Avianca-Gol tie-up seen as positive for debt

Oliver West
May 12, 2022 01:49 PM

Latin American airlines will operate under same holding company amid challenging environment

Brazilian low-cost airline Gol and Colombia’s flagship carrier Avianca said on Wednesday that their shareholders had agreed to bring the two entities under a single holding company in a move that is likely to be positive for the companies’ debt.

Gol and Avianca will continue to operate separate brands, but will now be controlled by a single parent company called Abra. Abra will also have a non-controlling 100% economic interest in Viva, a low-cost carrier in Colombia and Peru that only last month said it would be joining the same holdco as Avianca. And the group will further broaden its reach with convertible debt that will represent a minority interest in Chile’s Sky Airline.

“We believe that while the transaction is positive for both [companies], Avianca should be the most benefited with the transaction given Avianca’s market and financial position is weaker than Gol’s,” Josseline Jenssen, director of LatAm credit research at Lucror Analytics, an independent credit research provider.

Lucror said it expects the transaction to “pave the way for synergies and cost savings by centralising operations under a common strategy”, and sees this as a first step to a “a potential merger to create a stronger group, achieve a better position in supplier negotiations and compete in the region against leader Latam Airlines”. The development is not surprising given the impact from Covid-19 and rising fuel prices amid the Russia-Ukraine conflict, said the firm.

As the Covid-19 pandemic slammed the global travel industry, Avianca entered bankruptcy and its international bonds were wiped out. However, to emerge from bankruptcy the company raised debtor-in-possession (DIP) financing, including a 9% 2028 tranche that was ultimately freed to trade on the secondary market. This note is trading at around 90 cents on the dollar.

Gol was able to remain current on its bonds throughout the pandemic, and even accessed the bond market after it began. According to data from MarketAxess, the company’s bonds were flat in secondary markets on Thursday, with the 9% 2026s at a dollar price of around 86, or a yield of 12.425%.

One EM fixed income portfolio manager said the deal would not be enough to entice him back into the sector.

“Some guys liked Gol as a play on the economic reopening last year but the airline sector is done for us,” said the investor. “It’s got a terrible track record and is just too risky, especially in this environment.”

Roberto Kriete, chairman of Avianca’s board of directors, will also be the chairman of Abra, which will be a UK-incorporated privately held company. Gol’s founder Constantino de Oliveira Junior will be group CEO, while Avianca CEO Adrian Neuhauser and Gol CFO Richard Lark will be co-presidents of Abra and maintain their existing roles.

Both Neuhauser and Lark are familiar faces in the bond markets, with Neuhauser having been head of Chile investment banking at Credit Suisse until 2019, and Lark having led Gol’s bond market activity from the front ever since its first deal in 2006.

Latam gets creditor approval

Latin American airlines Aeromexico and Latam also defaulted on their international bonds in 2020 as a consequence of the Covid-19 pandemic, and both also entered bankruptcy in the US. There was a positive development on Wednesday for Latam as the company said Chilean bondholders, which include creditors represented by state-owned Banco Estado, and two group of unsecured creditors had agreed to its bankruptcy plan.

This includes the Ad Hoc group of unsecured creditors, comprising Sixth Street, Strategic Value Partners (SVP) and Sculptor Capital.

Latam’s bonds were bid a point higher on Wednesday at 92.875, according to data from MarketAxess.