Varig may avoid the threatened repossession of about half its fleet, but the crisis has left it little time to complete restructuring by its December deadline.

The mid-December date ends the six-month period allowed under Brazilian law for a company to restructure. It provides that after six months a company that has failed to restructure must liquidate. Varig’s lawyers predict the court will grant an extension, but the statute is too untested to be sure. “The law is clear,” one lawyer warns.

Varig was preoccupied through September and October by the threat from lessors to reclaim between 20 and 40 of its 76 aircraft. In November, it was poised to meet a deadline to come up with a $62 million payment on lease arrears, but only after intervention by the national development bank, BNDES and TAP Portugal. TAP agreed to buy Varig’s two most valuable subsidiaries, VarigLog, its cargo and logistics unit, and VEM, its maintenance and overhaul arm. The proceeds from those sales are earmarked for the lessors.

TAP says that it plans to bring both units back into the Varig Group if it continues to play a role in the airline’s reorganisation. It took the insistence of Brazil’s president Lula da Silva for BNDES to step in and offer financing to any investor willing to buy the two units. Local sources say president Silva told his cabinet that Varig should not be allowed to collapse.

Beyond the immediate crisis over leased aircraft, many questions remain. Varig pleaded to keep some of the cash from the sale of VarigLog and VEM to repair 15 aircraft now grounded because of maintenance needs. It argued that returning these aircraft to operation was essential to reverse its sliding fortunes. But the lessors objected and the entire amount is going to them.

TAP Portugal claims it is prepared to inject up to $500 million into Varig in exchange for a 20% stake, the most allowed under Brazil’s law, but it is not clear if the various stakeholders agree. Varig’s employees favour another plan offered by a local consortium headed by newspaper magnate Nelson Tanure. German Efromovich, head of the Synergy group that bought Colombia’s Avianca, also registered an interest. TAP is asking Varig for exclusivity, a move that is sure to rile rival bidders.

Even if Varig and its creditors prefer TAP – and Varig officials have openly said they do – the Portuguese airline still must associate with local investors because of the 20% cap on foreign investment.


Source: Airline Business