LATAM Airlines Group S.A.

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re:
LATAM Airlines Group S.A., et al.,
Debtors.1
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:
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Case No. 20-11254 (JLG)
Chapter 11
(Jointly Administered)
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MEMORANDUM DECISION GRANTING THE DEBTORS’ MOTION FOR ENTRY OF
AN ORDER AUTHORIZING AND APPROVING THE DEBTORS’ ENTRY INTO AND
PERFORMANCE UNDER BACKSTOP AGREEMENTS AND PAYMENT OF
RELATED FEES AND EXPENSES AND INCURRENCE
OF CERTAIN INDEMNIFICATION OBLIGATIONS
A P P E A R A N C E S :
CLEARY GOTTLIEB STEEN & HAMILTON LLP
Attorneys for the Debtors
One Liberty Plaza
New York, New York 10006
By: 	Richard J. Cooper, Esq.
Lisa M. Schweitzer, Esq.
Luke A. Barefoot, Esq.
Thomas S. Kessler, Esq.
1 	The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s tax identification number
(as applicable), are: LATAM Airlines Group S.A. (59-2605885); Lan Cargo S.A. (98-0058786); Transporte Aéreo
S.A. (96-9512807); Inversiones Lan S.A. (96-5758100); Technical Training LATAM S.A. (96-847880K); LATAM
Travel Chile II S.A. (76-2628945); Lan Pax Group S.A. (96-9696800); Fast Air Almacenes de Carga S.A. (96-
6315202); Línea Aérea Carguera de Colombia S.A. (26-4065780); Aerovías de Integración Regional S.A. (98-
0640393); LATAM Finance Ltd. (N/A); LATAM Airlines Ecuador S.A. (98-0383677); Professional Airline Cargo
Services, LLC (35-2639894); Cargo Handling Airport Services, LLC (30-1133972); Maintenance Service Experts,
LLC (30-1130248); Lan Cargo Repair Station LLC (83-0460010); Prime Airport Services Inc. (59-1934486);
Professional Airline Maintenance Services LLC (37-1910216); Connecta Corporation (20-5157324); Peuco Finance
Ltd. (N/A); Latam Airlines Perú S.A. (52-2195500); Inversiones Aéreas S.A. (N/A); Holdco Colombia II SpA (76-
9310053); Holdco Colombia I SpA (76-9336885); Holdco Ecuador S.A. (76-3884082); Lan Cargo Inversiones S.A.
(96-9696908); Lan Cargo Overseas Ltd. (85-7752959); Mas Investment Ltd. (85-7753009); Professional Airlines
Services Inc. (65-0623014); Piquero Leasing Limited (N/A); TAM S.A. (N/A); TAM Linhas Aéreas S.A. (65-
0773334); Aerolinhas Brasileiras S.A. (98-0177579); Prismah Fidelidade Ltda. (N/A); Fidelidade Viagens e
Turismo S.A. (27-2563952); TP Franchising Ltda. (N/A); Holdco I S.A. (76-1530348) and Multiplus Corredora de
Seguros Ltda. (N/A). For the purpose of these chapter 11 cases, the service address for the Debtors is: 6500 NW
22nd Street Miami, FL 33131.
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DECHERT LLP
Counsel to the Official Committee
of Unsecured Creditors
1095 Avenue of the Americas
New York, NY 10036
By: 	Allan S. Brilliant, Esq.
David A. Kotler, Esq.
Stephen M. Wolpert, Esq.
PAUL HASTINGS LLP
Counsel to Banco del Estado de Chile,
in its capacity as indenture trustee under the
Chilean Local Bonds Series A through D and
Series E issued by LATAM Airlines Group S.A.
200 Park Avenue
New York, New York 10166
By: 	Pedro A. Jimenez, Esq.
Andrew Tenzer, Esq.
Nicholas Bassett, Esq.
Shlomo Maza, Esq.
ARNOLD & PORTER KAYE SCHOLER LLP
Counsel to the Ad Hoc Group of Unsecured Claimants
250 West 55th Street
New York, New York 10019
By: 	Michael D. Messersmith, Esq.
Sarah Gryll, Esq.
Jeffrey A. Fuisz, Esq.
Robert T. Franciscovich, Esq.
HUNTON ANDREWS KURTH LLP
Counsel to Columbus Hill Capital Management, L.P.
200 Park Avenue
New York, NY 10166
By: 	Paul N. Silverstein, Esq.
Brian Clarke, Esq.
Philip M. Guffy, Esq.
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WACHTELL, LIPTON, ROSEN & KATZ
Counsel for Costa Verde Aeronáutica S.A.
51 West 52nd Street
New York, New York 10019
By: 	Richard G. Mason, Esq.
John R. Sobolewski, Esq.
Angela K. Herring, Esq.
DAVIS POLK & WARDWELL LLP
Counsel for Delta Air Lines, Inc.
450 Lexington Avenue
New York, New York 10017
By: 	Marshall S. Huebner, Esq.
Lara Samet Buchwald, Esq.
Adam L. Shpeen, Esq.
ALSTON & BIRD LLP
Attorneys for Qatar Airways Investments (UK) Ltd.
90 Park Avenue
New York, NY 10016
By: 	Gerard S. Catalanello, Esq.
James J. Vincequerra, Esq.
Geoffrey C. Williams, Esq.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
Counsel to the Parent Ad Hoc Claimant Group
1177 Avenue of the Americas
New York, New York 10036
By: 	Kenneth H. Eckstein, Esq.
Rachael L. Ringer, Esq.
David E. Blabey Jr., Esq.
Douglas Buckley, Esq.
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Introduction2
LATAM Airlines Group S.A. (“LATAM Parent”) and its affiliated debtors and debtors-
in-possession (collectively, the “Debtors”) together with certain non-debtor affiliates
(“LATAM”) is Latin America’s leading airline group. LATAM is the largest passenger airline
group in South America and one of the largest airlines in the world in terms of network
connections. LATAM Parent is a publicly traded company incorporated in Chile. After eighteen
months of effort by the Debtors and their advisors to stabilize their business and right-size their
operations, and in the wake of a mediation conducted by the Honorable Allan L. Gropper (Ret.)
the Debtors entered into a Restructuring Support Agreement (the “RSA”) 3 with (i) an ad hoc
group of LATAM Parent creditors (the “Parent GUC Ad Hoc Group,” and as signatories along
with other creditors to the RSA, the “Commitment Creditors”) who together controls more than
70% in amount of the general unsecured claims asserted against LATAM Parent, and (ii) a group
of shareholders (the “RSA Shareholders”) who together control more than 51% of LATAM
Parent’s common stock. The restructuring contemplated under the RSA is reflected in the
Debtors’ Plan and provides that LATAM will continue to operate as an integrated group (the
“Reorganized Debtors”) under LATAM Parent or any successor thereto, on or after the Effective
Date (the “Reorganized LATAM Parent”). It calls for the Debtors to raise more than $8 billion in
2 	Capitalized terms used but otherwise not defined shall have the meanings ascribed herein or, as applicable, in
the Restructuring Support Agreement, the Plan, Disclosure Statement and Backstop Agreements (all as defined
below).
