Brazil’s Azul reaches deal with bondholders for additional financing

By Gabriel Araujo

SAO PAULO (Reuters) -Azul has reached a deal with its existing group of bondholders to obtain additional financing, the Brazilian airline said on Monday, as part of restructuring it expects to ease market concerns about its debt load.

Azul dominates Brazil’s airline industry along with LATAM and Gol, and has managed to avoid the fate of a number of Latin American carriers who filed for bankruptcy after the COVID-19 pandemic, including its two main rivals.

The fresh capital was a condition of Azul’s recent deal with lessors to scrap nearly $550 million in obligations in exchange for an equity stake of around 20% of the firm, which analysts see as fundamental to strengthen the airline’s cash position.

Under the deal with bondholders, the carrier said in a securities filing, it will receive $150 million this week and another $250 million by year-end in fresh debt, totaling the $400 million it had been targeting.

The agreement, Azul added, may include another $100 million in financing and a potential debt-for-equity swap of as much as $800 million if the company manages to further improve its cash flow by reducing costs by around $100 million per year.

“It will allow for a quick deleveraging of Azul,” Chief Executive John Rodgerson said in an interview. “They say, ‘we are creditors but want to be equity holders if we have this cost reduction’. It is an option, but I’m confident we’ll take it.”

He noted that among the ways for Azul to reach the proposed cost reduction are negotiations with lessors and manufacturers such as Embraer, Airbus, GE and RTX’s Pratt & Whitney.

Rodgerson acknowledged the deals imply an equity dilution, but shrugged off concerns on that front. “It’s obvious that there will be dilution, but of a much stronger company. It is better to have a smaller piece of a much larger cake,” he said.

The Monday announcement, the Brazilian carrier said, also includes an agreement to improve cash flow by $150 million by reducing certain lessor and equipment manufacturer obligations over the next 18 months.

Reuters reported last week, citing sources, that Azul was in talks with multiple parties – including the existing bondholders and lender Jefferies – to raise about $400 million in fresh capital via debt financing, and an agreement was near.