Fitch Ratings has downgraded LATAM Airlines Issuer Default Rating (IDR) to D following news that it was entering in Chapter 11 bankruptcy protection just days after the agency knocked the carrier down from CC from B- when it failed to make interest or principal payments of all the three tranches of an unrated EETC transaction on May 15.
The downgrade to D follows LATAM's announcement that it, together with its affiliates in Chile, Peru, Colombia, Ecuador and the United States, initiated a reorganisation and restructuring of their debt under Chapter 11 protection in the United States. This process will result in material changes in the terms and conditions of its debt. Once the airline exits the administration proceedings, Fitch will assess its new strategy and restructured financial profile and re-rate LATAM accordingly.
This follows on from Fitch’s May 22 announcement that it was downgrading LATAM for failing to meet obligations due to outstanding EETC debt earlier in the month. LATAM has entered into a 15-day grace period in which it could avoid a default event. Fitch said it was unclear if LATAM intends to cure this missed payment or has begun the process of entering a larger debt restructuring, as the presence of cross default clauses in other financial obligations would allow those creditors to declare default and begin enforcing remedies.
LATAM continues seek different avenues to preserve cash amid and Fitch said this leaves creditors in a more vulnerable position and that the Chilean carrier’s current financial flexibility to raise new credit lines is quite limited, given market conditions. While financial support from the Brazilian government is on the table this would only provide limited relief, as any funding would have to be used to support operations in the Brazilian market.
Fitch estimates that LATAM has readily available cash at the end of April of $1.4 billion but cautions that it has a large exposure to the international market with 51% of LATAM 2019's revenues coming from this market.
The ratings agency cautions that recovery of this market remains highly uncertain, as certain countries or regions are expected to continue to restrict travel in the face of continued outbreaks.
Meanwhile Forbes is reporting that LATAM wants to return 19 aircraft to lessors as part of its first bankruptcy restructuring of its 340 aircraft. Lessors will have 15 days to claim the jets.
The group has “reached certain preliminary conclusions regarding excess aircraft that are no longer accretive to their business,” LATAM said in a motion awaiting court approval.
The 19 aircraft are made up of six A350 and 787 widebodies and 13 A320 family aircraft. “Bankruptcy courts have often authorized airline debtors to abandon aircraft subject to burdensome outstanding debt,” LATAM said.
Seventeen of the 19 aircraft are held by Wilmington Trust, which is LATAM’s largest secured creditor with $778 million due as of April 30.