Avianca Holdings S.A. – Following Recent Amendments as to Tranche A DIP Loans, Seeks Approval for Conversion of $940mn of Tranche B DIP Loans into Equity, Lines Up Commitments for Additional $200mn Equity Injection

September 1, 2021 – In a further sign of market support for their post-emergence prospects, the Debtors filed a motion seeking authority to convert $940.0mn of debtor-in-possession ("DIP") borrowings owed to lenders in respect of their fully drawn Tranche B Loans (approximately $790.0mn of principal and $150.0mn of interest and exit fees) into equity further to the terms of a September 1, 2021 Equity Conversion and Commitment Agreement (“ECCA”) [Docket No. 2070]. Adding to the Debtors' burgeoning post-emergence liquidity, the ECCA provides that certain of the Tranche B Lenders have committed to purchase an additional $200.0mn of equity (break-up fee of 5% in respect of this "new value commitment"); the combined proceeds of over $1.1bn "the last major component of post-emergence financing to be locked into place." The ECCA has "no shop" provisions but maintains a fiduciary out should a "superior proposal" appear (albeit with any further proposals having to contend with the break-up fee).

Earlier components were refined two weeks ago, when the Debtors were given Court authority to replace their existing $1.43bn Tranche A DIP Facility with a new $1.6bn New Tranche A DIP/Exit Facility [Docket No. 2032]. That 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." In addition to providing additional liquidity (the old $1.43bn Tranche A DIP Facility was fully drawn), benefits of the replacement Tranche A financing include that it converts into a 7-year exit facility.

Returning to Tranche B, the Debtors appear careful to avoid objections that the ECCA arrangements might constitute a sub rosa plan (ie, an arrangement locking in the Debtors and sidestepping the bankruptcy process…and the Court's authority), arguing that "the Debtors are not seeking by this Motion the Court’s approval to convert the Tranche B Loans into equity—such conversion will be governed by the Plan." Fellow Latin American airline LATAM Airlnes had faced time-consuming objections based on sub rosa plan arguments as to proposed (and not dissimilar) DIP financing in its own Chapter 11 cases.

On August 10th, the Debtors filed a Chapter 11 Plan and a related Disclosure Statement; and requested an October 26th Plan confirmation hearing [Docket No. 1983].

The Court scheduled the hearing to consider the motion for September 14, 2021, with objections due by September 7, 2021.

The Debtors requesting motion reads: “A key component of the Debtors’ DIP financing last fall was the Debtors’ ability, at their option and subject to certain conditions, to convert the Tranche B Loans into equity in the reorganized Debtors upon consummation of a chapter 11 plan (the ‘Conversion Option’). Having subjected the Conversion Option to a rigorous market test, the Debtors, through an independent committee of AVH’s board of directors (the ‘Independent Equity Committee’), determined to structure their proposed plan of reorganization around the conversion of approximately $940 million in Tranche B DIP Obligations into equity in the reorganized Debtors. Additionally, certain of the Tranche B Lenders have agreed to contribute $200 million of additional capital in exchange for additional equity… The relief sought by this Motion is vitally important to the Debtors’ progress toward confirmation. The ECCA commits the Supporting Tranche B Lenders to provide over $1.1 billion of equity investments, in the forms of converted debt and new equity purchases—the last major component of post-emergence financing to be locked into place. Nevertheless, the relief sought by this Motion is narrow. Confirmation of the Plan will be subject to solicitation of creditors and satisfaction of the statutory conditions. The Debtors remain able, consistent with their fiduciary duties and subject to the terms of the ECCA, to receive and consider unsolicited alternative transaction proposals. And the Debtors are not seeking by this Motion the Court’s approval to convert the Tranche B Loans into equity—such conversion will be governed by the Plan, under which the Tranche B Lenders will receive equity principally in exchange for their claims under the Tranche B DIP Loans. While this Motion seeks approval to enter into the ECCA and to lock in the terms of the Tranche B Lenders’ commitments both with respect to their converted DIP loans and new equity purchases, the Debtors submit that the only actions requiring Court approval are the payment of certain fees and expenses of, and indemnities to, the Supporting Tranche B Lenders, as well as the obligations to comply with certain milestones regarding case progress and the provisions of the ECCA regarding alternative transactions.

