Varig’s reorganisation under Brazil’s bankruptcy law could ease the way for negotiations with equity investors, including TAP Portugal.
The impetus for Varig filing in mid-June for court protection was to prevent repossession of 11 aircraft it had sold and leased back from ILFC. Negotiations with ILFC had failed, and ILFC’s threat had prompted other lessors Ansett and GATX Corporation to harden their positions with Varig. It filed for bankruptcy on the same day repossessions were set to start.
A Rio de Janeiro court has preliminarily prohibited all lessors from taking any Varig assets, although lawyers are still debating whether the law applies to aircraft sold and leased back. The new statute, which took effect only a week before Varig invoked it, allows airlines to retain control and continue operating during reorganisation. Formerly, they were required to shut down. This law was adopted in February mostly for Varig’s benefit. Varig has filed an ancillary proceeding in US bankruptcy court in New York and seeks to have both proceedings co-ordinated.
It has 60 days to present a reorganisation plan showing how it will deal with its huge debt, now estimated at R$6.4 billion ($2.7 billion). David Zilbersztajn, Varig’s chairman, believes court protection will allow it to negotiate with creditors and potential investors under “calmer conditions”. The new law grants protection for up to six months. During that time, Zilbersztajn predicts, Varig will be able to improve its cash flow, reach an accord on debts, and resolve its future ownership.
In principle, the government has approved plans by TAP Portugal to take a 20% stake, the maximum allowed under Brazil’s law. Any deal with TAP or other investors now must be part of the reorganisation plan.
The conditions TAP seeks could make a deal difficult. Even though its stake is limited by law, TAP wants to block larger local investors so that it can be Varig’s biggest single shareholder. This does not sit well with some, including Nelson Tanure, a local media owner who has increased his bid from $90 million to $190 million. Unions also complain that Varig’s management is “biased” in favour of TAP.
DAVID KNIBB SEATTLE
Source: Airline Business
