Monday, June 20th 2005 - 21:00 UTC

Varig files for bankruptcy in Brazil and US

The troubled Brazilian airline filed for bankruptcy protection in Brazil and the US on Friday June 17.

The new bankruptcy law in Brazil, just a week old, allows Varig to stay in business while it negotiates with creditors under the oversight of a judge appointed for the specific case. It has 60 days to present to creditors and the court its restructuring plan. The plan will have to be approved by the creditors which include the government, banks as well as ILFC which had filed for the return of 11 aircraft leased by the airline.

A decision on the return of the aircraft was due on Friday June 17, the same day the airline filed for bankruptcy reorganization in the 8th district state business court in Rio de Janeiro. At the same time the airline filed with the U.S. Bankruptcy Court in New York under Section 304 of the bankruptcy code which prevents U.S. creditors from pursuing lawsuits and other actions to get a hold of the airline's assets.

Varig's North American Vice President, Vicente Cervo, said in the filing "The U.S. filing will enable Varig to avoid a piecemeal distribution of its assets, prevent substantial litigation costs, and prevent creditors from attaching assets in the U.S."

Romina Nicaretta of Bloomberg News in Rio de Janeiro told AvNews that U.S. Bankruptcy Judge Robert Drain will consider the request later this month.

The carrier has $2.8 billion in balance sheet debt and $2 billion which is not included in its balance sheet. The airline's stock trading was suspended for about three hours on Friday while it explains its plans.

According to the airline it will operate normally for the next 180 days as it continues to work with Portugal's TAP which has an MOU ? approved by the FRB which controls the majority of the shares ? to acquire a 20% stake in the airline and is confident it can bring in new investors. Part of the plan is to offer Brazilian creditors, including the government, shares in the airline.

According to Fernando Pinto of TAP he is confident they will be able to raise the capital that is needed to salvage the second oldest airline in the Americas. Sounds complicated but it could be what was needed to (a) protect the airline from losing aircraft to leasing companies, and (b) getting new capital into the airline with new owners. "It's the ownership, stupid".

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