Avianca Holdings S.A. – Court Approves Amended $1.6bn DIP Financing Arrangements Which Add $170mn of Incremental Financing, Allows for Conversion to Exit Financing and Comes with Reduced Interest Rates

August 18, 2021 – The Court hearing the Avianca Holdings cases issued an order authorizing the Debtors to enter into amendments to their previously approved debtor-in-possession (“DIP”) financing arrangements which effectively replace the Debtors' existing $1.43bn Tranche A DIP Facility with a new $1.6bn New Tranche A DIP/Exit Facility [Docket No. 2032]. The new DIP facility is comprised of (i) $1.05bn of loans and notes (the “New Tranche A-1 DIP Loans” and the “New Tranche A-1 DIP Notes,” respectively) being provided by "a diverse group of lenders including several existing Tranche A lenders," and (ii) a $550.0mn in principal amount of “New Tranche A-2” notes (the “New Tranche A-2 DIP Notes” and together with the New Tranche A-1 DIP Loans and the New Tranche A-1 DIP Notes, the “New Tranche A Loans and Notes”) being provided by "a group of four new-money lenders." Proceeds from the New Tranche A Loans and Notes will be used to repay in full the old Tranche A DIP Facility (which included a $200.0mn roll-up), including "Back-end Fees of 1.75% for certain Tranche A loans that were originally made by lenders that provided a backstop and 0.75% for other Tranche A loans."

The amendments do not impact the Debtors' Tranche B financing, with the Debtors noting: "Tranche B…is also fully drawn…As with Tranche A, the Debtors have consistently paid interest and fees on Tranche B in kind. As a result, the total amount owing under Tranche B is now approximately $790,000,000 and, together with exit fees of 10%, will equal or exceed $935,000,000 upon the Debtors’ emergence from chapter 11 (based upon an exit timing of approximately October 31, 2021)."

Returning to Tranche A, beyond the obvious advantage of the increased quantum (the $1.43bn is now fully drawn), the Debtors tout several further advantages of the New Tranche A DIP/Exit Facility, including that it converts into a 7-year exit facility and that it is considerably cheaper (although with prodigious fees hardly cheap, interest will now be 9% vs. LIBOR plus 12.00%). 

Investment banker Seabury provides the following summary in a declaration in support of the amended DIP facility: "The Debtors, with Seabury’s guidance, have now obtained two important financial commitments for replacement DIP financing. The first commitment, from a group of lenders that includes many of the existing Tranche A DIP Lenders, is for $1,050,000,000 in New Tranche A-1 DIP/Exit Loans. The second commitment, from a group of four new-money lenders, is for $550,000,000 in New Tranche A-2 DIP/Exit Notes. The two tranches have slightly different commercial terms, but both will be used to refinance the existing Tranche A and both will convert (at the Debtors’ option and subject to satisfaction of all conditions) to a 7-year exit financing facility upon emergence (the “Exit Notes”). These commitments are memorialized in those certain DIP-to-exit commitment letters, which were executed on July 21, 2021 and approved by the Court (pursuant to the Commitment Approval Order) on July 26, 2021. The New Tranche A DIP/Exit Facility will simply replace the existing Tranche A DIP Facility, and the New Tranche A DIP/Exit Facility Secured Parties will simply step into the shoes of the existing Tranche A DIP Facility Secured Parties. 

If the relief requested in the DIP Amendment motion is granted, the Debtors will be able to refinance the majority of their existing DIP Loans (specifically, approximately $1.43 billion of Tranche A loans and notes) with cheaper debt that will convert into exit financing at the Debtors’ option. These new loans, the 'New Tranche A DIP/Exit Loans,' will be provided by a diverse group of lenders, including several existing Tranche A lenders."

In their August 5th requesting motion [Docket No. 1972], the Debtors stated, “…the Debtors are seeking authorization to amend their DIP Agreement and related credit documents and enter into new note purchase agreements and new indentures in accordance with such amendments in order to replace the existing approximately $1.43 billion Tranche A DIP Facility with a $1.6 billion New Tranche A DIP/Exit Facility to be provided by a diverse group of lenders, including several existing Tranche A lenders. The primary advantage of this new facility is that it may, at the Debtors’ option and subject to satisfaction of customary terms and conditions, convert into a 7-year exit financing facility upon the Debtors’ emergence from bankruptcy protection. This committed exit financing will be a key component of any chapter 11 plan that the Debtors may propose in these cases. In addition to this undoubted benefit, as described below, the new facility also provides the Debtors with incremental liquidity at lower interest rates and can be paid in kind during the pendency of the Chapter 11 Cases. The Debtors are also seeking authorization to pay certain fees in connection with the proposed amendments. These fees (principally, a commitment premium of % (redacted) for New Tranche A-1 and % (redacted) for New Tranche A-2 and a conversion premium of % (redacted) for New Tranche A-1 and % (redacted) for New Tranche A-2) are not unreasonable and, as stated in the Luth Declaration, are in line with the fees that the Debtors would be expected to pay for any alternative sources of long-term exit financing. The Debtors are also seeking to approve the fees of certain investment banks that assisted the Debtors in structuring, marketing, and ultimately obtaining the New Tranche A DIP/Exit Facility, including fees related to agency services going forward…This newly committed financing will be a key component of the Debtors’ contemplated plan of reorganization in their Chapter 11 Cases. Between the Tranche B Lenders’ expected agreement to convert the Tranche B Loans into equity, supplemented with $200 million of additional exit equity financing, and these new debt conversion options, the Debtors are expected to have shortly secured commitments for all of the exit financing needed for emergence, as shown in the illustrative chart below.”