3 	On November 26, 2021, the Debtors filed the Disclosure Statement with Respect to the Joint Plan of
Reorganization of LATAM Airlines Group S.A., et al., Under Chapter 11 of the Bankruptcy Code [ECF No. 3667]
(the “Disclosure Statement”). Attached to the Disclosure Statement as Exhibit E was the first draft of the
Restructuring Support Agreement (the “Original Restructuring Support Agreement” together with amendments and
exhibits thereto, and as may be modified amended or supplemented from time to time, the “Restructuring Support
Agreement”). On January 25, 2022, the Debtors filed a revised Restructuring Agreement and the First Amendment
to the Restructuring Support Agreement. See Notice of Filing of (I) Revised Restructuring Support Agreement and
(II) First Amendment to Restructuring Support Agreement [ECF No. 4165].
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new money to pay in full in cash under the Plan allowed administrative and priority claims, the
DIP Facility, LATAM 2024 Bond Claims, LATAM 2026 Bond Claims, and general unsecured
claims against all Debtors other than LATAM Parent, Piquero Leasing Limited, and LATAM
Finance, and to finance the Reorganized Debtors’ ongoing operations and capital needs
following their emergence from the Chapter 11 Cases.
The Debtors intend to raise most of those funds through certain New Capital Notes
Offerings and ERO Rights Offerings in the Chilean capital markets and in accordance with
Chilean law. That means LATAM Parent must obtain the consent of a majority of its
shareholders before it can launch the rights and notes offerings, and that those offerings will be
subject to the preemptive rights of its shareholders to subscribe for and purchase their pro rata
shares of the Plan Securities. Key aspects of the RSA are (i) the agreements of the RSA
Shareholders to consent to the Plan Securities offerings, and (ii) the agreements of the
Commitment Creditors and a subset of the RSA Shareholders to backstop a total of $5.4 billion
of those offerings. The Commitment Creditors will act as a backstop to the ERO Rights Offering
and New Convertible Notes Class C Offering and, as necessary, will purchase up to $400 million
of the Unsubscribed ERO New Common Stock, and subscribe for and purchase up to $3.269
billion of the Unsubscribed New Convertible Notes Class C. As consideration for those
commitments, the Debtors will pay the Commitment Creditors a cash payment (the “Backstop
Payment”) equal to 20% of the $3.669 billion backstop commitment, or approximately $734
million, and will hold back and offer 50% of the New Convertible Notes Class C Offering to the
Commitment Creditors, for their subscription and purchase under the Plan. A subset of the RSA
Shareholders consisting of Costa Verde Aeronáutica S.A. and Inversiones Costa Verde Ltda y
Cia. En Comandita por Acciones (together, “Costa Verde”), Delta Air Lines, Inc. (“Delta”), and
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Qatar Airways Investment (UK) Ltd. (“Qatar”, together with Costa Verde and Delta, the
“Backstop Shareholders” and with the Commitment Creditors, the “Backstop Parties”) will
backstop up to $400 million of the Unsubscribed ERO New Common Stock, and up to $1.373
billion of the New Convertible Notes Class B Offering, subject to the “Backstop Shareholders
Cap.” 4 They will not be paid a fee for that commitment, but, like the Commitment Creditors
under their backstop agreement, they are entitled to Expense Reimbursement and
Indemnification Benefits from the Debtors. Those agreements are reflected in the “Commitment
Creditors Backstop Agreement” and the “Backstop Shareholders Backstop Agreement”
(collectively, the “Backstop Agreements”).5
The matter before the Court is the Debtors’ motion (the “Motion”)6 for entry of an order
pursuant to sections 105(a), 363(b), 503(b)(1), and 507(a)(2) of title 11 of the United States Code
(the “Bankruptcy Code”), Rules 2002 and 6004 of the Federal Rules of Bankruptcy Procedure
(the “Bankruptcy Rules”), and Rule 9013-1 of the Local Bankruptcy Rules of the Southern
District of New York (the “Local Bankruptcy Rules”), (i) authorizing and approving the Debtors’
(a) entry into and performance under the Commitment Creditors Backstop Agreement, and the
Backstop Shareholders Backstop Agreement, and (b) payment of the Backstop Payment and
Expense Reimbursement and incurrence of the Backstop Indemnification Obligations; and (ii)
4 	The term “Backstop Shareholders Cap” means the total number of shares of Reorganized LATAM Parent Stock
issued to Backstop Shareholders pursuant to this Plan (inclusive of the Backstop Shareholders’ equity ownership in
Reorganized LATAM Parent on an as-converted basis with respect to the New Convertible Notes Class B and
exclusive of any Existing Equity Interests) which shall be no greater than 27% of the total amount of such
Reorganized LATAM Parent Stock (exclusive of any Existing Equity Interests) the apportionment of which among
the Backstop Shareholders shall be determined by the Backstop Shareholders in their sole discretion. See Initial
RSA, Ex. E, Equity Rights Offering of New Common Stock at 2–3 (definition of “Backstop Shareholders Cap”).
5 	Copies of the Commitment Creditors Backstop Agreement and the Backstop Shareholders Backstop Agreement
are annexed as Exhibits A and B, respectively, to the Motion.
6 	See Debtors’ Motion for Entry of an Order (I) Authorizing and Approving the Debtors’ (A) Entry Into and
Performance Under Backstop Agreements and (B) Payment of Related Fees and Expenses and Incurrence of Certain
Indemnification Obligations, and (II) Granting Related Relief [ECF No. 4056].
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granting related relief. In short, in support of the Motion, the Debtors assert that their entry into
and performance under the Backstop Agreements is an exercise of their sound business judgment
and is in their best interests, as well as the best interests of their estates, and all parties in interest.
The Official Committee of Unsecured Creditors (the “Committee”),7 Banco del Estado de
Chile (“BancoEstado”),8 an Ad Hoc Group of Unsecured Claimants (the “A&P Ad Hoc Group”)9
and Columbus Hill Capital Management, L.P. (“Columbus Hill”)10 (together, the “Objectors”)
filed objections to the Motion (the “Objections”). They contend that the Court should not defer to
the Debtors’ business judgment and should deny the Motion because the Backstop Payment and
other fees and expenses that the Debtor will incur under the agreements are unreasonably high
and significantly above market. The Debtors filed a Reply to the Objections.11 Costa Verde,12
7 	See Objection of the Official Committee of Unsecured Creditors to the Debtor’s Motion for Entry of An Order
(I) Authorizing and Approving the Debtors’ (A) Entry Into And Performance Under Backstop Agreements And (B)
Payment of Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, And (II) Granting
Related Relief [ECF No. 4289] (the “Committee Obj.”).
8 	See Objection of Banco del Estado de Chile, in Its Capacity as Indenture Trustee Under the Chilean Local
Bonds Series A Through D and Series E, to the Debtors' Motion for Entry of an Order (I) Authorizing and
Approving the Debtors' (A) Entry Into and Performance Under Backstop Agreements and (B) Payment of Related
Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting Related Relief [ECF
No. 4293] (the “BancoEstado Obj.”).
9 	See Objection of the Ad Hoc Group of Unsecured Claimants to the Debtors' Motion for Entry of an Order (I)
Authorizing and Approving the Debtors' (A) Entry into and Performance Under Backstop Agreements and (B)
Payment of Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting
Related Relief [ECF No. 4291] (the “A&P Ad Hoc Group Obj.”).
10 	See Columbus Hill Capital Management's Objection to the Debtors' Motion for Entry of an Order (I)
Authorizing and Approving the Debtors' (A) Entry into and Performance Under Backstop Agreements and (B)
Payment of Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting
Related Relief [ECF No. 4184].
