LatinFinance - July/August 2016 - 10

Source: Reuters

SEVERE TURBULENCE: Bondholders rejected repeated exchange
offers put forward by GOL CEO Paulo Kakinoff

Gol's initial reluctance to negotiate with bondholders is an
example of tensions between investors and borrowers in Latin
America. As corporates grapple with hefty borrowings - taken out
in happier times - they are finding themselves increasingly butting
heads with investors.
The economic slowdown across the region has left corporates
with weaker earnings to service their foreign-denominated debt.
Some are turning to buybacks and exchanges to ease stress on their
balance sheets.
At the same time, they are struggling to balance shareholders'
interests with demands from international and domestic
bondholders.
Offshore creditors are frequently frustrated by the bankruptcy
frameworks laws in the region. At the same time, shareholders are
reluctant to have their ownership diluted by a restructuring process
- an aversion that is often even more profound in family-controlled
businesses.
Troubled industry
From 2010 to 2012, the global airline industry was hard hit. Fuel
costs climbed as crude oil prices soared above $100 a barrel. Then as
crude oil prices decreased, Brazil's economy dipped. The country's
largest carrier TAM Linhas Aéreas merged with Chile's LAN Airlines,
creating LATAM Airlines, the region's biggest. The move chipped
away at Gol's market share.
Gol last posted an annual profit in 2010. In 2015, it lost $1.1 billion.
Over the past year, Gol has injected equity, renegotiated with
suppliers and attempted to revise outstanding bonds.
Like many Latin American companies, Gol has matured in its
approach to financing over the past decade. Borrowers turned
to sophisticated capital markets strategies and welcomed bond
investors buyers from around the world. Companies opened up to a
global investor base on the back of Latin America's economic boom.
Now, they must apply that sophistication in tougher
circumstances. Investors say that means sitting down at the table
with creditors. Support from creditors is vital before announcing
an exchange offer, for example, says Liam Localio, a director at

Greylock Capital.
"[Gol] put out the initial proposal and extended the period it
remains open," Localio says. "If you are thinking about it as a trade,
they're basically repeating the same offer to the market, which isn't
necessarily constructive."
Dario Pedrajo, a managing director at Kapax Investment Advisors
in Miami, says "goodwill" is important to creditors. "Gol's approach
can sour deals and make things difficult when it comes to making an
agreement."
A strong control group in many publicly traded Latin American
corporates companies can complicate restructuring processes,
Pedrajo says. The Constantino family, Gol's controlling shareholders,
may be reluctant to relinquish control, he says.
"There is a personal element involved. Families may have owned
these companies for generations," he says. "They have a vote, a voice
and may not have realistic expectations.
"This can be a weakness when it comes to financing," he adds.
"You have a generation of owners who have lived off of dividends
and are not sure how to restructure company debt."
Pedro Jiménez, a restructuring lawyer and partner at Jones Day,
says the advising process involves educating both the bondholder
and issuer.
"You're dealing with bondholders from all over the world and
then you're dealing with a family," he says. "On the other side
bondholders that are used to US-type law, you need to explain to
them that things don't work this way in Latin America."
Activists come out
While bondholders' reluctance to take haircuts comes as no
surprise, Greylock's Localio says the issue is the execution of the
exchange. Gol's refusal to convene with bondholders to find an
amicable solution is rare in debt exchanges, he says.
"If everyone involved sits down and decides what's needed for
a sustainable deal, this would lead to something," he says. "But the
sense here is that this has not happened yet."

LIAM LOCALIO, GREYLOCK CAPITAL

"IF EVERYONE INVOLVED SITS DOWN
AND DECIDES WHAT'S NEEDED FOR
A SUSTAINABLE DEAL, THIS WOULD
LEAD TO SOMETHING.
BUT THE SENSE HERE IS THAT THIS
HAS NOT HAPPENED YET"

10 L ATINFINA NCE.COM - July/August 2016

CoverStory.indd 10

7/21/16 2:34 PM


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Table of Contents for the Digital Edition of LatinFinance - July/August 2016

Contents
LatinFinance - July/August 2016 - Cover1
LatinFinance - July/August 2016 - Cover2
LatinFinance - July/August 2016 - Contents
LatinFinance - July/August 2016 - 2
LatinFinance - July/August 2016 - 3
LatinFinance - July/August 2016 - 4
LatinFinance - July/August 2016 - 5
LatinFinance - July/August 2016 - 6
LatinFinance - July/August 2016 - 7
LatinFinance - July/August 2016 - 8
LatinFinance - July/August 2016 - 9
LatinFinance - July/August 2016 - 10
LatinFinance - July/August 2016 - 11
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