The Existing DIP Financing

The motion continues, “Last fall, this Court entered the First Final DIP Order, approving a senior tranche of loans and notes (‘Tranche A’) and a junior tranche of loans and notes (‘Tranche B’). The Debtors’ obtaining postpetition financing was a major step forward in the Chapter 11 Cases, coming after months of negotiations with existing lenders and bondholders, existing equity holders, other sources of new-money financing, the Committee, and other stakeholders, led by the Debtors’ management team, Seabury Securities LLC (‘Seabury’), and other arrangers. Tranche A, which is now fully drawn, consists of loans and notes, the consideration for which consisted of new money from prepetition noteholders and new lenders, Advent International’s sale of LifeMiles equity to the Debtors, and a roll-up of prepetition secured notes. The Debtors have consistently paid interest and fees on Tranche A in kind. As a result, the total amount owing under Tranche A as of July 31, 2021 was approximately $1.395 billion, inclusive of accrued interest but without Back-end Fees. 

Tranche A may be repaid in cash at any time without penalty, but must be paid in full in cash no later than its maturity date or the date on which the Debtors consummate their chapter 11 plan. Whenever Tranche A is repaid, the Debtors will be charged Tranche A Back-end Fees of 1.75% for certain Tranche A loans that were originally made by lenders that provided a backstop and 0.75% for other Tranche A loans. Therefore, if as planned a payoff of the Tranche A Loans occurs by the end of August 2021, the total amount owed is approximately $1.43 billion, with Back-end Fees and accrued interest. Tranche B, which is also fully drawn, consists of loans and notes, the consideration for which consisted of new-money investments (mostly from lenders under the prepetition credit facility known as the ‘Stakeholder Facility’) and a roll-up of all outstanding loans under that same facility. As with Tranche A, the Debtors have consistently paid interest and fees on Tranche B in kind. As a result, the total amount owing under Tranche B is now approximately $790,000,000 and, together with exit fees of 10%, will equal or exceed $935,000,000 upon the Debtors’ emergence from chapter 11 (based upon an exit timing of approximately October 31, 2021).”

Efforts to Obtain Exit Financing Commitments

The motion further added, “As previously reported to the Court, the Debtors commenced a competitive marketing process for exit financing, led by Seabury, on April 14, 2021. The purpose of this process was to solicit at least $300 million of additional equity capital, and possibly $1.2 billion or more, in order to provide the Debtors with an alternative source of exit equity financing. The intent was to secure sufficient interest from alternative parties to position the Debtors to negotiate reasonable, arms-length terms and conditions for the equity conversion option being negotiated with the Tranche B Lenders. Seabury and the Debtors solicited proposals from any party or group of parties willing to provide exit equity capital on more attractive terms than the Tranche B conversion option and of sufficient size to pay off the Tranche B obligations. Indications of interest in exit equity financing were due to Seabury by June 2, 2021. The Debtors and Seabury initially contacted over 125 potential investors. Many of these parties, such as current DIP lenders, were already highly familiar with the Debtors’ business. Ultimately, over 35 parties signed up for access to a data room containing comprehensive information on the Debtors’ business plan, cash flow projections, DIP loan collateral, and other materials. Many of these potential investors also participated in focused diligence sessions with Avianca’s management and professionals.

Although the main purpose of this marketing process was to obtain additional equity capital (to either supplement or replace the Tranche B conversion option), the Debtors and Seabury also actively discussed debt financing structures with dozens of potential investors. At the same time, the Debtors sought the advice of (and are in the process of formally retaining) Credit Suisse Securities (USA) LLC (‘Credit Suisse’) as a debt capital markets advisor for exit debt financing, along with other banks. The Debtors did so in order to benefit from Credit Suisse’s and other banks’ expertise and to obtain their advisory and structuring services in connection with the exit debt financing. As a result of those discussions, the Debtors have now obtained two important financial commitments for replacement DIP financing. The first commitment, from a group of lenders that includes many of the existing Tranche A DIP Lenders, is for $1,050,000,000 in New Tranche A-1 DIP/Exit Loans. The second commitment, from a group of four new-money lenders, is for $550,000,000 in New Tranche A-2 DIP/Exit Notes. The two tranches have slightly different commercial terms, but both will be used to refinance the existing Tranche A and both will convert (at the Debtors’ option and subject to satisfaction of all conditions) to a 7-year exit financing facility upon emergence (the ‘Exit Notes’).”

