LATAM Airlines Group (OTCPK:LTMAQ) filed for Chapter 11 in the US on May 26, including its affiliates in Chile, Peru, Colombia, Ecuador, and the United States. This process will allow the company to resize its operations to the new demand environment and reorganize its balance sheets, enabling them to emerge more agile, resilient, and sustainable. LTMAQ has the right to propose a reorganization plan during the 120 days following the presentation of the Request. This period can be extended for a term of up to 18 months. LarrainVial and JT Partners will be the financial advisors. Important to mention that the subsidiaries in Argentina, Paraguay, and Brazil do not participate in the procedure because of their specific financial situation.
LTMAQ has secured the financial support of shareholders, including the Cueto and Amaro families, which have lasting ties to LATAM, and Qatar Airways, to provide up to $900M in debtor-in-possession (DIP) financing. Also, the company is looking to secure more DIP debt in the range of $1B to $1.5B. In parallel, LTMAQ is in discussions with governments from Chile, Brazil, Colombia, and Peru to assist in additional sourcing financing, protect jobs where possible and minimize disruption to its operations.
Based on Fact Set EBITDAR estimates and a 6x EV/EBITDAR valuation multiple, the recovery value for debt holders and stockholders is $13B. Total claims, including an assumption of $2B DIP debt and current market cap, are $20.3B. If the company is liquidated, there will not be enough money for existing stockholders. We believe that this is the main reason Cueto and Amaro families, and Qatar Airways are willing to commit DIP debt, so it might transform to new equity in an event their current stockholders is wiped-out.
Based on 2021 EBITDAR estimates, and a 3x Total Debt/EBITDAR target for a post-restructuring structure, we found that current stockholders will be wiped-out. The unsecured debtholders’ recovery value is 100% but in new equity.
We also found that that secured debt should receive 100% of its claims. The aggregate recovery will be 54% debt + 46% new equity. We divide DIP debt into two. Those who are current stockholders will prefer to convert this DIP debt into new equity, while the remainder will prefer cash. The waterfall looks like this:
Finally, we believe this will be how the new balance sheet will be. Unsecured and secured debtors will have 37% and 51% of the new company, respectively. Families and Qatar Airways will have 12%.
We believe LTMAQ is a great name for a short sale. Not only is short sell because the airline industry is going through difficult times, but also the company fundamentals reinforce the trade.
Disclosure: I am/we are short LTMAQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.