Pressured by the prolonged economic consequences of the COVID-19 pandemic, Brazilian airline Gol Linhas Aereas SA (Gol) recently started an in-court restructuring to deal with its multi-billion debt, which stems mostly from defaulted obligations related to bonds and operating aircraft leasing claims. Rather than seeking court protection in its home country, however, the company opted for a voluntary Chapter 11 case in the United States, which could be explained by certain differences between the bankruptcy laws of each of these jurisdictions.

The Debtwire legal analyst team examined these differences below, highlighting the reasons that could have guided the airline’s decision to file for bankruptcy abroad, rather than taking advantage of the in-court restructuring tools available in Brazil.

Source: Debtwire’s Restructuring Database

Background – Latin American airline bankruptcy cases

As with almost all airlines worldwide, restrictions on gatherings and movement of people stemming from the COVID-19 pandemic led to an unprecedented reduction in Gol’s operational activities, making the company unable to comply with its financial obligations. As opposed to certain other Latin American airlines that filed for bankruptcy in the beginning of the pandemic, including Chile-based Latam Airlines, Colombian Avianca Holdings and Mexican Aeromexico, Gol engaged in several out-of-court negotiations to postpone maturities of lease agreements, which made it able to avoid a filing at the time.

In contrast to the other airlines, however, Gol never completed a full renegotiation of lease obligations, and an increase in lease payments more recently, along with rising interest rates in the US and Brazil, pressured the company’s free cash flow and led it to file a voluntary Chapter 11 case with the United States Bankruptcy Court for the Southern District of New York.

Alternatively, the airline could have filed for judicial recovery in Brazil and then filed a Chapter 15 petition for recognition of the Brazilian bankruptcy as the main reorganization proceeding in the United States, seeking to extend the effects of the Brazilian court’s rulings to the American territory. Avianca Brasil and Transbrasil Linhas Aereas SA are examples of Brazilian airlines that have adopted this strategy to restructure their claims in the past.

Source: Debtwire’s Restructuring Database

Why Gol chose to place its main proceedings in the US, unlike the other Brazilian distressed airlines, likely has something to do with the efficiency, agility and – perhaps most of all – the predictability provided by the US bankruptcy system, especially regarding the restructuring of aircraft leasing claims and the US post-petition funding market.

Impairment of aircraft leasing claims

Brazilian bankruptcy law excludes certain claims from potential impairment by a reorganization plan (the so-called extraconcursal claims), an exception that applies to claims stemming from defaulted aircraft leasing agreements. Brazilian law also sets forth that the 180-day stay period does not apply to these creditors, which – along with bondholders and financial institutions – usually hold the vast majority of airlines’ claims worldwide. Together, these special characteristics provide lead aircraft leasing claimholders with the status of “super-extraconcursal” creditors in judicial recovery cases, thereby disincentivizing domestic airline restructurings.

Source: Debtwire’s Restructuring Database

An alternative legal interpretation could support the conclusion that the stay protection applies for those lessors, at least for 30 days. When Brazil signed the Cape Town Convention[1], it opted for the protocol titled Alternative “A” of that Treaty, according to which aircraft lessors must have their collateral returned to them within either 30 days from the default or any other limit established by the country’s law, whichever ends first.

At first glance, repossessions should be implemented immediately after the default, as the stay does not apply and therefore the local law deadline “ends first.” However, depending on the circumstances of a particular case and in order to avoid a liquidation, a bankruptcy court could also provide a distressed airline with a 30-day protection against lessors, relying on the Cape Town Convention along with the principle of company preservation[2] set forth in the law.

In this uncertain context, the Avianca Brasil judicial recovery illustrates how unpredictable a distressed airline’s in-court debt restructuring can be in Brazil. The company filed for bankruptcy in late 2018 and, relying on the abovementioned principle of company preservation, the court prevented the lessors from repossessing their aircraft and engines while the company moved forward with the process.

After several months and a number of appeals filed with the Superior Courts, Avianca Brasil’s lessors were finally authorized to enforce their rights and recover their assets, but the damages they incurred in the meantime were never compensated. Additionally, the company was later declared insolvent and had its reorganization process converted into a liquidation proceeding, which was deemed evidence that the restructuring process did not work for any of the involved parties. It is arguably not a coincidence that that was the last time an airline filed for bankruptcy in the country.

On the other hand, US bankruptcy courts have been dealing with domestic and foreign distressed airlines for a long time, and that country’s bankruptcy law allows distressed airlines to restructure aircraft leasing claims, which may include either terminating or renegotiating related agreements. In a press conference held on the same day that the Brazilian airline commenced its voluntary Chapter 11 case, Gol’s CEO emphazised that the airline has been negotiating with aircraft lessors, and some of them were in fact supporting the company in the Chapter 11 case.

Source: Debtwire’s Restructuring Database

DIP availability

The second reason that would justify choosing the US in-court restructuring system is likely related to post-petition funding via debtor-in-possession (DIP) facilities, a common way of funding US bankruptcies. Clear, predictable rules to accommodate both adequate protection for prepetition claims and privileges for new claims in the waterfall priority structure have contributed to the development of a robust DIP financing market in the United States, in which international investment funds feel comfortable providing distressed companies with new money, especially in the cases in which the DIP loan is used to refinance or roll up prepetition debt early in the restructuring.

