LatinFinance - July/August 2017 - 16

Disciplined approach
The deals Latam has not executed are perhaps even more illustrative
of the company's focused financing strategy than those that have
gone through. Its EETC landmark is a good example.
The first two tranches of the deal were a resounding success,
raising a little over $1 billion. But the company held a third tranche
for which it had prepared documentation, deciding that pricing for
the deeply subordinated C tranche was simply not worth pushing.
Regardless of its junior ranking, the C tranche would have used some
collateral, but market conditions meant Latam would have paid a
similar yield to unsecured paper.
With access to other markets available, Latam bided its time.
"By 2017, the market for that C tranche rallied a lot - that market
was looking for paper," says Hollahan. "There was no question that
the C tranche pricing was coming in way inside where it had been in
2015, or where Latam could do an unsecured bond, and it became
attractive again." Latam ultimately issued the $140 million C-tranche
earlier this year.
Latam burnished its reputation for a disciplined approach again
last October when it backed away from a benchmark-sized senior unsecured bond. It planned to use the cash to buy back old debt issued
by TAM, a 7.375% 2017 and an 8.375% 2021. But the market quickly
turned as the deal advanced, and the company decided that no deal
would be better than a poorly priced one.
"They didn't need to chase the market if it wasn't presenting them
with the terms that made sense," says Hollahan. "They waited until
the market improved and went back to the unsecured market this
year and raised $700 million in an excellent execution." The new
6.875% 2024 bond was priced to yield 7%.
Latam is "very disciplined," says Debano. "They don't chase -
they let the market come to them."
That controlled approach to finance, in addition to the wide
range of sources of capital it has accessed over the past year, made
Latam Airlines stand out in LatinFinance's 2017 Best Corporates in

EMILY DISTEFANO, CLIFFORD CHANCE

"WHAT THEY'VE DONE IS VERY
SIMILAR TO WHAT COMPANIES
LIKE DELTA AND AMERICAN
AIRLINES HAVE DONE, WHICH IS
TO GET A DIVERSITY OF FUNDING
SOURCES FOR THEIR AIRCRAFT,
FOR THEIR GENERAL DAY-TO-DAY
NEEDS, FOR ALL THEIR
CAPITAL NEEDS"

"Over the last five years, Latam has increasingly established itself
as a global airline - not just as an operational entity, but also in terms
of capital resourcing, structuring and pricing," says Emily DiStefano,
a partner at Clifford Chance, which has advised Latam Airlines on
multiple financial transactions. "What they've done is very similar to
what companies like Delta and American Airlines have done, which
is to get a diversity of funding sources for their aircraft, for their general day-to-day needs, for all their capital needs. Unlike US airlines,
they also have access to export credit financings."
The wide range of funding sources provides comfort to all creditors concerning Latam's creditworthiness. "They recognize that a
diversity of capital sources adds value to each individual tranche,
whether that's tangible in terms of pricing, or whether it's simply
access," says Gary Brooks, a Clifford Chance partner.

Making up for Brazilian pain

Cost-cutting drive

Kilometers traveled by paying passengers, by route

Latam Airlines Group costs, $m

35,000

4,000

30,000

3,500

25,000

3,000

Amid a tough operating environment, Latam Airlines
Group has taken a hatchet
to its costs, laying off staff,
cutting capacity and reducing its financing costs.

2,500

20,000

2,000

15,000

1,500

10,000

1,000

5,000

500

1Q17

3Q16

4Q16

1Q16

2Q16

4Q15

3Q15

1Q15

2Q15

3Q14

4Q14

1Q14

2Q14

International routes

Spanish-speaking countries

Source: Latam Airlines Group

Revenue passenger kilometers is a metric of passenger traffic, showing
how many of the available seats were actually sold. As demand from
Brazilians for domestic travel waned, Latam Airlines Group has
increased paying passengers on cross-border flights and local routes in
its other countries.

16 L ATINFINA NCE.COM - July/August 2017

0

1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17

Brazil

4Q13

3Q13

1Q13

2Q13

0

Other Operating Expenses

Depreciation and Amortization

Aircraft maintenance

Commissions to agents

Aircraft Rentals

Aircraft fuel

Passenger Services

Wages and Benefits

Other Rental and Landing Fees
Source: Latam Airlines Group
http://www.LATINFINANCE.COM
Table of Contents for the Digital Edition of LatinFinance - July/August 2017
