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Delta, facing its own troubles, may have to repay $300 million on behalf of Brazil's Gol

[August 27, 2020] By Marcelo Rochabrun

SAO PAULO (Reuters) - Delta Air Lines <DAL.N> is facing a fresh Latin American headache as a Monday deadline nears for former Brazilian partner Gol Linhas Aereas Inteligentes <GOLL4.SA> to repay a $300 million loan that the U.S. carrier guaranteed.

If Gol fails to repay - which ratings agencies say is looking more likely - Delta would have to honor the debt on Gol's behalf, honoring the five-year-old agreement. But just like Gol, the Atlanta-based carrier, which said in July it was burning $27 million a day https://www.reuters.com/article/us-delta-air-results/delta-ceo-says-demand-at-a-stall-2019-business-travel-may-never-return-idUSKCN24F193, has little cash to spare due to the coronavirus pandemic.

Gol's struggles are just the latest challenge for Delta, whose investments in Latin America, once seen as a growth area, have faltered due to COVID-19.

Delta's 49% stake in Aeromexico and 20% stake in LATAM Airlines Group are at risk of dilution or being wiped https://www.reuters.com/article/us-delta-air-latam-bankruptcy-analysis-idUSKBN2431HV out as both airlines undergo bankruptcy restructurings.

For Gol, Brazil's largest carrier, the due date of the Delta-backed private loan comes amid a severe cash crunch. The loan was extended by unidentified private investors.

"Gol is facing constant cash burn without refinancing possibilities," said Amalia Bulacios, who covers Gol for S&P Global Ratings, which rates its debt as CCC-, at risk of default.

By Monday, before repaying the loan, Gol could have just 1.6 billion reais ($285.19 million) left in cash, Reuters calculated. The calculation is based on Gol's cash and cash equivalents, as well as its liquid investments, as of June 30, minus its expected cash burn of 3 million reais a day.

"We are three business days away from the deadline and the company has been very silent; it's not even clear if there is a negotiation under way," she added.

Gol and Delta declined to confirm if any negotiations were occurring. A source familiar with the matter said negotiations were indeed taking place.

The situation echoes that of Colombia's Avianca Holdings <AVT_p.CN> in May, when it filed for bankruptcy because of a debt repayment deadline the next day. Analysts, however, said Gol's restructuring needs are much simpler than Avianca's and could potentially happen out of court.

Raising cash at the 11th hour, however, appears unlikely.

While Brazil's government has offered Gol 2 billion reais ($356.49 million) in loans, two sources said it would not release the money unless Gol manages to postpone its debt deadline. Brazil wants the funds to be used on the airline's operations, not to repay creditors.

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Captain Natalia Weiss and co-pilot Thays Goncalves of Brazilian Airline GOL prepare before taking off with a full female crew in the mark of International Women's Day, in Sao Paulo, Brazil, March 8 2020. REUTERS/Rahel Patrasso/File Photo

Meanwhile, Gol executives acknowledged last month that the airline has little prospect of raising fresh capital.

"There's a certain aversion to Brazil, a certain aversion to airlines, and then we're kind of in the cross-set of that bucket," Gol's CFO Richard Lark said during the company's earnings call. "It's not really there, the private market."

DEBT UNDERPLAYED

Gol's debt troubles show how quickly the coronavirus upended the balance sheets of airlines around the world.

For years, Gol underplayed the significance of the $300 million loan. Executives said not only that they would repay it in full but that they would do so ahead of schedule.

As late as Feb. 25, even as the pandemic raged in Asia and Europe, a Gol presentation said the airline had "no relevant maturities in next five years."

Now, Gol's future hangs in the balance because of the once apparently insignificant loan coming due.

Delta, which has long expanded worldwide by buying into other carriers, in 2015 injected $56 million of equity into Gol and guaranteed the $300 million loan. At the time, Gol executives said they could not have raised the debt without Delta's backing.

Delta sold its stake in Gol in 2019 to buy its stake in Gol rival LATAM Airlines but maintained the loan guarantee.

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade <SMLS3.SA>, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

"It doesn't make much sense."

($1 = 5.6103 reais)

(Reporting by Marcelo Rochabrun; Additional reporting by Rodrigo Viga Gaier, Carolina Mandl and Tracy Rucinski; Editing by Christian Plumb and Cynthia Osterman)

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