11 	See Debtors' Omnibus Brief in Further Support of Their Motion for Entry of an Order (I) Authorizing and
Approving the Debtors' (A) Entry into and Performance Under Backstop Agreements and (B) Payment of Related
Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting Related Relief [ECF
No. 4311] (the “Reply”).
12 	See Statement of Costa Verde Aeronautica S.A. in Support of Debtors Motion for Entry of an Order (I)
Authorizing and Approving the Debtors (A) Entry Into and Performance Under Backstop Agreements and (B)
Payment of Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting
Related Relief [ECF No. 4309].
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Qatar,13 Delta14 and the Parent Ad Hoc Claimant Group15 filed statements in support of the
Motion that urge the Court to grant the Motion, approve the Backstop Agreements and authorize
the Debtors to make the payments and incur the liabilities called for under the agreements.
The Court conducted an evidentiary hearing on the Motion. As discussed below, the
Court finds that the Backstop Parties are providing necessary funding to the Debtors on terms
that are fair and reasonable in the particular circumstances of these cases. The authorization of
the Debtors to enter into and perform under the Backstop Agreements is integral to the Debtors’
pursuit of the Plan. For the reasons set forth below, the Court overrules the Objections and grants
the Motion.
Jurisdiction
The Court has jurisdiction to consider this contested matter pursuant to 28 U.S.C. §§ 157
and 1334 and the Amended Standing Order of Reference, dated January 31, 2012 (Preska, C.J.).
This is a core proceeding pursuant to 28 U.S.C. § 157(b).
Background
On May 26, 2020 (the “Initial Petition Date”), certain of the Debtors (the “Initial
Debtors”) filed voluntary petitions under chapter 11 of the Bankruptcy Code (the “Initial Chapter
11 Cases”). On July 7 and 9, 2020 (the “Subsequent Petition Date” and, together with the Initial
13 	See Statement of Qatar Airways Investments (UK) Ltd. (I) in Support of the Debtors' Motion for Entry of an
Order (1) Authorizing and Approving the Debtors (A) Entry into and Performance under Backstop Agreements and
(B) Payment of Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II)
Response to the Limited Objections Raised to the Backstop Shareholder Backstop Agreement [ECF No. 4310].
14 	See Statement of Delta Air Lines, Inc. in Support of the Debtors' Motion for Entry of an Order (I) Authorizing
and Approving the Debtors (A) Entry into and Performance under Backstop Agreements and (B) Payment of
Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting Related Relief
[ECF No. 4308].
15 	See Statement of the Parent Ad Hoc Claimant Group in Support of Debtors' Motion for Entry of an Order (I)
Authorizing and Approving the Debtors' (A) Entry Into and Performance Under Backstop Agreements and (B)
Payment of Related Fees and Expenses and Incurrence of Certain Indemnification Obligations, and (II) Granting
Related Relief [ECF No. 4312] (the “Parent GUC Ad Hoc Group Statement”).
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Petition Date, as applicable to each Debtor, the “Petition Date”), additional LATAM affiliates
(the “Subsequent Debtors”) filed voluntary petitions under chapter 11 of the Bankruptcy Code
(the “Subsequent Chapter 11 Cases” and together with the Initial Chapter 11 Cases, the “Chapter
11 Cases”). The Debtors continue to operate their businesses and manage their properties as
debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The
Chapter 11 Cases are jointly administered for procedural purposes only. On June 5, 2020, the
United States Trustee for Region 2 (the “U.S. Trustee”) appointed the Committee and on May
26, 2021, the U.S. Trustee amended the appointment of the Committee.16 No trustee or examiner
has been appointed in any of these Chapter 11 Cases.
On May 27, 2020, the Grand Court of the Cayman Islands granted the applications of
certain of the Debtors for the appointment of provisional liquidators pursuant to section 104(3) of
the Companies Law (2020 Revision). On June 4, 2020, the 2nd Civil Court of Santiago, Chile
issued an order recognizing the Chapter 11 Cases with respect to LATAM Parent., Lan Cargo
S.A., Fast Air Almacenes de Carga S.A., Latam Travel Chile II S.A., Lan Cargo Inversiones
S.A., Transporte Aéreo S.A., Inversiones Lan S.A., Lan Pax Group S.A. and Technical Training
LATAM S.A. On June 12, 2020, the Superintendence of Companies of Colombia granted
recognition to the Chapter 11 Cases.
The Mediation Process
On June 16, 2021, the Committee filed two motions seeking derivative
standing to assert certain purported avoidance claims, principally under section 548 of the
Bankruptcy Code, held by the Debtors against (i) Qatar and certain of its affiliates and (ii) Delta
and certain of its affiliates. See Motion of the Official Committee of Unsecured Creditors for (I)
16 	The U.S. Trustee has not solicited additional members for the Committee on the basis of the Subsequent
Chapter 11 Cases.
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Leave, Standing, and Authority to Commence and Prosecute Certain Claims and Causes of
Action On Behalf of the Debtors’ Estates Against Qatar Airways Q.C.S.C. and Its Affiliates and
(II) Non-Exclusive Settlement Authority Regarding Such Claims [ECF No. 2532] (the “Qatar
Standing Motion”); Motion of the Official Committee of Unsecured Creditors for (I) Leave,
Standing, and Authority to Commence and Prosecute Certain Claims and Causes of Action On
Behalf of the Debtors' Estates Against Delta Air Lines, Inc. and Its Affiliates and (II) Non-
Exclusive Settlement Authority Regarding Such Claims [ECF No. 2531] (the “Delta Standing
Motion” and, together with the Qatar Standing Motion, the “Standing Motions”).
Upon the Court’s suggestion that a mediator might facilitate resolution of the issues
raised with respect to the Standing Motions, including shareholder-related issues in connection
with the plan process. After negotiating a form of mediation order with various stakeholders and
parties in interest, on August 17, 2021, the Debtors filed a proposed order appointing the
Honorable Allan L. Gropper (Ret.) (the “Mediator” or “Judge Gropper”) as mediator and
establishing procedures for a mediation regarding the Standing Motions. Notice of Presentment
of Proposed Order Appointing Mediator and Establishing Procedures for Mediation [ECF No.
2962].
On August 31, 2021, the Court issued an order directing certain parties to conduct a
mediation regarding the Standing Motions before the Mediator. See Order Appointing Hon.
Allan L. Gropper (Ret.) as Mediator [ECF No. 3060] (the “Mediation Order”). The Mediation
Order also contemplated that certain parties may seek to mediate “other shareholder matters that
were raised at the July 30, 2021 hearing, if and when the Designated Parties agree that such
issues are ripe for mediation or as directed by the Court; and (c) such other matters as the
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Designated Parties may agree upon or the Court may direct.” Id. at ¶ 1.17 The mediation on the
Standing Motions was conducted between September and October 2021. On October 15, 2021,
the Mediator filed a report informing the Bankruptcy Court that the mediation on the Standing
Motions was not successful. See Mediator’s Final Report [ECF No. 3371].
