GOL’s uncertain future due to the maturity of a 300 million dollar debt: Will Delta have to bear the cost?

Delta Air Lines faces a new headache in Latin America as Monday’s deadline approaches for former partner GOL to repay a $300 million loan of which the U.S. company is a guarantor.

If GOL fails to pay, which rating agencies say is likely, Delta would have to assume the debt on behalf of the Brazilian airline under the five-year agreement. But like GOL, Delta – which said in July that it was burning $27 million a day – has little to spend because of the coronavirus pandemic.

The problem with GOL is only the latest challenge for Delta, whose investments in Latin America, once seen as a growth area, failed because of Covid-19.

Delta’s 49% stake in Aeromexico and 20% in Latam Airlines is at risk of being diluted or turned into dust as both airlines are in restructuring due to judicial recovery or bankruptcy.

For GOL, the maturity of the Delta-backed loan occurs in the midst of a severe cash crisis. The loan was granted by unidentified private investors.

“GOL faces constant cash burns with no possibility of refinancing,” said Amalia Bulacios, who covers GOL for S&P, which classifies its debt as CCC-.

On Monday, before paying off the loan, GOL could have only R$1.6 billion (US$288 million) in cash, Reuters calculated. The calculation is based on the airline’s cash and cash equivalents and net investments as of June 30, less expected cash consumption of R$3 million (US$540,000) per day.

“There are three business days left before the deadline and the company is very calm; it is not clear if negotiations are ongoing,” said Bulacios.

GOL and Delta have not confirmed whether negotiations are taking place. A source familiar with the issue said that negotiations are taking place.

The situation is similar to that of Colombia’s Avianca in May, when it filed for bankruptcy due to the next day’s debt repayment deadline. But analysts said GOL’s restructuring needs are much simpler than Avianca’s and can occur outside of court.

But last minute money collection seems unlikely. Although the Brazilian government offered GOL R$2 billion (US$360 million) in loans, two sources said the money will not be delivered unless the airline manages to postpone its debt. Brazil wants the funds to be used for the airline’s operations, not to reimburse creditors.

Meanwhile, GOL executives acknowledged last month that the airline has little prospect of raising new capital. “There’s a certain aversion to Brazil, a certain aversion to airlines, so we’re in the middle of that,” GOL Vice President of Finance Richard Lark said in a conference call about results.

GOL’s debt problems show how quickly the coronavirus changed the balance sheets of airlines around the world. For years, the company underestimated the importance of the $300 million loan. Executives said they would not only pay it back in full, but would do so before the deadline.

On February 25, even as the pandemic devastated Asia and Europe, a GOL presentation said the airline “had no relevant maturities in the next five years. Now, GOL’s future is at stake because of the seemingly insignificant maturity of the loan.

Delta, which has been expanding around the world by buying from other operators, injected US$56 million into GOL in 2015 and obtained the US$300 million loan. At the time, GOL executives said they could not have increased the debt without Delta’s support.

Delta sold its stake in GOL in 2019 to buy a stake in its Latin rival, but kept the loan guarantee. If GOL fails to make payment, Delta will have the option to have the Brazilian airline participate in the Smiles loyalty program company that guaranteed the loan.

But Gol’s stake in Smiles is worth only R$954 million (US$171 million). And the loyalty program has little strategic value, since Delta switched from GOL to Latin America.

“If Delta does this, it will strangle GOL’s cash, jeopardize the survival of the Brazilian airline and become a shareholder of Smiles, a company that needs GOL to succeed,” said Ricardo Fenelon, a former director of Anac. “It doesn’t make sense”.

By Reuters – America Economía