From Bankruptcy to Resurgence: LATAM Airlines’ Successful Restructuring Journey

Introduction and financial considerations

LATAM Airlines' downfall to its recovery represents an interesting case study in corporate resilience and effective restructuring of an airline in time of crisis. The LATAM Airlines Group S.A. is a Chilean airline, the largest airline company in South America. Following the COVID-19 pandemic in May 2020 the company became famous after filing for Chapter 11 bankruptcy protection. The bankruptcy could be linked to the devastating impact caused by the COVID-19 pandemic on all the airline industry. LATAM successfully emerged from bankruptcy in November of 2022. Its journey highlights strategic decision-making, stakeholder alignment, and adaptability as key drivers of corporate recovery.

The pandemic collapse in air travel due to the worldwide pandemic was unprecedented. In the same year, the global air transport sector suffered a drastic 94.4% reduction in air traffic. Decimating LAT-AM's revenues, which in 2019 were almost near to $10 billions. On top of revenues reduction, LATAM had accumulated, through the years, significant debt. Debt generated to finance the heavy expansion efforts of the company. Like the acquisition of the Brazilian airline TAM in 2012. By early 2020, LATAM’s total liabilities exceeded $18 billion. By April of the same year, LATAM had burned through much of its cash reserves due to ongoing fixed costs-aircraft leases, maintenance, and salaries. Attempts to secure government bailouts were unsuccessful in some key markets, like Brazil. All these difficulties combined with plunging revenue, fixed obligations, and limited support from out-side, pushed LATAM to file for Chapter 11 bankruptcy protection in May 2020.

Why did LATAM go for Chapter 11?

Although LATAM carried out most of its operations in South America, it opted to conduct its restructuring procedure in the United States for some reasons.

Insolvency proceedings under US law are governed by the Bankruptcy Code, created by the Bankruptcy Reform Act of 1978. The Bankruptcy Code is an integral part of the United States Code and is set out in Title 11 of that law. The Bankruptcy Code aims to recover the company by preserving its activity and thus promoting its healthy return to the financial market (the so-called 'fresh start'). The legal institute to which LATAM resorted was reorganization, provided for in Chapter 11, through which companies in crisis wish to restructure their liabilities, which is done through a recovery plan voted on by their creditors, while at the same time continuing with their ongoing activities.

While in some jurisdictions a request for judicial reorganization represents a real blemish on a company's reputation, in the United States this view is different. A corporate crisis is seen as a consequence of the capitalist regime and free enterprise, and large companies such as General Motors and Delta Airlines have already undergone reorganization and managed to recover.

Another aspect that motivated the filing of the restructuring in the North American jurisdiction was the plurality of creditors in terms of nationality, as well as the fact that LATAM has subsidiaries of its economic group spread all over the world. It is therefore a clear case of transnational insolvency. In this sense, the North American jurisdiction, being widely recognized and accepted in the international market, was an interesting option for LATAM.

Thus, it is reasonable to say that LATAM opted out for filling the proceeding under US jurisdiction for the greater flexibility that this legislation offers, providing unique legal instruments that assist in restructuring, that allows the company to continue its operation and to obtain new investment.

Considerations on LATAM's restructuring plan from a legal point of view

I. DIP Financing

As mentioned above, Chapter 11 seeks to favor the company's restructuring prospects so that it can resume its operational flow and normalize its activities. In this sense, section 364 of Chapter 11 pro-vides for DIP Financing, which is essential insofar as it enables the company to obtain new lines of credit for structuring its plan, providing the reorganized company with the necessary resources to maintain its activities throughout its reorganization process.

While in some jurisdictions, as mentioned above, investing in companies in crisis does not attract many investors, in the United States there are many advantages to granting DIP Financing, bringing the ideal combination of low risk and good financial return. Thus, creditors who promote this type of financing will have privileges over the others, having priority in the payment of credit when the company emerges from its state of reorganization.

