Latam Airlines Series 2015 Certificates Ratings Affirmed And Off CreditWatch Negative

  • In early April 2019, the Sao Paulo Court of Appeals issued a ruling correctly interpreting the Cape Town Convention (CTC), which authorized the lessors to repossess their aircraft from Avianca Brasil (not rated), that had filed for bankruptcy.
  • S&P Global Ratings bases its ratings on Chile-based Latam Airlines' enhanced equipment trust certificates (EETCs) partly on the legal rights of creditors to quickly repossess aircraft in a bankruptcy scenario. These EETCs are collateralized by aircraft operated by Latam and by its majority-owned Brazilian subsidiary, TAM S.A.
  • On July 19, 2019, S&P Global Ratings removed its issue-level ratings on Latam's series 2015-1 EETCs from CreditWatch with negative implications and affirmed the ratings on EETC-2015 1 Class A at 'BBB+(sf)', Class B at 'BB+(sf)', and Class C at 'BB(sf)'.
SAO PAULO (S&P Global Ratings) July 19, 2019—S&P Global Ratings took rating actions described above. The rating actions on Latam Airlines Group S.A. follow a final ruling by the Sao Paulo Court of Appeals, which the Superior Court of Justice (STJ) confirmed, on the applicability of the CTC. In addition, our rating actions are based on our assessment that Latam's EETCs possess certain characteristics that mitigate some of the legal uncertainty in Brazil and Chile.
A Brazilian bankruptcy court's decision to allow Avianca Brasil S.A. (not rated), which had filed for bankruptcy in December 2018, to keep possession of aircraft beyond the 30-day stay period set forth in the CTC had raised legal uncertainties regarding the protections provided under the international treaty. The CTC's terms are one of our base-case assumptions for rating Latam's (EETCs) because they establish a legal framework for aircraft lease or secured debt creditors' rights to repossess aircraft collateral if a bankrupt airline doesn't resume payments and make up past-due amounts after a short stay period following a bankruptcy filing.
On April 8, 2019, the Sao Paulo Court of Appeals issued a ruling properly interpreting CTC and authorizing immediate repossession of Avianca Brazil aircraft by lessors. The airline immediately appealed the ruling, but STJ denied Avianca's petition and affirmed the appeals court's ruling. Although during this first airline bankruptcy in Brazil since the country ratified CTC in 2012, lessors were exposed to an almost 4-month stay period instead of CTC's stipulations of the 30 days, we believe the April appeals court ruling sets a favorable precedent. In the future airline bankruptcy cases in Brazil, we expect creditors to repossess their aircraft in a timely fashion.
Latam's EETCs have a unique structure because they're exposed to two jurisdictions. Out of 17 aircraft under this structure, Latam subleases seven of them to its Brazilian subsidiary, TAM S.A. The mitigating factor is that the majority of Latam's planes backing the EETCs are located in Chile, because of our view of the country's stronger and more predictable judicial system relating to insolvency proceedings and creditor rights, although it hasn't ratified the CTC. Furthermore, subleases to the Brazilian subsidiary could be terminated any time. In addition, the EETCs are supported by a 21-month liquidity facility, three months longer than is typical for this type of debt, which could pay timely cash interest in a bankruptcy scenario.
Given that Chile's bankruptcy law is new and despite Brazil's ratification of CTC, we still had some degree of uncertainty regarding the timing for a legal decision on the aircraft recovery in both jurisdictions and uncertainties regarding the timing for deregistration and export of the aircraft. Therefore, we already factored this into our ratings.
Our ratings on EETCs can be well above the issuer credit rating on the airline because a default on the certificates occurs only if the airline enters bankruptcy, either liquidates or reorganizes, but rejects the secured aircraft debt or leases that collateralize the rated certificates, and proceeds from repossession and sale of the aircraft collateral are insufficient to repay principal and interest due on the certificates. The chance of these three events happening in succession is almost always less than that of a bankruptcy filing of the airline. Holders of EETCs, particularly the senior class, can also be repaid if the airline agrees on a restructuring plan with them that lowers payments but still pays enough to cover the senior class of EETCs.
If Latam were to file for bankruptcy, we still view a high likelihood of a debt restructuring, rather than liquidation, given the airline's importance to several economies in Latin America. Also, the pool of assets in EETCs remains liquid and attractive in the secondary market. As a result, our loan-to-value analysis remains unchanged, providing collateral enhancement for classes A and B.
We currently provide five notches of uplift to a rating on Latam's Class 2015-1A certificates, two notches to the Class 2015-1B rating, and one notch to Class 2015-1C rating above the 'BB-' issuer credit rating.
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