In exchange for over $1.1 billion in financial commitments, each of the Debtors’ commitments is a sound exercise of the Debtors’ business judgment. Specifically:

• Payment of the Supporting Tranche B Lenders’ fees and expenses is reasonable and appropriate in light of their extensive efforts to provide binding financing commitments and negotiate the terms of definitive documentation. Moreover, the Debtors are already obligated to pay the fees of most of the Supporting Tranche B Lenders’ advisors under the order approving the DIP financing.
• The break fee (the ‘Break Fee’) is equal to 5% of each Supporting Tranche B Lender’s new value commitment (i.e., 5% of $200 million in the aggregate). It was vigorously negotiated at arm’s length, and it would be payable by the Debtors only if the ECCA terminates under certain conditions, such as breach by the Debtors or an exercise of the Debtors’ fiduciary out. As such, the Break Fee fairly compensates the Supporting Tranche B Lenders for their commitment and the risk that their sponsored transaction will fail to close through no fault of their own.
• The milestones set forth in the ECCA are also reasonable and achievable. Under the ECCA, the Debtors must obtain approval of the ECCA itself and the Debtors’ Disclosure Statement within 30 business days of the ECCA’s execution—i.e., by October 15, 2021. The Debtors must then obtain confirmation within 60 days of the order approving the Disclosure Statement. These dates are consistent with the Debtors’ proposed schedule of a Disclosure Statement hearing on September 14 and a confirmation hearing on October 26. The Closing Date occurring by the Outside Date (February 8, 2022) is also achievable, as the Debtors expect to emerge from chapter 11 well in advance of the Outside Date.
• The ‘no shop’ provision is similarly appropriate. Through their market test, the Debtors have adequately and vigorously canvassed the market. The Debtors have, nonetheless, bargained for a customary fiduciary out that allows them to consider unsolicited offers and, if such offers constitute superior proposals, to terminate the ECCA.

The ECCA is a major step forward toward a successful conclusion of these Chapter 11 Cases, as the commitments of the Supporting Tranche B Lenders are necessary to fund consummation of the Plan. The benefits of entering into the ECCA and moving forward with the Plan greatly outweigh the relatively limited obligations that the ECCA imposes on the Debtors.”

Key Terms of ECCA

• DIP Loan Conversion: As consideration for the termination and cancellation of the Aggregate Tranche B DIP Obligations Amount and the termination and release of the guarantees and security interests related thereto, Reorganized AVH shall issue to each Supporting Tranche B Lender such number of AVH Shares as is equal to 40,000,000 multiplied by the percentage set forth opposite the name of such Supporting Tranche B Lender in column (W) on Schedule I.
• Equity Contributions: 
  1. Each Supporting Tranche B Lender (other than United Airlines) shall purchase from Reorganized AVH, and Reorganized AVH shall issue to such Supporting Tranche B Lender such number of AVH Shares as is equal to 40,000,000 multiplied by the percentage set forth opposite the name of such Supporting Tranche B Lender in column (X) on Schedule I and, as consideration therefor, such Supporting Tranche B Lender shall pay the amount set forth opposite the name of such Supporting Tranche B Lender on Schedule I.
  2. United Airlines shall purchase from Reorganized AVH, and Reorganized AVH shall issue to United Airlines such number of AVH Shares as is equal to 40,000,000 multiplied by the percentage set forth opposite the name of United Airlines in column (X) on Schedule I and, as consideration therefor, United Airlines shall make the contributions set forth in the United Asset Contribution Agreement.
• Break-Up Fee: 
  1. Upon termination of the ECCA under certain circumstances described in the ECCA, the AVH Parties shall pay each Supporting Tranche B Lender a cash break fee equal to 5% of such Supporting Tranche B Lender’s new investment commitment amount (which will be an administrative expense, pari passu with the Tranche B Obligations).
  2. The Break Fee is payable where the ECCA is validly terminated in the following circumstances:
  3. failure of Closing to occur by the Outside Date (February 8, 2022) or the End Date (March 31, 2022), if the failure is primarily caused by the AVH Parties’ breach of the ECCA;
  4. the issuance, adoption or enactment of a governmental order, law or regulation prohibiting the consummation of the transactions contemplated in the ECCA or the Plan;
  5. the dismissal of the Chapter 11 Cases or the conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code or the denial of the confirmation of the Plan or the Disclosure Statement by the Bankruptcy Court, in each case, if the primary reason for any such events was a breach by the AVH Parties of their obligations under the ECCA;
  6. a breach by the Company or the other AVH Parties of their representations or warranties or a failure by the AVH Parties to perform the covenants contained in the ECCA that would reasonably be expected to cause certain conditions to Closing not to be satisfied and such breach is not cured (if capable of cure) by the 10th business day after written notice thereof;
  7. any AVH Parties’ filing, announcement that it will file, or joining or supporting an alternative plan of reorganization or the filing of a motion or application seeking authority to sell its material assets, in each case, without the prior written approval of the Required Supporting Tranche B Lenders;
  8. termination, reversal, stay, dismissal, vacatur, reconsideration, modification, or amendment of the ECCA Approval Order, the Disclosure Statement Order, or the Confirmation Order, in a manner that prevents or prohibits the consummation of the transactions contemplated by the ECCA or the other Transaction Documents in a way that cannot be remedied in a manner reasonably acceptable to the Required Supporting Tranche B Lenders;
  9. the Company’s announcement that it has withdrawn or abandoned the Plan;
  10. failure to achieve certain specified bankruptcy case milestones and the primary reason for such failure is a breach by the AVH Parties of their obligations under the ECCA;
  11. entry by the Company and United Airlines into any amendment, modification, or supplement to the United Asset Contribution Agreement without the consent of the Required Supporting Tranche B Lenders;
  12. acceleration of the Tranche B Obligations and the termination of the automatic stay with respect thereto, following the declaration of an Event of Default under the DIP Credit Agreement and following the expiration of the Remedies Notice Period;
  13. prior to the entry of the Confirmation Order, the Company or any other AVH Party enters into a binding agreement in respect of an Alternative Transaction upon the exercise of the Debtors’ fiduciary out in connection with a Superior Transaction
  14. a breach by the AVH Parties of their obligations with respect to Alternative Transactions under the ECCA; the Bankruptcy Court’s approval or authorization of an Alternative Transaction; the entry into any Contract for the consummation of any Alternative Transaction or the filing of any motion or application seeking authority to propose, join in or participate in the formation of, any actual or proposed Alternative Transaction by any of the AVH Parties; or an announcement by any of the AVH Parties to take any of the foregoing actions;
  15. any amendment or modification to, or filing a pleading seeking authority to amend or modify, the Plan or any of the definitive documents and agreements governing the transactions contemplated thereby that is materially inconsistent with the ECCA or the Plan without the prior written consent of the Required Supporting Tranche B Lenders; the suspension or revocation of the Transaction Documents; or an announcement by the Company or any other AVH Party of its intention to take any of the foregoing actions; and
  16. failure of the AVH Parties to timely pay the fees and expenses as set forth in the ECCA, including the Expense Reimbursement, which is not cured by the fifth (5th) business day after receipt of written notice of such failure.
• Milestones: 
  1. Entry of the order granting this Motion no later than 30 business days after the Execution Date.
  2. Entry of the Disclosure Statement Order no later than 30 business days after the Execution Date.
  3. Entry of the Confirmation Order no later than 60 days after the entry of the Disclosure Statement Order.