Source: Debtwire’s Restructuring Database

On the other hand, obtaining post-petition funding may be harder and more time consuming for distressed companies in Brazil. A major reform in the country’s bankruptcy law that became valid in early 2021 introduced new rules to govern guaranteed post-petition loans and clarify the waterfall priority recovery structure for liquidation scenarios, making it clear that claims stemming from DIP facilities are near the top of the recovery priorities – one of the worst problems with the law in the past.

However, despite the improvements stemming from the law reform, the Brazilian distressed funding market remains incipient compared to the US, and the amounts involved in Brazilian transactions generally are smaller than those usually provided in high-profile Chapter 11 cases. Gol’s Chapter 11 filing came with a USD 950m DIP financing commitment from members of an ad hoc group of bondholders of Abra Group, the holding company for the operations of Gol and Colombia’s Avianca. In Brazil, such an amount would be enough to fund most of the large distressed companies, and it is very rare – not to say impossible – to see bankruptcy processes filed along with relevant new-money loans like these.

Source: Debtwire’s Restructuring Database

In addition, getting court authorization for a DIP loan in Brazil usually takes much more time than in the US. While Gol obtained the bankruptcy court’s authorization to access part of the DIP four days after the filing, a similar request may take weeks or even months in Brazilian judicial recovery cases, especially when there is litigation involving shareholders, creditors and other stakeholders interested in providing the company with fresh money – as we recently saw in the Oi SA case – not to mention the time consumed by judicial managers and Public Prosecutors to present their legal opinions on DIP proposals. In certain other cases, timing issues cause companies or investors to withdraw from DIP transactions, as was the case in the Grupo Virgolino de Oliveira and Samarco Mineracao in-court restructurings.

Conclusion – predictability makes a difference

The guiding rules for airline bankruptcy processes in Brazil might support the conclusion that aircraft leasing creditors – usually the most relevant creditors in this sector – are theoretically in a very comfortable position, in contrast to the companies themselves. The country’s bankruptcy law explicitly bars airlines from restructuring their aircraft leases through a judicial recovery, and further allows the aircraft leasing creditors to foreclose on their assets during that process, immediately after the default.

In practice, however, bankruptcy courts’ contralegem (ie, against the law) protective rulings preventing lessors from exercising their rights create legal uncertainty, regardless of the good intentions enshrined by the principle of company preservation. As a result, aircraft lessors may become less confident in doing business with Brazilian airlines, and these companies may choose to restructure their debt under the oversight a foreign court, rather than filing for Judicial Recovery in Brazil. Both scenarios evidence legal uncertainty and unquestionable deficiencies in the country’s bankruptcy system, which affects the development of the economy in a negative way.

In early 2024, the government presented congress with a bill (PL 03/2024) proposing certain modifications in the bankruptcy law, which is currently pending with the Chamber of Deputies. This could be an opportunity to also amend the provisions that, in practice, give companies no leverage to restructure aircraft lease claims and lead to the undesirable consequences mentioned above.

DIP-related provisions could also be eventually reviewed in the future but, as they have been introduced only a few years ago and apply to all high-profile restructurings, it could take more time for case law to develop and fill the gaps – in contrast to those regarding aircraft lease claims, which could produce immediate effects if other Brazilian airlines need to file for bankruptcy.

Given the current state of Brazilian law, however, domestic distressed airlines – and their creditors as well – are likely to continue to consider the US insolvency system more a more beneficial alternative than the Brazilian one to deal with their cases. The financial turnaround of airlines is never a simple process, regardless of what jurisdiction they choose, but the unpredictability of the Brazilian bankruptcy system seemingly makes things even worse, justifying Gol’s choice to restructure abroad.

Endnotes

[1] The Cape Town Convention is an international treaty with the purpose of standardizing transactions involving movable property. The treaty created international standards for the registration of contracts of sale, leases, liens and a series of legal remedies for default in financing agreements, including repossession. The treaty was originally signed by a number of countries in 2001 and Brazil joined this group in 2011, aiming to benefit from the advantages available for the other signatory members, including agility, predictability and lower interest costs in international funding agreements for local airlines, as well as faster asset repossession proceedings, in the event of default on aircraft and related equipment lease agreements.

[2] This principle establishes that judicial reorganization aims to overcome the economic and financial crisis of the debtor in order to preserve the economic activity and the public interest resulting from the recovery, such as the preservation of jobs, tax collection and the circulation of goods, products and services, as well as the interests of creditors.

Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst, he practiced with Passos & Sticca Advogados Associados, and worked in the legal department of Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit recovery, representing creditors such as banks and financial institutions in high-profile restructurings. He also obtained his LL.M in Financial and Capital Markets Law from Insper Instituto de Ensino e Pesquisa, and is currently enrolled in the Master’s Program in Commercial Law at Universidade de Sao Paulo.

Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.