Unimpressed By DIP Financing Plan, Bancolombia Terminates Coverage of Avianca

Yesterday, Bancolombia issued an analysis of Avianca’s proposed DIP financing plan and reiterated both its sell position on any securities, along with a notice that it would no longer be covering the Colombian airline going forward. Already delisted from the NYSE (AVH), the bankrupt airline has also ceased trading on Colombia’s BVC stock exchange (BVC:PFAVH).

The Medellín based bank, Colombia’s largest, offered 3 justifications for its decision:

1. United Airlines (NASDAQ:UAL) decided in the first quarter of this year, to write off its $456 million USD loan to BRW Aviation collateralized by Avianca stock.
2. Avianca’s net assets at the end of Q2 were negative $355 million USD,
3. Under Avianca’s presented DIP financing plan, the B Tranche financing of $700 million USD will be convertible into stock in 2022 diluting any residual value left to current shareholders.

Furthermore, the bank expressed doubts that the DIP financing and associated reorganization plan would even be successful, as it depends on authorizations from various entities that have not been obtained and is subject to restrictions.

Breaking News: Former Avianca Chairman Germán Efromovich Arrested On Corruption & Bribery Charges (click here)

2020’s economic conditions combined with the travel restrictions and COVID-19 Pandemic make it an uncertain time even for solvent airlines, so much more challenging for financially weak airlines such as Avianca.

“We consider that the likelihood that Avianca’s stock has any tangible value is significantly low.”—Bancolombia

Bancolombia makes the observations that according to Avianca’s DIP financing plan, the airline seeks to add an additional $1.2 billion USD, bringing the total debt to $1.989 billion. Most Avianca 2023 bondholders such as United Airlines & Kingsland Holdings have decided to cede the guarantees of their former debt to the new debt in order to encourage other investors to participate in the DIP financing.

Tranche A debt is targeted at $1.289 billion, with the Tranche B being $700 million convertible into stock in 2022.

Avianca has also negotiated a path to retake complete ownership of its Lifemiles loyalty program, part of which was sold off to raise capital three years ago under the airline’s previous management team, controlled by South American magnate Germán Efromovich.

Termination of coverage

“In conclusion, in view of the different shareholder market signals mentioned in investor considerations, the high risk of investing in a chapter 11 company the difficult conditions of the air sector, we have decided to finalize the fundamental coverage of Avianca which was (already) under review.”—Bancolombia

Above photo: Bancolombia’s Medellín headquarters buiding