The Debtors sought and received numerous extensions of the periods during which the
Debtors have the exclusive right to file a plan and the periods during which the Debtors have the
exclusive right to solicit acceptance thereof (together, the “Exclusivity Periods”). On October 14,
2021, the Debtors sought to further extend the Exclusivity Periods. See Fifth Motion to Extend
Exclusivity Period for Filing a Chapter 11 Plan and Disclosure Statement [ECF No. 3363] (the
“Fifth Exclusivity Motion”). Various parties in interest filed statements in support of the
exclusivity period extensions. See Statement of Delta Air Lines, Inc. with Respect to the
Debtors’ Fifth Motion for Entry of an Order Extending the Debtors' Exclusive Periods in Which
to File a Chapter 11 Plan and Solicit Acceptances Thereof [ECF No. 3411]; Statement of Costa
Verde Aeronautica S.A. and Lozuy S.A. Regarding Debtors Fifth Motion for Entry of an Order
Extending the Debtors Exclusive Periods in Which to File a Chapter 11 Plan and Solicit
Acceptances Thereof and Certain Responses Thereto [ECF No. 3413]; See Statement of Qatar
Airways Investment (UK) Ltd. Concerning Debtors’ Fifth Motion for Entry of an Order
Extending the Debtors' Exclusive Periods in Which to File a Chapter 11 Plan and Solicit
Acceptances Thereof [ECF Nos. 3414]. Although the Committee and the Parent GUC Ad Hoc
Group did not oppose the requested exclusivity extension, they filed responses expressing
concerns related to a potential plan of reorganization. In particular, the Parent GUC Ad Hoc
17 	As defined in the Mediation Order, the Designated Parties consist of: (a) the Debtors; (b) the Committee; and
some or all of the following parties as applicable to the relevant Mediation Matters: (c) Delta; (d) Qatar; (e) the
Parent GUC Ad Hoc Group; (f) the Moelis Ad Hoc Creditor Group represented by White & Case LLP; and (g)
Costa Verde. See Mediation Order ¶ 2.
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Group requested that the Court condition a further extension of the Exclusivity Periods on further
mediation with the Mediator regarding potential plan, exit and shareholder related issues. See
Parent Ad Hoc Claimant Group’s Limited Objection to Debtors’ Fifth Motion for Entry of an
Order Extending the Debtors’ Exclusive Periods in Which to File a Chapter 11 Plan and Solicit
Acceptances Thereof [ECF No. 3394]. On October 25, 2021, the Debtors filed a reply in further
support of their request to further extend the Exclusivity Periods, indicating their willingness to
engage in further mediation. See Debtors' Reply in Further Support of Debtors’ Fifth Exclusivity
Extension Motion [ECF No. 3419]. The Debtors also began discussions with various parties on
the form and structure of such mediation. At the October 28, 2021 hearing, the Debtors
announced that the Debtors and certain interested parties, including the Committee, the Parent
GUC Ad Hoc Group, Delta, Qatar, Costa Verde and BancoEstado, had reached an agreement on
a construct to mediate certain shareholder and Chilean law issues and that the Fifth Exclusivity
Motion was therefore proceeding on an uncontested basis. The Court granted the Debtors’
requested extension of the Exclusivity Periods, which extended the period of time to file a plan
of reorganization to November 26, 2021, and the period of time to solicit acceptances to that plan
to January 26, 2022. See Order Extending the Debtors’ Exclusive Periods in Which to File a
Chapter 11 Plan and Solicit Acceptance Thereof [ECF No. 3485]. 18
Pursuant to the Mediation Order and as discussed at the October 28, 2021 hearing before
the Court, the Designated Parties, together with Lozuy S.A. and BancoEstado (the
“Mediation Parties”) agreed to mediate certain shareholder issues, Chilean law issues, and other
18 	The Court has since extended the Subsequent Debtors’ exclusivity to file a Plan and solicitation period to
January 7, 2022 and March 7, 2022, respectively. See Order Granting Motion to Extend/Limit Exclusivity Period for
Filing a Chapter 11 Plan and Disclosure Statement and Denying Motion to Terminate the Debtors' Exclusive Periods
[ECF No. 4355].
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issues related thereto (the “Mediation”). The Debtors also notified the Mediator that Columbus
Hill, the Ad Hoc Committee of Shareholders and a syndicate of lenders wished to participate in
the Mediation. The Debtors filed a notice of mediation regarding the subjects identified in
paragraph 1(b) of the Mediation Order. See Notice of Mediation With Respect to Additional
Mediation Matters [ECF No. 3457]. This notice further indicated that the Mediator had the
discretion to invite any additional parties that were not otherwise Designated Parties to
participate. See id. The Mediation Parties commenced the Mediation on November 1, 2021
before the Mediator. The Mediation spanned several weeks and included numerous in-person
meetings in New York among key stakeholders’ advisors and principals from around the globe.
The RSA and Plan
On November 26, 2021, the Debtors entered into the RSA with the Commitment
Creditors and the RSA Shareholders. Together, the Commitment Creditors hold approximately
70.74% of the General Unsecured Claims asserted against LATAM Parent. The RSA
Shareholders are comprised of: Andes Aerea SpA, Inversiones Pia SpA and Comercial Las
Vertientes, Costa Verde, Delta, and Qatar. See RSA at 1; See also Plan § 5.10. Together, they
control more than 51% of LATAM Parent’s common stock. On November 26, 2021, the Debtors
filed their Joint Plan of Reorganization of LATAM Airlines Group, S.A., et al, Under Chapter 11
of the Bankruptcy Code [ECF No. 3666] (as amended or supplemented, the “Plan”) and the
related disclosure statement [ECF No. 3667] (as amended or supplemented, the “Disclosure
Statement”).19 Thereafter, the parties engaged in more than six weeks of additional negotiations
19 	The Debtors filed a revised version of the Plan and Disclosure Statement on December 17, 2021. See ECF No.
3837. For administrative reasons, the revised documents were separately re-filed on December 20, 2021. See ECF
Nos. 3844, 3845. The Debtors filed the Fourth Revised Joint Plan and Fourth Revised Disclosure Statement,
respectively, on February 28, 2022. See ECF Nos. 4449, 4452. References to the “Plan” and “Disclosure Statement”
will be to those versions of the documents.
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before finalizing the Backstop Agreements on January 12, 2022. See Parent GUC Ad Hoc Group
Statement ¶ 15.
The Plan calls for a multi-billion-dollar capital infusion in the form of exit financing,20
and through a combination of transactions (the “Restructuring Transactions”), including rights
offerings and convertible notes offerings, which the Debtors will conduct in the Chilean capital
markets and in accordance with applicable Chilean law. Under Chilean law, a Chilean company
can issue new shares of stock only with shareholder approval, and subject to the preemptive
rights of eligible shareholders to subscribe for and purchase their pro rata shares of any newly
issued equity and convertible debt. The Debtors assert that their proposed equity rights offering
and convertible notes offerings will comply with Chilean law because the Plan contemplates that
in all cases, the offering and allocation of new shares or new convertible notes will include a
preemptive rights offering to Eligible Equity Holders with only the unsubscribed shares after the
preemptive rights offering, if any, being distributed, offered or sold to other parties. Moreover,
the Plan calls for LATAM Parent to obtain the requisite shareholder approvals for such capital
raises from its shareholders at a shareholders’ meeting prior to the Effective Date. See Plan §§
6.1, 6.2, 10.2. As noted, the RSA Shareholders collectively hold approximately 51% of the
outstanding equity of LATAM Parent. See RSA, Schedule II – Commitment Parties, Eblen
Group, Participating Claims and Equity Interests. Pursuant to the RSA, they have agreed to vote
in favor of approving all capital increases, stock issuances and convertible debt issuances and/or
bylaw amendments as may be contemplated as part of the Restructuring Transactions, including
the issuance of all Plan Securities. Id. § 4.03.
