According to LATAM, this "modified equity subscription election" was a valuable asset, particularly if it did not have sufficient cash to pay off the Tranche C loan at the end of the case. The Tranche C loan facility provided that, in lieu of repaying the loan in cash, LATAM had the option to repay the loan by giving the Tranche C lenders restricted equity in the reorganized company at a 20% discount to plan value (a discount valued at approximately $283 million). LATAM had the right to prepay the Tranche A loan, but not the Tranche C loan. Both loans were to be conferred with super-priority administrative expense status.
Sub rosa plus#
The delayed-draw Tranche C loan (up to $900 million plus an additional $250 million increase commitment) was to bear payment-in-kind interest at the initial rate of 14.5% and was to be secured by a lien junior to the lien of the Tranche A lender. The Tranche A loan ($1.3 billion) was to bear interest at an adjusted LIBOR rate plus an applicable margin and would be secured by a senior lien on LATAM's unencumbered assets and a junior lien on its encumbered assets. ("Delta") acquired approximately 20% of the common stock of LATAM's parent corporation in connection with a 2019 tender offer and an ensuing joint venture agreement. Together, Qatar, Costa Verda, and their affiliates held approximately 32% of LATAM's common stock. The Tranche A lender had no relationship with LATAM prior to the bankruptcy cases. ("Costa Verda")-as Tranche C lenders (an alternative super-priority DIP loan facility proposal with a Tranche B loan was abandoned). Accordingly, upon the filing of its chapter 11 case, LATAM sought bankruptcy court approval of a $2.45 billion debtor-in-possession ("DIP") financing agreement with a Tranche A lender and two of its existing shareholders-Qatar Airways Investments (U.K.) Ltd ("Qatar") and Costa Verde Aeronautica S.A. LATAM's prepetition efforts to secure government financial assistance were unsuccessful. and certain affiliates (collectively, "LATAM"), Latin America's leading airline group, filed for chapter 11 protection in the Southern District of New York after losing 95% of its passenger business due to travel restrictions imposed during the COVID-19 pandemic. However, after the parties modified the financing agreement to remove the equity election feature, the bankruptcy court approved the financing. However, the court initially refused to approve the proposed financing agreement, finding that the agreement was a prohibited " sub rosa" chapter 11 plan because it provided that the debtor could elect to repay the shareholder loan with discounted stock in lieu of cash and effectively prevented confirmation of any plan other than the debtor's. 10, 2020), the court held that the debtor demonstrated that secured financing provided by its existing shareholders was necessary, that the terms of the loan were fair, and that the lenders were acting in good faith. Bankruptcy Court for the Southern District of New York. Such a proposed financing arrangement was the subject of a ruling recently handed down by the U.S.
Sub rosa full#
The practice is typically sanctioned by bankruptcy courts under an exception-the "new value" exception-to the "absolute priority rule," which prohibits shareholders and junior creditors from receiving any distribution under a plan on account of their interests or claims unless senior creditors are paid in full or agree otherwise. Postpetition financing provided by pre-bankruptcy shareholders or other "insiders" is not uncommon in chapter 11 cases as a way to fund a plan of reorganization and allow old shareholders to retain an ownership interest in the reorganized entity.
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