Latam Airlines disclosure statement draws objection from committee

By Sarah Lizee

Olympia, Wash., Jan. 14 – Latam Airlines Group, SA’s disclosure statement for its Chapter 11 plan drew an objection from the official committee of unsecured creditors, according to a Friday filing with the U.S. Bankruptcy Court for the Southern District of New York.

The committee said the defects in the plan and the proposed voting and solicitation procedures are “so numerous and extreme, there is a risk that the flaws that are merely improper will be overshadowed by those that are truly egregious.”

The committee claims the debtors and their insider shareholders have “struck an illicit bargain” with the Evercore group, a preferred group of creditors holding a large voting block.

In exchange for the group’s agreement that the insider shareholders may retain a significant ownership stake in the debtors on terms favorable to them, the debtors and the insider shareholders have agreed that the Evercore group may “enjoy a basket of arbitraged benefits that vastly overcompensates their funding contributions and claims as both general unsecured creditors and bondholders,” the committee said.

“This bargain has not been subject to any market test,” the committee added. “Rather, in executing their restructuring support agreement, the debtors have formally bound themselves to avoid exposing this bargain to any true market light.”

The committee said the plan’s “remarkable unfairness” is revealed by reference to the debtors’ own valuation of their business, between $13 billion and $15 billion with a midpoint of $14 billion, and a comparison of distribution recoveries.

The plan allocates the debtors’ enterprise value chiefly among the insider shareholders and the Evercore group, yielding general unsecured creditors a return of less than 20%.

“In contrast, based on a pro rata allocation amongst unsecured creditors, a sale of the debtors at a lower enterprise value of $13 billion would yield general unsecured creditors a far more robust recovery,” the committee said.

The discrepancy stems from the debtors’ proposed diversion of roughly $1.9 billion in fees and discounts to the Evercore group and shareholders, the committee said.

“This illustrates how far the plan’s economics stray from any reasonable market-based proposal: no reasonable business would agree to such financial terms,” the group said.

“Of course, these costs have to be paid by someone, and under the debtors’ plan that ‘someone’ is the debtors’ general unsecured claimants who will receive far less under the plan than they would if the debtors’ business were sold to a third party.”

As previously reported, Region 2 U.S. trustee William K. Harrington has also objected to the statement.

Latam Airlines is a Santiago, Chile-based airline. The company filed bankruptcy on May 25, 2020 under Chapter 11 case number 20-11254.

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