20 	The Plan contemplates the inclusion of (i) $2.25 billion of new Exit Notes/Loan, (ii) a $500 million revolving
credit facility, which shall be undrawn at emergence and (iii) the refinancing or amendment and extension of the
Debtors’ existing revolving credit facility, and (iv) the refinancing or amendment and extension of the Revised
Spare Engine Facility. See Plan § 5.8; See also id. § 1.1 (defining terms and amounts).
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The Plan construct contemplates a rights offering (the “ERO Rights Offering”) in an
amount of $800 million of new common stock of Reorganized LATAM Parent (the “ERO New
Common Stock”). See RSA at 3. In exchange for, among other things, an aggregate 20%
Backstop Payment, the Commitment Creditors will provide a backstop commitment to acquire
up to $400 million in ERO New Common Stock that is not purchased by the Eligible Equity
Holders to the extent they exercise their preemptive rights under the ERO Rights Offering (the
“Unsubscribed ERO New Common Stock”). See RSA, Ex. E, Equity Rights Offering of New
Common Stock. The Backstop Shareholders will backstop the remaining $400 million of the
offering, without a fee, but subject to the Backstop Shareholders Cap. Id. Thus, the ERO Rights
Offering will include: (i) Eligible Equity Holders (other than the Backstop Shareholders) to the
extent they are exercising their preemptive rights under the ERO Rights Offering, (ii) the
Backstop Shareholders, and (iii) the Commitment Creditors, as backstop providers. See id. The
cash proceeds from the rights offering will be used as necessary under the Plan and otherwise for
working capital purposes. See id.
The Plan construct also calls for Reorganized LATAM Parent to issue three series of
convertible notes (the “New Convertible Notes Offerings”) consisting of New Convertible Notes
Class A, B and C (collectively, the “New Convertible Notes” and, together with the ERO New
Common Stock, the “Plan Securities”). See RSA at 2–5; see also RSA at Exs. B–D. In each case,
the offering is subject to the rights of Eligible Equity Holders to exercise their preemptive rights
under Chilean law to purchase the New Convertible Notes. Thus, the offering of each class of the
New Convertible Notes will include a preemptive rights offering to Eligible Equity Holders. See
id. at Exs. B–D.
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The aggregate principal amount of the New Convertible Class B Notes (the “Class B
Notes”) is approximately $1.372 billion. See RSA at 2; see also id., Ex. A, Offering of New
Convertible Notes Class B Due December 31, 2121 at 1. The Backstop Shareholders will agree
to exercise all their preemptive rights to subscribe for and purchase the Class B Notes, and
backstop (the “New Convertible Notes Class B Backstop Commitment”) the remainder of the
Class B Notes not subscribed for and purchased by the Eligible Equity Holders in the New
Convertible Notes Class B Preemptive Rights Offering, subject to the Backstop Shareholders
Cap. Id. The Backstop Shareholders will not be paid a fee on account of the New Convertible
Notes Class B Backstop Commitment. See id. at 2. The offering of Class B Notes will include (i)
a preemptive rights offering to Eligible Equity Holders, and (ii) the allocation on the Effective
Date of Class B Notes not subscribed for and purchased by Eligible Equity Holders (the “New
Convertible Notes Class B Subsequent Notes Allocation”) to the New Convertible Notes Class B
Backstop Parties. Id. Any cash proceeds generated by the New Convertible Notes Class B
Preemptive Rights Offering and the New Convertible Notes Class B Subsequent Notes
Allocation will be used by LATAM Parent for payments as necessary under the Plan and
otherwise for working capital purposes. Id.
The New Convertible Notes Class A and Class C Notes will be distributed/offered for
purchase under the Plan. The aggregate principal amount of the New Convertible Notes Class A
(the “Class A Notes”) is approximately $1.467 billion. Those notes are not backstopped. See
RSA, Ex. B, Offering of New Convertible Notes Class A Due December 31, 2121 at 1–2. The
aggregate principal amount of the New Convertible Notes Class C (the “Class C Notes”) is
approximately, $6.816 billion–consisting of allowed claims and new money. See id., Ex. D,
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Offering of New Convertible Notes Class C Due December 31, 2121 at 1–2. Those notes are
backstopped by the Commitment Creditors. Id.
The Plan classifies Holders of Claims and Equity Interests in eleven classes. See Plan §
2.2. Class 5 of the Plan consists of General Unsecured Claims against LATAM Parent. Id. This
class is impaired and is entitled to vote to accept or reject the Plan. Id. The Commitment
Creditors are among the Holders of General Unsecured Claims holding Allowed Class 5 Claims.
The Plan calls for each Holder of Allowed General Unsecured Claims against LATAM Parent to
receive in full satisfaction, settlement, discharge and release of its Allowed Class 5 Claim, a
distribution pursuant to the Plan’s Class 5a Treatment, unless such Holder opts into Class 5b
Treatment. See id. § 3.2(e)(ii). The Plan contemplates that in accordance with Chilean law, the
Class A Notes and Class C Notes will be offered to Eligible Equity Holders during the 30-day
New Convertible Notes Preemptive Rights Offering Period. Id. § 6.2(b); See also id. § 1.1
(defining terms). It provides that to the extent not subscribed for and purchased by Eligible
Equity Holders during such preemptive rights offering period, (i) the Class A Notes will be
distributed to the Holders of Allowed Class 5 Claims who do not opt into Class 5b Treatment;
(ii) and subject to allocation of the Direct Allocation Amount to the Commitment Creditors, the
Class C Notes will be offered for subscription to, and purchase by, Holders of Allowed Class
who opt into Class 5b Treatment in accordance with the terms of the Plan. See id § 6.2(b).21
21 	The Backstop Shareholders will waive their preemptive rights to Class A and C Notes. See RSA, Ex. B,
Offering of New Convertible Notes Class A Due December 31, 2121 at 3 (“The Backstop Shareholders
shall waive their preemptive rights with respect to such offering, and the related New Convertible Notes Class A
shall be retained by the Issuer for allocation in the New Convertible Notes Class A Subsequent Notes Allocation. . .
.”); RSA, Ex. D, Offering of New Convertible Notes Class C Due December 31, 2121 at 2. (“The offering and
allocation of New Convertible Notes Class C will include (i) a preemptive rights offering (the “New Convertible
Notes Class C Preemptive Rights Offering”) to Eligible Equity Holders, provided, however, that the Backstop
Shareholders will waive their preemptive rights with respect to such offering, . . .”).
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Class 5a Treatment calls for Holders of Allowed Class 5 Claims to receive their pro rata
shares of the issuance of the $1.467 billion of the Class A Notes in full satisfaction, settlement,
discharge and release of their Allowed Class 5 claims. See Plan § 3.2(e). The Class A Notes will
convert into equity at a conversion rate of 0.19333x. See RSA, Ex. B, Offering of New
Convertible Notes Class A Due December 31, 2121 at 3. Class 5b Treatment provides for
Holders of Allowed Class 5 Claims (the “Class 5 Opt In Creditors”) to receive Class C Notes in
satisfaction of their claims, conditioned on such Holders subscribing to and purchasing
$0.921692 of new money Class C Notes for each $1 of Allowed General Unsecured Claims
receiving Class 5b Treatment. See id., Ex. D, Offering of New Convertible Notes Class C Due
December 31, 2121 at 4; Plan § 5.10. The Class C Notes, inclusive of new money ($3.269
billion), are capped at $6.816 billion. See id., Ex. D, Offering of New Convertible Notes Class C
Due December 31, 2121 at 1; see also RSA at 2; Plan §§ 5.10, 6.2. The Class C Notes would
convert into equity at a conversion ratio of 0.705506x, inclusive of the new money investment
obligation. See RSA, Ex. D, Offering of New Convertible Notes Class C Due December 31,
2121 at 4. To the extent that Class C Notes are oversubscribed, the Class 5 Opt In Creditors will
receive Class A Notes in full satisfaction, settlement, discharge and release of their claims. See
Plan § 6.2(c).
