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Avianca majority shareholder breaches United loan conditions

Avianca's majority shareholder Synergy breached covenants of a 2018 loan from United Airlines that was secured by its shares in the Latin American airline, opening the possibility of United taking control of Avianca even as the two Star Alliance airlines continue joint venture talks.

Bogota-based Avianca says in a securities filing it was informed by Synergy subsidiary BRW Aviation and United on 10 April that BRW had fallen out of compliance with the collateral coverage ratio covenant of the United loan.

BRW, incorporated in Delaware, owns about 78.1% of Avianca's common shares. In November 2018, BRW borrowed $456 million from United, secured by BRW's equity and its 516 million shares of Avianca common stock.

A United spokesperson tells FlightGlobal that the Chicago-based carrier has not taken any enforcement action.

However, BRW's breaching loan conditions has forced Avianca to amend other financing agreements to include United as a permitted holder, so that any potential enforcement actions by United in the form of a takeover of Avianca will not constitute a change of control.

"Assuming that this approach is accepted by lenders under such financing agreements of Avianca Holdings, United would be able to enforce under the share pledge in connection with the United loan to take ownership of the shares of Avianca Holdings without causing a change of control under any of the financing agreements of Avianca Holdings," says the Colombian carrier.

Without the amendments, some of Avianca's current financing agreements could be terminated in the event of a change of control, says KPMG in an independent auditor's report that accompanied Avianca's financial statements.

Since the breach was reported, Avianca negotiated an amended agreement with creditor Banco de Bogota, to prevent a default. United was added as a permitted beneficial owner of Avianca, says the Colombian carrier.

United's spokesperson says any conversations to amend Avianca's other loans "will be directly with the borrower". An Avianca spokesperson says the airline is currently in the process of amending its financing agreements, and cannot provide an estimate of when it will complete the negotiations.

Synergy has been under increasing financial pressure. Its wholly-owned Avianca Brazil is in bankruptcy protection, and has had most of its fleet repossessed. Further south in Latin America, uncertainty hangs over the fate of another Synergy-owned carrier, Avianca Argentina. Both airlines are managed separately from Colombia's Avianca.

The common brand name has resulted in customers confusing Colombia's Avianca and Avianca Brazil for one and the same, and the Colombian carrier's share price has suffered. The Colombian carrier's chief executive Hernan Rincon recently resigned and will leave the airline at the end of the month. Since late 2018, Avianca has divested non-core businesses and shrunk its network in a bid to improve profitability. The airline's full-year operating profit in 2018 fell 21% to $232 million.

United's spokesperson says it continues to move forward with its planned joint venture with Avianca and Panama's Copa Airlines. The three Star Alliance carriers unveiled the pact in November 2018, alongside the United loan to Synergy.

Story updated with Avianca comment

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