About the Debtors

According to the Debtors: " Avianca is the commercial brand for the collection of passenger airlines and cargo airlines under the umbrella company Avianca Holdings S.A. Avianca has been flying uninterrupted for 100 years. With a fleet of 158 aircraft, Avianca serves 76 destinations in 27 countries within the Americas and Europe. With more than 21,000 employees, Avianca Holdings had revenues of US$4.6 billion in 2019 and transported 30.5 million passengers. On February 22, 2019, Avianca Holdings announced its corporate transformation plan consisting of four key pillars: 1) the improvement of operational indicators, 2) fleet adjustments, 3) the optimization of operational profitability and 4) repositioning of non-strategic assets. On May 24, 2019, control of Avianca Holdings was assumed by Kingsland Holdings Limited, an independent third party of United Airlines."

S&P added: "Avianca, through its subsidiaries, engages in the passenger and cargo air transportation services,aircraft maintenance, airport services to other carriers, travel-related services to its customers,and ground operations for third-party airlines in hub airports. Moreover, Avianca is the mainshareholder of LifeMiles, a loyalty rewards program company. Avianca is Colombia's largest airline. It has operations in 27 countries and flies to 105 destinations in the U.S., Latin America,and Europe. Avianca was founded in 1919 and is headquartered inPanama City, Panama."

Background on Current Ownership Structure 

On November 9, 2018, Synergy, which was then the Debtors' controlling shareholder and which, in turn, is indirectly controlled by Mr. José Efromovich and his brother Germán Efromovich, transferred a number of he Debtors'  common shares, comprising 78.1% of the voting share capital, to BRW Aviation LLC, a Delaware limited liability company (“BRW”). BRW is owned by BRW Aviation Holding LLC, a Delaware limited liability company (“BRW Holding”), which is wholly owned by Synergy. 

On November 29, 2018, BRW, as borrower, and BRW Holding, as guarantor, entered into a loan agreement (the “United Loan Agreement”) with United, as lender, and Wilmington Trust, National Association, as administrative and collateral agent (“Wilmington Trust”). In connection with such loan, BRW pledged to Wilmington Trust, for the benefit of United, all of the common shares of Avianca Holdings owned by BRW (which represented 78.1% of voting share capital) as security for BRW’s obligations under the United Loan Agreement (the “Pledged Shares”). 

Following defaults by BRW under the United Loan Agreement (unrelated to any financial covenants applicable to Avianca Holdings), on May 24, 2019, United commenced the exercise of certain remedies against BRW and BRW Holding. Pursuant to the terms of the United Loan Agreement, United appointed Kingsland as an independent third party entitled to exercise voting control over BRW and, as a result, BRW Holding (and, indirectly, Synergy) lost the right to direct the manner in which BRW votes the Pledged Shares. Following the foregoing transactions, Kingsland appointed itself as BRW’s manager. Through its ownership of the Debtors' common shares and its authority as manager of BRW (with the right to direct the voting of the Pledged Shares), Kingsland assumed voting control over Avianca Holdings. Subsequently, certain members of our board of directors, including José Efromovich and Germán Efromovich, were replaced by our current directors."

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