A group of Chilean creditors of LATAM Group has filed an application to a US bankruptcy court to include two Cayman financing subsidiaries in the reorganisation process of South America’s largest airline.

The creditors argue in their application that the consolidation of LATAM Finance Ltd. and Peuco Finance Ltd. would “have a tremendous impact” on how much money they can recover and whether they would vote in favour of LATAM’s restructuring plan.

LATAM filed for bankruptcy protection in the US in May of last year after the airline was hit by the collapse in air travel in response to the coronavirus pandemic.

Earlier this month, the group requested from the bankruptcy court a deadline extension until September for the presentation of its restructuring plan, stating that it would not interfere with its intention to exit Chapter 11 by the end of this year.

The creditors, who hold US$490.5 million in bonds issued by the airline locally in Chile, said there were “serious concerns” about certain intercompany transactions between LATAM Group and its Cayman subsidiaries.

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The motion was filed by Banco del Estado de Chile in its capacity as indenture trustee of several of the airline’s Chilean local bonds series.

The filing stated that LATAM Finance and Peuco were created in connection with the issuance of $1.5 billion in international bonds, but the subsidiaries had no operations and assets and were relying on the parent group to repay international bond investors.

The creditors claim that after issuing the international bonds, LATAM Group, without notice, “engaged in certain transactions that resulted in Peuco holding $1.3 billion in intercompany claims against certain operating companies, thus siphoning away hundreds of millions of dollars in value” from local bondholders and LATAM’s other creditors.

The creditors said they aim to file a more substantive consolidation motion to ensure that they and other creditors “are not unfairly deprived of $1.3 billion in value” and that international bondholders, “who never expected to have access to any separate assets at Peuco or LATAM Finance, do not receive an unjustified windfall in that same amount”.

The application aims to have the matter heard in court before the company presents its reorganisation plan.

On 27 May, LATAM filed a petition to wind up LATAM Finance in Cayman’s Grand Court on the basis that the parent company had passed a special resolution and LATAM Finance was unable to pay its debt.

In the petition, LATAM Finance was described as a financing vehicle that “other than the issuing, and making payments on, the notes that it has issued, its ability to pay principal, interest and other amounts due on the notes that it has issued depends upon the financial condition of LATAM and the proceeds generated from its operations”.

According to a September 2020 schedule of assets and liabilities filed with the bankruptcy court, LATAM Finance had unsecured liabilities of $1.5 billion, representing the principal amount of the outstanding international bonds, and $1.3 billion in assets in the form of an inter-company receivable owed by Peuco.

Peuco, in turn, reported this amount as its entire debt that was fully matched by money it is owed by LATAM operating companies.

The creditors’ court application cited a report published by corporate restructuring news outlet Reorg on 12 Jan. 2021, which noted that, “Holders of unsecured bonds issued by special purpose vehicle LATAM Finance could recover value from certain operating companies within the group as a result of $1.3 billion of intercompany receivables due to the SPV issuer.”

The Chilean local bondholders suggest that since then the prices of international and local bonds, which “had been essentially the same”, started to diverge with international bond prices increasing significantly in value compared with local bond prices and the value of other unsecured creditor claims.

Court documents show that an ad hoc group, which says it represents more than 70% of holders of international bonds, has stated that it believes its members’ claims are “structurally senior”.

A committee of unsecured creditors has filed a limited objection to the local bondholders’ application stating that the issues raised and the validity of intercompany claims should be resolved quickly through mediation and negotiation rather than litigation.

LATAM Group objected to the application arguing that litigation of these issues would be premature and interfere with its exclusive right to develop and propose a plan.

In a court filing, the group said the consolidation application seeks to litigate substantive consolidation questions on a fast-track basis before engaging with other bondholders to explore these issues “as part of the larger plan conversations”.

Such “litigate-first tactics” should not be rewarded, LATAM said, because it would incentivise other parties to negotiate through aggressive litigation tactics that would result in higher costs and “distract management from the larger consensual plan”.

LATAM added that it “takes umbrage” with the characterisation of the transactions involving LATAM Finance and Peuco “to the extent that BancoEstado even indirectly raises any questions regarding the purpose of these intercompany transactions or the sufficiency of any disclosures related thereto”.

In a letter to Chilean newspaper La Segunda, Juan José Tohá, the director of corporate affairs for the LATAM Group, denied claims made in a news article that any funds had been transferred to the Cayman Islands or that the transactions had anything to do with lowering the company’s tax burden.

He clarified that all financing transactions had taken place between 2017 and 2019, before the group entered Chapter 11 proceedings.

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