LATAM Files For Chapter 11 Bankruptcy

I’d be interested to know how this all works being listed on both the NY and Santiago stock exchanges - sound very complicated

StevenE - It is actually pretty simple. Both the United States and Chile have adopted UNCITRAL's Model Law on Cross-Border Insolvency. This allows bankruptcy courts in the two countries to coordinate parallel insolvency proceedings and/or treat one proceeding as the "main proceeding" (such as the U.S. proceeding) while treating the other as an "ancillary proceeding" (such as any proceeding in Chile). The court where the ancillary proceeding is pending can--and typically does--defer to the main proceeding for consistency's sake (called "comity" in international law).

Because chapter 11 bankruptcy in the United States is a fairly unique and predictable insolvency regime, many foreign or predominantly foreign companies seek to avail themselves of chapter 11 rather than pursuing a plenary proceeding in their home country. Among other things, chapter 11 allows the company to continue operating, management stays in place absent compelling circumstances, the company can borrow additional money despite its insolvency, and there are powerful tools for shedding burdensome contracts, leases, and other obligations. Plus, chapter 11 has a concept called "cram down" where a company can confirm a plan of reorganization without the consent of many creditors. Many of these are features unique to chapter 11. Believe it or not, many countries do not have even have an insolvency proceeding where the company can continue as a going concern. In many countries, once the company becomes insolvent, it is required to liquidate.

@Matt:

Great explanation! Thanks for breaking it down for us laypersons. I had the same question as StevenE, so this was great.

American Airlines watching this whole drama unfold and realizing all of this happened only when Delta entered into this LATAM saga : ‘HAHAHAHAHA, I see no god up here, other than ME’

But seriously tho, QR is in really really DEEP trouble. like first, Air Italy, then COVID-19 and their exceptional losses during that period of time, since they continued to operate 15-16 hour flights with 20-30 passengers (?!) and some flights to Colombo and Bangkok with 1 or 2 passengers, and then LATAM. Keep in mind, when everything was going right in 2019, QR had already posted a huuuuge loss, due to the blockade. Jeez, I really hope airlines make it out of the pandemic alive and i’m glad the statement ‘Most of the airlines would permanently cease operations by the end of May’ didn’t end up true. phew.

What happens with the Delta/Latam relationship now that Delta will no longer own any of the airline?
Yes, they bought a 20% stake a few months ago, but equity holders are usually wiped out in Chapter 11 with ownership transferring to debt holders in exchange for reduction of debt. Might the new creditor owners rescind the Delta arrangement?

Rob— The short answer is maybe. With some exceptions, chapter 11 debtors can reject agreements. Once rejected, any damages arising from the debtor’s non-performance of the agreement typically will be a general unsecured claim that will be discharged once a chapter 11 plan is confirmed. So, LATAM could potentially back out of the agreement and discharge any resulting liability, freeing it to enter into new agreements with other airlines.

What a shame! After all the splash they created with DL partnership and oneworld exit and blew off AA and IAG. I hope they at least realize now what a blunder they made in the last few months!

Poor Delta, first Virgin and now LATAM, only Etihad has had worse luck recently with their partners. Korean should be ok at least, thanks to a great domestic response to the pandemic on behalf of their government. It is the Brazilian part of LATAM I would worry about.

@Frederik -- Unfortunately, Korea's domestic COVID-19 response is unlikely to help Korean Air. Close to 75% of Korean Air's passenger volume is on international flights, and domestic containment efforts do nothing to help international passenger or flight volume, and may even hurt them as containment efforts continue to restrict international travel.

It will be interesting to see if Korea bails out Korean Air. If I recall correctly, Korean Air is largely owned and controlled by Hanjin, and the largest creditor of Korean Air is Korea Development Bank. Hanjin also used to own and control Hanjin Shipping, which was Korea's largest international shipping company. Hanjin Shipping's largest creditor was also Korea Development Bank through various life support loans. In 2016, Hanjin Shipping was reeling and needed a bailout. Both Hanjin and Korea (through the Korea Development Bank or otherwise) decided at the last minute not to bail out Hanjin Shipping, resulting in the spectacular and disastrous failure of Korea's largest shipping company almost overnight.

Like Hanjin Shipping, Korean Air is on life support through a loan from Korea Development Bank. If matters get worse, it could end up like Hanjin Shipping.

The upshot is there is very recent precedent for Korea declining to bail out the largest, flagship player in an industry key to international trade and connection.

American Airlines like: Yeah baby! Karma is B*tch!
Delta is like: Oh, holy sh*t!...

@Matt, thanks. Very helpful. Keep your comments coming.

I told you, you didn't listen, all those cheap Business fares in March, April, May, I told you to beware and you did't bloody listen, now we will have to hear from all the victims... the bleating, the whining, the screaming like stuffed pigs, the whingeing.....

You fools, you should have listened when I told you to beware and not buy those cheap bucket fares from this tinpot, third world South American airline.

I mean seriously, look at them, they have been through Star Alliance at one point, then One World, and as soon as Delta aligned them with Sky Team the alarm bells should have been ringing.... why the hell did you not think One World and Star Alliance dumped them?

But no, you still bought cheap Business tickets in the last few months, and now you'll expect me to have empathy or sympathy because you can't get your money back from a recalcitrant South American, very dodgy airline.

Don't even think about it. You dug your own grave, now lie the hell in it.