Key Terms of the Replacement DIP Financing

• Borrower: Avianca Holdings S.A.
• DIP Lenders:
  1. New Tranche A-1: Group of institutional lenders represented by Davis Polk & Wardwell LLP (the “New Tranche A-1 Lenders”).
  2. New Tranche A-2: Group of lenders represented by Skadden, Arps, Slate, Meager & Flom LLP (full group) and Paul Hastings LLP (one lender as fund counsel) (the “New Tranche A-2 Lenders,” and together with the New Tranche A-1 Lenders, collectively, the “New Tranche A DIP Lenders”).
• Amount, Type and Availability: 
  1. New Tranche A-1 DIP/Exit Facility: comprised of $1,050,000,000 of senior secured term loans and/or notes.
  2. New Tranche A-2 DIP/Exit Facility: comprised of $550,000,000 of senior secured term loans and/or notes.
• Interest Rate: 
  1. Fixed interest rate of 9.00% per annum, which may be payable, at the Debtors’ discretion, in cash or in kind. If converted to Exit Notes, rate of 9.00% per annum payable in cash.
  2. During the continuance of a payment default, the New Tranche A DIP Loans/Notes and all other outstanding obligations in respect of the New Tranche A DIP/Exit Facility will bear interest at an additional 2% per annum.
• Fees:
  
  • Commitment Premium: [redacted] (for New Tranche A-1) and [redacted] % (for New Tranche A-2) of commitments under the New Tranche A DIP Loans/Notes, due and payable to certain lenders on the Closing Date, in cash or in the form of original issue discount.
    
  • Exit Fee:  If on the earlier of the Maturity Date and the date on which the Borrower or any of its successors exits from its Chapter 11 Case (whether by way of consummation of a plan of reorganization or otherwise), the Borrower has not made a Conversion Election or the Conditions Precedent to Conversion Election are not satisfied on such date, the Borrower shall pay the New Tranche A DIP Lenders, for their ratable benefit, a premium in an amount equal to 9.00% of the New Tranche A DIP Loans/Notes then outstanding. 
  • Prepayment  Premium: Prior to the Maturity Date, any prepayment of New Tranche A DIP Loans/Notes (other than in connection with a Conversion Election) shall be accompanied by (x) a premium equal to 9.00% of the principal amount of New Tranche A DIP Loans/Notes so prepaid plus (y) all accrued interest, payable in cash on the New Tranche A DIP Loans/Notes so prepaid.
  • Conversion Premium: If the Borrower exercises the Conversion Election, a conversion premium in an amount equal to [redacted]% (in the case of New Tranche A-1 DIP Loans/Notes) or [redacted] % (in the case of New Tranche A-2 DIP Loans/Notes) of the (x) principal amount of the New Tranche A DIP Loans/Notes and (y) all accrued interest, and shall be paid in the form of Exit Notes to the New Tranche A DIP Lenders.
• Investment Bank Fees: 
  1. Seabury Securities LLC is the Debtors’ financial advisor and investment banker. While Seabury will earn $4.25 million in fees for the incremental $170 million of DIP loan financing, the total amount of fees earned by Seabury during the Chapter 11 Cases (inclusive of exit debt success fees) is unlikely to be affected because Seabury’s aggregate success fees for the Chapter 11 Cases as a whole will be bounded by the cap set forth in its engagement letter. In addition, payment of Seabury’s success fee for the New Tranche A DIP/Exit Facility will be deferred until final fees are determined.
  2. Credit Suisse Securities (USA), LLC advised the Debtors regarding debt capital markets. It will earn a success-based $6.5 million fee upon the funding of the New Tranche A DIP/Notes, as set forth in its engagement letter and retention application.
  3. JPMorgan Chase, N.A. (“JPMorgan”) will continue to act as administrative agent and collateral agent for the DIP Facility and will earn an annual administration fee of [redacted]. In addition, it will act as a fronting lender for up to $325 million during the first 10 days after the initial funding of the New Tranche A-1 DIP Loans, in exchange for a Fronting Fee of [redacted] % of the principal amount of fronted loans, not to exceed a total of [redacted]. JPMorgan will also be appointed joint lead arranger and bookrunner for the New Tranche A DIP/Exit Loans and will receive a Transaction Fee of in exchange for the various services it is providing to the Debtors. Along with JPMorgan, both Goldman Sachs Lending Partners LLC (“Goldman Sachs”) and BofA Securities, Inc.  (“BofA Securities”) consulted with the Debtors’ management team in roles as joint lead arrangers and bookrunners. Both will receive fees of [redacted].
• Use of Proceeds: 
  1. To repay in full the existing Tranche A DIP Facility
  2. To pay fees, expenses, and other amounts incurred in connection with the New Tranche A DIP Loans/Notes, and
  3. For working capital and general corporate purposes of the Debtors.
• Maturity Date: March 31, 2022.
• Milestones: In addition to existing milestones:
  • The Bankruptcy Court shall have entered an order confirming a Company Approved Reorganization Plan, which order shall be reasonably acceptable to the requisite New Tranche A DIP Lenders, by no later than 60 days after entry of the disclosure statement order; and
  • such Company Approved Reorganization Plan shall have become effective by no later than 30 days after the entry of the Confirmation Order.

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