The distribution of Class C Notes under the Plan is subject to the Debtors’ obligation
under the Commitment Creditors Backstop Agreement to hold back 50% of the Class C Notes
(the “Direct Allocation Amount”) and offer them for subscription and purchase by the
Commitment Creditors. See Plan § 6.2; see also id. § 1.1 (definition of “Direct Allocation
Amount”). The Commitment Creditors shall subscribe to the Direct Allocation Amount with new
money (as with the other Class C Notes) and an amount of Allowed Claims equal to 50% of the
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Allowed Claims held by the Commitment Creditors. See id § 3.2(e). The new money
requirement totals approximately $1.635 billion. Under the Class 5b Treatment, the Class C
Notes available (if any) after the conclusion of the New Convertible Notes Preemptive Rights
Offering Period and the distribution of the Direct Allocation Amount (i.e. the “GUC New
Convertible Notes Class C Distribution”) will be allocated as follows:
The Class 5 Opt In Creditors (excluding the Commitment Creditors) (collectively,
the “Other Class 5 Opt In Creditors”) shall receive in full satisfaction, settlement,
discharge and release of their Allowed Class 5 Claims, their respective Pro Rata
shares of the GUC New Convertible Notes Class C Distribution in settlement of
an amount of such Allowed Claims (and related new money) equal in the
aggregate to approximately 35.37% of the Allowed Class 5 Claims that are held
by the New Convertible Notes Class C Unsecured Creditors. Those creditors have
the opportunity to subscribe to and purchase approximately 14.6% of the Class C
Notes at an aggregate new money commitment of $477 million.
The Commitment Creditors shall receive in full satisfaction, settlement, discharge
and release of their Allowed Class 5 Claims, their respective Pro Rata shares of
the GUC New Convertible Notes Class C Distribution in settlement of an amount
of such Allowed Claims (and related new money) equal in the aggregate to
approximately 70.74% of the Allowed Claims held by the New Convertible Notes
Class C Backstop Parties that remain after reduction by Allowed Class 5 Claims
used in the Direct Allocation Amount. Those creditors have the opportunity to
subscribe to and purchase approximately 35.4% of the Class C Notes at an
aggregate new money commitment of $1.157 billion.
Any GUC New Convertible Notes Class C Distribution that remains unallocated
after such applications shall be allocated to the Commitment Creditors in
accordance with their New Convertible Notes Class C pursuant to the
Commitment Creditors Backstop Agreement.
See Plan § 5.10. Thus, under the Plan, the Commitment Creditors will have the opportunity to
subscribe for and purchase approximately 85.4% of the Class C Notes not purchased by Eligible
Equity Holders during the New Convertible Notes Preemptive Rights Offering Period, at a new
money cost of approximately $2.762 billion. The Commitment Creditors shall backstop the Class
C Notes (i) that are not purchased by the Eligible Equity Holders during the New Convertible
Notes Preemptive Rights Period; (ii) that are held back and allocated to the Commitment
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Creditors for purchase under the Plan (the “Direct Allocation Securities”) but that the
Commitment Creditors do not subscribe for and purchase; and (iii) that are not subscribed for
and purchased by Holders of Class 5 Claims under the Plan, up to an aggregate amount of new
money contribution of $3.269 billion. Id.; RSA, Ex. D, Offering of New Convertible Notes Class
C Due December 31, 2121 at 1–2.
The Backstop Agreements
Below, the Court summarizes the terms of the Backstop Agreements most relevant to the
Motion.
Commitment Creditors Backstop Agreement
Allocation of Securities
On and subject to the terms and conditions of the agreement and subject to the
registration of the Plan Securities in the Registro de Valores of the Comisión para
el Mercado Financiero (the “CMF”), the Backstop Parties shall be offered the
Direct Allocation Securities, in an aggregate principal amount equal to the Direct
Allocation Amount, based on the respective Backstop Commitment Percentages of
such Backstop Parties.
Commitment Creditors Backstop Agreement § 2.1(a)(ii).
Backstop Commitment
Each Backstop Party, on a several and not joint basis, shall backstop the New
Convertible Notes Class C and ERO New Common Stock in the following
amounts: (a) Unsubscribed New Convertible Notes Class C, up to $6,816,071,621
(consisting of approximately $3,269,160,305 in cash and the remainder in parent
general unsecured claims); and (b) Unsubscribed ERO New Common Stock, up to
$400,000,000.
Id. §§ 2.2 (a), (b).
Backstop Payment
As consideration for the Backstop Commitment and the other agreements of the
Backstop Parties in the agreement, the Debtors shall pay or cause to be paid to the
Backstop Parties a Backstop Payment paid in cash equal to an aggregate of 20%
of approximately $3,669,160,305.88; the payment shall be fully earned,
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nonrefundable and non-avoidable upon entry by the Bankruptcy Court of the
Backstop Order, and will be payable in cash on the closing date and the effective
date (or, if applicable, in the form of a termination payment).
Id. § 3.1(a).
Expense Reimbursement
Whether or not the transactions contemplated under the agreement are
consummated, the Debtors agree to pay the reasonable and documented fees,
expenses, disbursements and other costs (excluding travel, meal and
entertainment expenses except as otherwise agreed in writing by LATAM Parent)
(the “Reimbursable Expenses”) incurred in connection with the Chapter 11 Cases
by (x) each of the Backstop Parties, up to a maximum aggregate amount of
$3,000,000 for all such parties, and (y) the Parent GUC Ad Hoc Group
represented by Kramer Levin Naftalis & Frankel LLP, including but not limited to
the fees and Reimbursable Expenses of the Reimbursable AHG Professionals, for
which there is not cap on the expenses.
Id. § 3.3.
Conditions Precedent
Article VII contains conditions precedent to the parties’ obligations mutually
acceptable to the Debtors and the Backstop Parties including customary
conditions such as no material adverse effect occurring, payment and
reimbursement of all expenses, no legal impediment to implementation being
enacted, adopted or issued, performance of all covenants in all material respects,
board and shareholder approvals, and representations and warranties continuing to
be true and correct. It also contains precedent tailored to particular aspects of the
Plan, the RSA and the Debtors’ business operations.
Id. Art. VII.
Indemnification Obligations
Under Article VIII of the agreement, irrespective of whether or not the
transactions contemplated by the agreement or the Plan are consummated or
whether or not the agreement is terminated, the LATAM Parent and the other
Debtors have broad indemnification obligations to each Backstop Party, its
Affiliates, shareholders, members, partners and other equity holders, general
partners, managers, directors and its and their respective Representatives, agents
and controlling persons from and against any and certain losses, claims, damages,
liabilities and costs and expenses imposed by any Chilean Government Entity
subject arising out of or in connection with this agreement, the Plan and the
transactions contemplated under the agreement and the Plan, including the
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Commitment Creditors Backstop Commitment, the Offerings, the payment of the
Backstop Payment or the use of the proceeds of the Offerings or the Commitment
Creditors Backstop Commitments, or any breach by the Debtors of the agreement
(including the use of proceeds thereof).
