivities

Developments That May, Individually or Collectively, Lead to Positive Rating Action

Fitch would review the Rating Watch Negative if the company successfully completes the refinancing of its USD$550 million senior unsecured notes.
·Adjusted gross leverage below 6.5x on sustainable basis;
·EBIT margin consistently above 6.5%;
·Coverage ratio, measured as total EBITDAR/(interest expense plus rents) ratio, consistently above 2x;
·Liquidity, cash/LTM revenues, consistently above 10%.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

·Failure to proceed with current refinancing strategies in order to reduce the high refinancing risks;
·Adjusted gross leverage above 7.5x;
·EBIT margin consistently below 5%;
·Coverage ratio, measured as the total EBITDAR/(interest expense + rents), consistently below 1.5x;
·Liquidity, cash/ LTM revenues, consistently below 8%.

Liquidity

Limited Financial Flexibility: As of March 31, 2019, the company had USD $357 million in cash.
USD $626 million of debt will come due in the short term (excluding operating leases), and USD $568
million of its unsecured notes are due in May 2020. Total adjusted debt was USD $5.9 billion at YE
2018. Debt consists primarily of USD $4 billion of on-balance-sheet debt, most of which is secured,
and an estimated USD $1.9 billion of off-balance-sheet debt associated with lease obligations, per
Fitch’s criteria. Avianca’s cash position in percentage of its last 12 months has deteriorated to 7.3%
as March 31 2019 from 10.3% in December 2018.

Complete list of ratings actions:

Fitch has downgraded and placed the following ratings on Rating Watch Negative:
Avianca Holdings S.A.
·Long-Term Issuer Default Rating (IDR) to ‘B-‘ from ‘B’;
·Long-Term Local Currency IDR to ‘B-‘ from ‘B’;
·USD550 million unsecured notes due in 2020 to ‘CCC+’/’RR5’ from ‘B-‘/’RR5’.
Aerovias del Continente Americano S.A.
·Long-Term IDR to ‘B-‘ from ‘B’;
·Long-Term Local Currency IDR to ‘B-‘ from ‘B’.
Grupo Taca Holdings Limited
·Long-Term IDR to ‘B-‘ from ‘B’.
Avianca Holdings, Grupo Taca, and Avianca Leasing are co-issuers of the USD550 million
unsecured notes.

The buyer is Regional Airlines Holding LLC., domiciled in Delaware, USA. The transaction was closed on May 31, 2019 by executing the contract for the purchase and sale of shares signed on April 22 between the parties. As of press time it is unknown who controls Regional Airlines Holding.

This transaction occurs within the framework of Avianca Holding’s new corporate strategy aimed at strengthening its international passenger transportation segment, as well as focusing on the Lifemiles loyalty program and cargo transportation business units.

The 2 regional airline subsidiaries primarily operate short distance domestic flights within the 2 small Central American countries, outside of Avianca’s core international strategy

Due to this transaction, thirteen Cessna 208 (Caravan) and two ATR 42 aircraft (such as pictured above) will no longer be part of Avianca Holdings’ fleet, in line with the company’s fleet simplification strategy.

 Avianca’s international routes served from the Juan Santamaria International Airport (SJO) in San José, Costa Rica, and the Augusto Sandino International Airport (MGA) in Managua, Nicaragua, will operate normally with their regular itineraries.

In Costa Rica, Avianca has its own airline, Avianca Costa Rica S.A., operating direct flights to the company’s three hubs in San Salvador, El Salvador, Bogota, Colombia and Lima, Peru; as well as flights into Guatemala City, Guatemala and Panama City, Panamá. Those flights to destinations in Canada, Chile, Ecuador, the United States and Mexico are operated with Costa Rican crews.

Avianca has said that despite the sale, it will continue offering international connectivity in Nicaragua with daily flights to San Salvador and Miami. The capacity of these flights was recently increased are now operated on Airbus A320 aircraft.

Restructuring at the top: The United Airlines Factor

United Airlines (NASDAQ: UAL) proceeded to enforce its contractual rights derived from the loan agreed with BRW Aviation (Synergy Group) and appointed Kingsland Holdings Limited as a third independent party with the voting rights corresponding to BRW Aviation, although not its ownership. Kingsland, the largest minority shareholder in the company, has a trajectory of more than 40 years in the aviation industry and has been a member of the company’s board since the completion of the merger between Avianca and Roberto Kriete’s TACA.

Likewise, Kingsland Holdings Limited made the decision to restructure Avianca’s board of directors, which now has Roberto Kriete as CEO and consists of Richard Schifter, Sergio Michelsen, Fabio Villegas, Alvaro Jaramillo, Oscar Dario Morales, James Leshaw, Juan Emilio Posada, Jairo Burgos, Rodrigo Salcedo and Roberto Zamora. This first-level board include three of Avianca’s former presidents and several global experts in the airline industry.

Kingsland has indicated that it will continue to work towards creating a more transparent corporate government for Avianca Holdings. Kriete tangled with Avianca’s former chairman and controlling shareholder Germán Efromovich in recent years over governance and transparency in recent years.

“We foresee a very positive future for all collaborators, creditors, suppliers, shareholders and especially for Avianca’s customers. My job is to promote a capable team and board of directors, with the necessary skills to really lead Avianca’s transformation. We have many opportunities in the future and working together, and we will rise to the challenge”, said Kriete.

“This change is very positive for our corporate government, a clear show of confidence from the airline’s shareholders and for the transformation plan currently in place. Our focus remains the same: to seek a profitable model with high operational efficiency, and delivering the best services for our customers,” said Renato Covelo, acting CEO of the company.

The end of an Empire?

Germán Efromovich, the ousted Chairman of Avianca Holdings, also controlled two separate airlines that share Avianca’s name under a licensing agreement: Avianca Brasil and Avianca Argentina. After defaulting on Synergy Group’s loan payment to United Airlines, Efromovich lost control of Avianca Holdings. Almost simultaneously, Brazilian regulators shut down Avianca Brasil after several jets were very publicly repossessed Avianca Brasil filed for bankruptcy in December, 2018. and this week Avianca Argentina has declared bankruptcy and ceased flights. The website has been taken down as of press time.

With no shares of Avianca Holdings as collateral, it is doubtful that Efromovich can raise the capital to resurrect Avianca Brasil and Avianca Argentina, especially as they are both in bankruptcy and not operating. It is also almost certain that the new leadership of Avianca Holding will oppose the licensing of the Avianca brand name to these two separate entities. According to FlightGlobal, Avianca Argentina was only operating two ATR 72-600s.