In addition, the granting of DIP Financing is common and well accepted in American courts, and is carried out with a certain degree of regularity. This is not only because of the good financial return that this type of financing can offer, but also because of the legal certainty that the legal system offers for the application of this institute, especially through the application of the equitable mootness doctrine. According to this doctrine, challenges to decisions and acts carried out in bankruptcy proceedings cannot lead to the annulment of certain acts or to a retroactive return to the status quo ante, since the assessment of their merits could do more harm to the proceedings and the creditors' community, considering the objectives of Chapter 11, than good. In other words, it is unlikely that the granting of a DIP Financing, which will bring many benefits to the progress of the proceedings and the recovery of the company, will be undone or annulled.

In the case of LATAM's restructuring, the company obtained approval for a USD 2.45 billion Debtor-in-Possession (DIP) financing, structured in three tranches. Tranches A and B were financed by ex-ternal creditors, while Tranche C relied on strategic shareholders, including Qatar Airways and the main shareholders of the Cueto group, evidencing internal support for the restructuring. Tranche C of LATAM's DIP Financing included an option to convert debt into equity. This meant that participating creditors could, under certain conditions, convert their financial contributions into equity in the re-structured company. This feature was a point of controversy, as some external creditors argued that the conversion disproportionately benefited existing shareholders, such as the Cueto and Qatar Airways groups, to the detriment of other stakeholders.  However, after lengthy negotiations and adjustments, the plan was approved, ensuring essential liquidity for operations and continuing the reorganization process

II. Fleet restructuring

In the context of Chapter 11, fleet restructuring refers to the reconfiguration or optimization of an air-line's aircraft fleet during the restructuring process. In the aviation sector, aircraft leasing contracts are common, a contract in which an airline (lessee) leases an aircraft from another company (lessor) for a fixed period, rather than buying it. LATAM had this type of contract with major creditors such as Boeing and Airbus.

While in many South American jurisdictions, such as Brazil's, the leasing contract is treated as an out-of-court transaction in a restructuring process, in the United States this treatment is different. Once the claim is treated as bankruptcy remote, the creditor can seek satisfaction of its claim by other means, without being subject to the contest of creditors or the restructuring plan. This could make it impossible for the company to continue its activities. Under Section 365 of Chapter 11, the reorganized company may renegotiate the maintenance of these contracts and their terms. This is a great advantage offered by the U.S. legal system, since aircraft leasing is essential for an airline.

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Conclusion

LATAM’s process of restructuring shows the strong legal instruments, like Chapter 11, that help companies to withstand acute financial stress. Strategic financing means, such as DIP loans and renegotiations of significant contracts, have allowed the airline to define its operations and continue to compete in the global aviation market.

Of course, beyond the technicalities of the legal processes involved in this, the recovery of LATAM also reflects another fundamental element: stakeholder collaboration. The restructuring was mostly a negotiation process regarding the airline's survival, during which the interests of various parties, that is internal investors and external creditors, were balanced.

This process also raises many questions about the role of international insolvency laws in cross border corporate crises: filing under US jurisdiction has been a strategic option, mirroring today's much inter-connected nature of markets across the globe.

LATAM’s adaptation, not only to the financial crisis that the pandemic has caused, but also to the rapid evolution of the global market dynamics post-recovery, is going to be critical for its future success. Its transformation - from one of the largest bankruptcies in South America to a revitalized, profitable air-line - is a clear example of how companies can slowly overcome, through strategic foresight, strong partnerships and legal flexibility, even the most challenging crises. In fact, this case could easily set a precedent for other multinational companies in crisis, especially for industries like aviation, where the need for quick recovery and liquidity can make - or break - a company’s future viability.

In conclusion then, LATAM’s restructuring is not just a recovery story, but a meaningful example of how resilience, adaptability and strategic leadership can help a company emerge even stronger from the ashes of financial upheaval.

CC: Lais Dumitrescu Dias, Alexia Rossi, Sergio Zorzut