LATAM Airlines is seeking bankruptcy court permission to reject 19 aircraft, most which are part of enhanced equipment trust certificate (EETC) offerings, that it deems as excess assets "no longer accretive to the business", according to a filing.

The Santiago-based carrier lists a total fleet of 320 aircraft, of which nine are unencumbered, 213 are under finance leases and 98 are under operating leases. 

LATAM's fleet includes Airbus A320 family aircraft as well as Boeing 767-300ER, 787-8, 787-9, 777-300ER and Airbus A350-900 units. It has eleven dedicated 767 cargo aircraft.

It has requested rejection of 15 aircraft from 26 May, with the exception of four 787-9s for which the carrier is seeking rejection from 3 June.

The filing says the "analysis is continuing" but in the case of each lease identified "such agreements do not provide value beneficial to the debtors or their estates in light of the economic climate facing the airline industry today."

Airfinance Journal received mixed opinions from financiers speaking on condition of anonymity regarding why LATAM would first seek to reject mainly EETC-backed assets ahead of leased aircraft.

A banker says the move could be down to negotiating tactics. "It forces the noteholders to come to the table, and this incentivises them to break down the cross-collateralisation and to renegotiate individual aircraft," he says.

Another banker adds that the assets could "represent the aircraft they want to cull and is administratively simpler to isolate the rejects in a single structure." 

However, the move could impact LATAM's ability to raise debt going forward, says a third banking source. "The lessor community will have a short memory, but that might not be the case with the financing world. In the longer term, this could focus investors more toward the USA and away from non-US issuers." Also, "given LATAM's pedigree" the decision could have a meaningful impact on the "entire capital markets", the source adds.  

A lessor source explains the push to EETC assets is because "operating lessors are desperate to keep planes" at LATAM due to the sharp fall in travel demand due to the pandemic. "LATAM can simply pick their numbers for terms with lessors," the source says. 

Another lessor adds: "There will be more rejections across the fleet. Lessors will likely be next in the process."

EETC rejects

The carrier is seeking to reject 19 aircraft with Wilmington Trust listed as the pass-through trustee, loan trustee and subordination agent on each asset.

The aircraft include Rolls Royce Trent-powered Airbus A350-900s, with 2015 and 2016 build years, on lease to TAM from Rayador Leasing and Canastero Leasing. Four 2015-built Roll Royce Trent-powered 787-9s are on lease with LATAM from Rayador Leasing, Canastero Leasing and Aercap.

The widebody aircraft are subject to a $1.02 billion 2015 EETC and a C tranche offering that closed in 2017, according to Airfinance Journal's Deal Tracker. LATAM closed the private two-tranche EETC offering to finance 17 new aircraft (11 Airbus A321s, 2 Airbus A350-900 and 4 Boeing 787-9s). It later closed a C tranche of its 2015 EETC that amounted to an additional $140 million.  Citi is the mandated lead arranger of the C tranche.

One 787 is supported through a commercial loan, according to Deal Tracker. 

Eleven CFM International CFM56-5B-powered Airbus A321-200s are on lease from Cuclillo Leasing and Parina Leasing. Six of the A321s are on lease to TAM and the rest with LATAM. The A321s, which have 2015 and 2016 build years, are part of the same 2015  EETC and 2017 offerings, according to Airfinance Journal's Deal Tracker.

A 2002-built Airbus A319 equipped with International Aero Engines V2500-A5 engines is on lease from Amendoeira Leasing. KfW is listed as the lender, DVB Bank as the aviation lender and the B lender is Airbus Financial Services. The final aircraft, a 2005-built Airbus A320, is on lease from Araucaria Leasing. DVB Bank is the lender, and Natixis is the security agent. The A319 and A320 are on lease to TAM. 

LATAM, with a history extending back 90 years, boasts one of the largest route networks in the world. Before the onset of the COVID-19 pandemic, LATAM offered passenger transport services to 145 different destinations in 26 countries. 

The airline has cut capacity by 95% due to the coronavirus but its cargo operations "largely have been unaffected". 

Relief needed

Despite undertaking "meaningful cost-saving and liquidity preserving measures", LATAM said its liquidity position had continued to deteriorate in the wake of the COVID 19 pandemic, necessitating the voluntary petitions for relief under Chapter 11. 

The voluntary reorganisation includes LATAM's affiliates in Chile, Peru, Colombia, Ecuador and the United States; however, its Argentina, Brazil and Paraguay units were not included in the Chapter 11 filing. 

The airline's five largest secured creditors, which are owed $2.2 billion, include Wilmington Trust with $778 million in Class A enhanced equipment trust certificates (EETC), backed by 11 Airbus 321, two A350, and four Boeing 787s, followed by Citibank with $603 million, supported by a loan with 26 aircraft,15 spares and engines and Credit Agricole with $274 million, backed by a 41-engine loan facility.

Wells Fargo is owed $277 million in connection to a US Export-Import bond on nine Boeing 767s while Natixis has $243 million with the carrier backed by a loan for nine A321s, according to the court filing.

LATAM's top 40 unsecured claims include original equipment manufacturers Boeing with $16.16 million and CFM with $7.4 million. Aercap has the largest unsecured operating lessor claim at $7.43 million, followed by Avolon at $6.48 million and BBAM at $6.32 million.

It has secured up to $900 million in debtor-in-possession financing from Qatar Airways, which owns roughly 10% of the group's equity, Chile's Cueto family, which has a 21.46% stake, and Brazil's Amaro family. Delta Air Lines holds 20% of the carrier. 

Passenger and cargo flights will continue to operate during the reorganisation, and employees will still be paid, the airline says. 

Industry speculation about LATAM had grown during the past week after the carrier failed to make bond payments on 15 May.

LATAM didn't reply to Airfinance Journal's emails early last week requesting comment regarding the EETC payments due on the 2015 $1.02 billion offering. 

The missed payments later prompted downgrades by S&P and Fitch on 22 May. 

The carrier entered a 15-day grace period to resolve the payments or trigger an event of default.

LATAM says it had around $1.3 billion in cash on hand at the time of filing.