Avianca Brazil has filed a financial recovery plan with a Sao Paulo bankruptcy court under which three funds associated with US investor Paul Singer and his Elliott Management Corporation would inject liquidity of $75 million into the independent Brazilian affiliate of Colombia’s Avianca Group.

The Brazilian carrier filed for bankruptcy protection in December last year.

Sao Paulo daily Valor reports the recovery plan proposed by Avianca Brazil to the court includes the creation of a new corporate umbrella company, to which the airline’s principal assets - including some aircraft and landing slots - will be transferred.

This “new Avianca Brazil” is set to receive a $75 million convertible loan from investment funds Elliott Associates, Elliott International and Manchester Securities. If approved by the court, the loan can be converted into 49% shares of the newly created company that will control Brazil’s fourth largest airline. The carrier accounted for a 14% share of the Brazilian domestic market in 2018.

Elliott Management did not respond to requests for comments on the plan, while Avianca Brazil says it cannot comment on any news related to the judicial recovery process.

A source at Brazil’s Civil Aviation Authority ANAC, who has heard only unofficially about the plan, expresses doubts that airport landing slots can be considered “assets” in a financial sense.

“While we have not received a formal enquiry or request from Avianca Brazil to transfer slots to a different company, I want to point out that our regulations about transferring slots between airlines is very restrictive, as they are considered a public asset that cannot be traded as such," he says. “They can only be transferred, at no cost, between airlines belonging to the same group of companies”.

While this statement may reduce the cash value of Avianca’s slots to zero, it adds value to the company that is using them commercially as, according to these rules, the new Avianca Brazil would be entitled to receive the slots as it shares the same controlling shareholder with its current operator.

Slots at highly congested, single-runway Sao Paulo’s Congonhas and Rio de Janeiro’s Santos Dumont downtown airports are among the most appreciated assets belonging to Brazilian airlines.

The speed with which the bankruptcy court rules on the proposal, and with which the loan is made available, will be crucial to Avianca Brazil’s future and its ability to retain its Airbus A320 and A320neo fleet - part of which lessors GECAS and Aircastle have been taking steps to repossess.

After the lessors got an initial go-ahead to take back Avianca Brazil aircraft over unpaid lease rates, the bankruptcy court later temporarily blocked the aircraft repossessions “while the debt restructuring negotiations continue”.

This decision was received with unease by other Brazilian airlines. Jerome Cadier, president of Latam Airlines Brazil suggests this could create uncertainties to lessors, "which could lead to higher lease rates in Brazil, which is something we obviously do not want”.

Elliott Management has a long-standing relationship with Colombia's Avianca Holdings and its reference shareholder German Efromovich, whose brother Jose has historically been managing Ocean Air, the unit which later became Avianca Brazil.

Last year, German Efromovich reached an agreement with United Continental Holdings under which its Star Alliance partner airline would provide a convertible $456 million loan to Efromovich’s investment vehicle Synergy Aerospace to inject liquidity into Avianca Holdings.

According to Colombian media, Elliott Management had pushed for this agreement as much of the loan will be used to repay loans to the US hedge fund.

Source: Cirium Dashboard