Id.§ 8.1.
Termination Payment
Article IX of the agreement governs the termination of the agreement. Section 9.1
includes the rights of the parties to terminate the agreement. Section 9.2 addresses
the Effect of Termination and includes a schedule of payments upon termination.
The termination payments range from 10% to 50% of the Backstop Payment.
Id. §§ 9.1, 9.2
Backstop Shareholders Backstop Agreement
Backstop Commitments
The Backstop Parties on a several and not joint basis, shall backstop the New
Convertible Notes Class B and ERO New Common Stock in the following
amounts: (a) Unsubscribed New Convertible Notes Class B, up to
$1,372,839,694; and (b) Unsubscribed ERO New Common Stock, up to
$400,000,000, subject to the Backstop Shareholders Backstop Agreement.
Backstop Shareholders Backstop Agreement § 2.2.
Backstop Payment
None
Expense Reimbursement
Whether or not the transactions contemplated under the agreement are
consummated, the Debtors agree to pay the reasonable and documented fees,
expenses, disbursements and other costs (excluding travel, meal or entertainment
expense, except as otherwise agreed in writing by the Company) incurred by each
of the Backstop Parties in connection with the Chapter 11 Cases, including, but
not limited to, attorneys’, financial advisors’, consultants’, and agents fees
incurred by the Backstop Parties, whether prior to or after the execution of the
agreement and whether prior to or after consummation of the Plan. There is no
cap on the expenses.
Id. § 3.1
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Conditions Precedent
Article VII of the Backstop Shareholders Backstop Agreement contains
conditions precedent to the parties’ obligations mutually acceptable to the Debtors
and the Backstop Parties including customary conditions such as no material
adverse effect occurring, payment and reimbursement of all expenses, no legal
impediment to implementation being enacted, adopted or issued, performance of
all covenants in all material respects, board and shareholder approvals, and
representations and warranties continuing to be true and correct. It also contains
conditions precedent tailored to particular aspects of the Plan, the RSA and the
Debtors’ business operations.
Id. Art. VII.
Indemnification Obligations
Under Article VIII of the agreement, irrespective of whether or not the
transactions contemplated by the agreement or the Plan are consummated or
whether or not the agreement is terminated, the LATAM Parent and the other
Debtors have broad indemnification obligations to each Backstop Party, its
Affiliates, shareholders, members, partners and other equity holders, general
partners, managers, directors and its and their respective Representatives from and
against any and certain losses, claims, damages, liabilities and costs and expenses
imposed by any Chilean Government Entity subject arising out of or in
connection with the agreement, the Plan and the transactions contemplated under
the agreement and the Plan, including the Backstop Shareholders Backstop
Commitment, the Offerings, the payment of the Backstop Payment or the use of
the proceeds of the Offerings or the Backstop Shareholders Backstop
Commitments, or any breach by the Debtors of the agreement (including the use
of proceeds thereof).
Id. Art. VIII.
The Issuance of the Plan Securities
The entry of the Confirmation Order will put into motion the steps that the Debtors
project will culminate in the issuance of the Plan Securities. In the Disclosure Statement, the
Debtors summarize the steps they will take after the Plan is confirmed in offering the Plan
Securities, as follows:
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Within one month after entry of the Confirmation Order, the Debtors will initiate
the securities offering procedures under Chilean law.
To comply with the Chilean law requirements, the LATAM Parent Board will
convene an extraordinary meeting of Holders of Existing Equity Interests (the
“Shareholders’ Plan Meeting”).
At the Shareholders’ Plan Meeting, the shareholders must vote to approve the
issuance of the Plan Securities. The requisite voting threshold for each of the Plan
Securities is the majority of the Existing Equity Interests attending the
Shareholders’ Plan Meeting.
The Debtors contemplate that at the Shareholders’ Plan Meeting, the shareholders
would delegate the pricing of the ERO New Common Stock to the LATAM
Parent Board and such delegation will be effective for 180 days thereafter.
The LATAM Parent Board will then agree to issue the Plan Securities which will
then be registered with the CMF. After such registration is completed, the
LATAM Parent Board will set the price of the ERO New Common Stock.
After registration of the Plan Securities with the CMF, and prior to the Effective
Date, LATAM Parent will notify the Eligible Equity Holders of their right to
subscribe and purchase the ERO New Common Stock and the New Convertible
Notes. The regulatory vote and issuance of the new securities is anticipated to
take approximately three months from the date of the order confirming the Plan.
Eligible Equity Holders will have thirty days from the date of that notice to
exercise their preemptive rights to subscribe and purchase the ERO New
Common Stock and New Convertible Notes.
See Disclosure Statement § X, G (1)–(2).
The Backstop Agreements commit the Backstop Parties to provide the backstops through
the Effective Date and possibly longer. Among the conditions precedent to the Plan’s Effective
Date are:
All shareholder approvals and board approvals necessary to implement the Plan
and issue the New Convertible Notes and ERO New Common Stock and amend
the bylaws of LATAM Parent shall have been obtained. Plan § 10.2(c).
All of the conditions precedent for consummation of the transactions
contemplated by the Backstop Agreements shall have been satisfied or waived in
accordance with the terms thereof. Id. § 10.2(g)
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All government and regulatory filings and approvals necessary to implement the
Plan shall have been completed or received, as applicable, including anti-trust and
competition filings (to the extent required) and registration of Plan Securities with
the CMF. Id. § 10.2(i).
The Debtors and the Backstop Providers estimate that it could take eight months, and perhaps
longer, for the Reorganized Debtors to satisfy the conditions precedent to the Plan’s Effective
Date.
The Motion
Most of the over $8 billion in new money that the Debtors require to satisfy the Plan’s
cash payment obligations and to finance the Reorganized Debtors’ ongoing operations and
capital needs following their emergence from the Chapter 11 Cases will come from the New
Convertible Notes Offering and ERO Rights Offering. The Backstop Parties agreements to
backstop over $5.4 billion in new money investments are part of the broader agreements among
the Commitment Creditors and RSA Shareholders on a comprehensive restructuring and
recapitalization of the Debtors that are memorialized in the RSA. This includes the parties’
commitments to support the Plan and to take all actions necessary to implement the transactions
called for under the Plan.
The record shows that to date, the Backstop Parties (along with the lenders providing the
Exit Financing) are the only parties that have proposed any reorganization transaction, plan and
exit proposal, that have any realistic prospect of consummation, and which enjoy the creditor and
shareholder support necessary to confirm and implement an otherwise confirmable plan of
reorganization that complies with applicable foreign law in the United States and the other
jurisdictions where the Debtors operate, including Chile. Motion ¶ 6. The Debtors say that the
Backstop Parties’ commitments are the product of extensive arm’s-length negotiations and offer
a variety of benefits to the Debtors and their estates by enabling the Debtors to meet the
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proposed timetable for confirmation of the Plan and protecting against the contingency that
insufficient funds will be generated by the New Convertible Notes Offering and the ERO Rights
Offering. Id. ¶ 5. They maintain that the Backstop Parties’ commitments are necessary to enable
the Debtors to satisfy the Plan’s cash payment obligations and successfully emerge from these
Chapter 11 Cases with a well-capitalized balance sheet. Id.
