Brazil’s Azul shares sink 40% after Chapter 11 filing

Brazilian airline Azul shares fell at least 40% in US premarket trading Wednesday after the company sought Chapter 11 protection in the United States.

The move highlights continuing economic strain from the COVID-19 pandemic. It makes Azul the latest purse-stringed Latin American airline to turn to the courts for debt protection after a protracted industry downturn.

According to a Reuters report, the airline cited pandemic-era liabilities as the key basis for its bankruptcy filing, despite subsequent efforts to stabilise its balance sheet through restructuring agreements and capital injections.

The company’s US-listed shares dropped approximately 40% in premarket trading, bringing the year-to-date decline to around 70%.

Restructuring plan aims to slash debt and boost liquidity

The airline disclosed a restructuring agreement in a securities filing, which includes $1.6 billion in committed financing during the process, elimination of over $2 billion in debt, and an additional commitment of up to $950 million in equity financing upon emergence.

These actions could help the airline move forward while maintaining service continuity.

The company said that it has struck settlements with key stakeholders, including bondholders, aircraft lessor AerCap, and strategic partners United Airlines and American Airlines.

These agreements are meant to help Azul through the restructuring process and emerge from bankruptcy with a healthier balance sheet.

United and American Airlines have also agreed to invest up to $300 million to backstop an equity rights offering aimed at repaying the airline’s debtor-in-possession financing upon its emergence from bankruptcy.

Pandemic-era pressures continue to weigh on recovery

Azul’s financial woes are similar to those of other Latin American carriers that declared bankruptcy, including Aeromexico, Avianca, Gol, and LATAM Airlines.

Despite efforts to restructure in 2023, including a contract to convert $550 million in debt to equity and raise $500 million from bondholders, Azul is still struggling.

High operational costs, delayed aircraft deliveries due to supply chain concerns, and a weakening Brazilian real have all contributed to increased costs of servicing dollar-denominated debt.

By the end of the first quarter of 2024, Azul’s net debt had increased by 50% year on year to 31.35 billion reais ($5.6 billion).

The situation worsened last month when a capital raising fell short of expectations, driving Azul’s shares even down and prompting credit rating downgrades from agencies such as Fitch and S&P.

The latter cited increased default risk in its decision.

Merger prospects with Gol diminish

The bankruptcy case also jeopardises Azul’s aspirations for a merger with competitor carrier Gol.

The amalgamation of the two corporations could have resulted in a dominating carrier in Brazil, the region’s largest economy.

Azul CEO John Rodgerson previously referred to such a union as a potential “national champion” for Brazilian aviation.

However, with Azul now in Chapter 11, the prospects for a merger have dropped dramatically.

Any prospective consolidation is likely to be postponed or cancelled entirely while Azul works to recover from bankruptcy and restore financial health.

Operations to continue during bankruptcy proceedings

Azul, however, stressed that it would continue to operate normally both for flights and sales during the Chapter 11 process.

The airline views the bankruptcy case as a mechanism to clear long-term debt, rather than a reflection of its daily performance or customer expectations.

Azul has a financing strategy and backing from larger stakeholders, and expects to finish its restructuring prior to the end of 2025.

It remains to be seen whether the airline can successfully navigate the exit, with a newly stable financial performance being crucial to offset continued macroeconomic and operational headwinds.

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