The Debtors contend that their entry into and performance under the Backstop
Agreements is an exercise of their sound business judgment and that the Court should authorize
them to do so under section 363(b) of the Bankruptcy Code and pursuant to its equitable powers
under section 105 of the Bankruptcy Code. They assert that the Backstop Payments (with respect
to the Commitment Creditors), Expense Reimbursement and Indemnification Obligations are
reasonable and appropriate under the circumstances and the Debtors’ decision to pay such fees
and incur such obligations is a reasonable exercise of their business judgment. They argue that
given the substantial benefits provided by the Backstop Parties respective commitments
under the Backstop Agreements and the need to secure their respective commitments, such fees,
reimbursements, and incurrence of indemnification obligations, as applicable, are actual and
necessary costs for maximizing the value of the Debtors’ estates and enhancing creditor
recoveries and the Court should accord them administrative expense priority under section
503(b)(1)(A) of the Bankruptcy Code.
To support their contention that the Backstop Payment and other fees and costs payable
under Backstop Agreements to the Backstop Parties are reasonable, the Debtors rely on the
expert advice of Brent Herlihy.22 He is a Managing Director in the Restructuring and Special
22 	See Trial Ex. 11, Declaration of Brent Herlihy in Support of the Backstop Agreements Motion (“Herlihy Decl.”
or “Herlihy Declaration”); Trial Ex. 12, Supplemental Declaration of Brent Herlihy in Support of the Backstop
Agreements Motion.
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Situations Group at PJT Partners LP (“PJT”), the investment banker that the Debtors have
retained in these Chapter 11 Cases. See Herlihy Decl. ¶ 1. The Herlihy Declaration provides an
analysis through which Mr. Herlihy opines that the Backstop Payments are reasonable and
appropriate. Id. ¶¶ 7–12. In reaching that conclusion, he measures the Backstop Payments against
a purported “comparable set” of 28 backstop arrangements from 26 chapter 11 cases (the “PJT
Comps Set”). See id. Ex. 1 (the “Chart”). The PJT Comps Set consists of backstop arrangements
for amounts greater than $200 million over the last five years and all backstop arrangements that
have been executed since the beginning of the COVID-19 pandemic. Id. ¶ 38. Mr. Herlihy notes
that in comparable equity rights offerings the costs of backstopped capital take the form of (i) a
backstop fee, which is typically paid on the full size of the commitment provided by backstop
parties using equity consideration priced at the same discount to plan value as the rights offering;
(ii) a direct allocation or “holdback” amount that allows the backstop parties to invest no less
than a certain amount; (iii) the discount at which the new money is being invested in the
offerings; and (iv) typical reimbursements of professional fees and expenses. Id. ¶ 40. He
explains that:
In order to compare the cost of backstops across different cases, PJT calculated
the combined impact of (i), (ii) and (iii) above and netted it against the investment
made in the rights offering to determine an “implied discount” to invest (the
“Implied Discount”). A higher Implied Discount indicates better economics for
the backstop parties.
PJT further analyzed scenarios where (i) the backstop parties backstop and
subscribe for 100% of the rights offering; and (ii) the backstop parties subscribe
to their pro rata allocation of the new money (i.e., the rights offering is fully
subscribed by eligible parties). PJT assumed that, in the latter case, backstop
parties receive any applicable holdback amount plus their pro rata allocation of
the post-holdback new money, based on the backstop parties’ stated share of the
unsecured claims pool.
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Id. ¶¶ 41–42. The Chart reflects these calculations for the rights offerings in these Chapter 11
Cases, and in the PJT Comps Set. In the Chart, Mr. Herlihy includes analysis of the maximum,
75 th percentile, mean, median, 25th percentile, and minimum backstop payments using the
methodology and metrics described above as a percentage of the full size of the commitment. He
also sets forth the termination fee provided to backstop parties—both as a percentage of the
commitment and the dollar value—and the backstop commitment duration for the comparable
transactions. See id., Chart. Mr. Herlihy notes that the particularly long duration of the Backstop
Parties’ commitments in these Chapter 11 Cases—under which the Backstop Agreements
Closing Date could be extended until November 30, 2022—informs how he assesses the
reasonableness of the Backstop Payments here. See id. ¶ 39; see also, Feb. 10, 2022 Hr’g Tr. at
238:18–21 [ECF No. 4373].
According to Mr. Herlihy, the Backstop Payments fall within the range of backstop
commitment fees paid in the comparable transactions set forth in the Chart. Herlihy Decl. ¶ 39.
Although he does not include an analysis of the Expense Reimbursement and Indemnification
Obligations, he asserts that those provisions are “essential components” of the agreements that
are “in line with market precedent.” Id. ¶ 47.
The Objectors oppose the Motion and urge the Court to deny it. They contend that in
applying section 363 of the Bankruptcy Code to the Backstop Agreements, the Court must hold
the Debtors to a heightened standard of scrutiny, not merely their business judgment, because
“insiders” of the Debtors are parties to the agreements. They assert that the Court should not
accord any deference the Debtors’ business judgment because the Backstop Agreements are
unfair and unreasonable and are the products of a flawed process that did not include arm’s-
length negotiations of the agreements, and because the Debtors did not subject the Commitment
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Creditors Backstop Agreement to a market test. They argue that the Backstop Payment on
account of the Class C Notes runs afoul of sections 503(b)(1)(A) and 1129(a)(4) of the
Bankruptcy Code because it is unreasonable and unnecessary since, by its terms, the
Commitment Creditors Backstop Agreement mitigates any risk of loss to the Commitment
Creditors and the economics of the Plan guarantee that between them, the Commitment Creditors
(85.4%) and Other Class 5 Opt In Creditors (14.6%) will subscribe for and purchase 100% of the
Class C Notes.
In that light, Columbus Hill labels the Backstop Payment as “illusory” and contends that
it violates Chilean law and thereby renders the Plan unconfirmable under section 1129(a)(11) of
the Bankruptcy Code. The Committee and A&P Ad Hoc Group likewise raise a Plan
confirmation issue in opposing the Motion. They contend that Backstop Agreements should not
be approved because they support a Plan structure that violates the equal treatment requirements
of section 1123(a)(4) of the Bankruptcy Code, on the theory that the GUC Parent Ad Hoc Group
will receive more favorable treatment than other unsecured creditors by virtue of (i) the
allocation of New Convertible Notes Class C comprising the Direct Allocation, plus (ii) the
backstop payment. See Committee Obj. ¶¶ 65-70; A&P Ad Hoc Group Obj. ¶¶ 4, 13. Both
objections are premature, as they must await the Plan confirmation hearing. On that basis, the
Court overrules the objections, without prejudice to those parties’ rights to assert the objections
in connection with the Plan confirmation hearing.
Finally, relying on their own experts’ analyses,23 the Objectors contend that the fee data
(that does not account for the fact that the Debtors are paying the fee in cash), the PJT Comps
23 	The Committee relies on their expert, Elizabeth LaPuma. She is the head of Debt Advisory and Restructuring at
UBS Securities LLC, the investment banker for the Committee. See Trial Ex. 197, Corrected Declaration and Expert
Report of Elizabeth LaPuma (the “LaPuma Decl.”) ¶ 1. The A&P Ad Hoc Group relies on the testimony of their
expert, Joshua S. Scherer. Mr. Scherer is a partner at Ducera Partners LLC (“Ducera”) and is the financial advisor to
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and Mr. Herlihy’s Implied Discount Methodology are flawed. They also say that the Expense
Reimbursement, Indemnification Obligations, Termination Payments, and other terms and
conditions of the Backstop Agreements are unreasonable and not at market rates. They argue that
the Court should deny the Motion both because the Backstop Payments are not necessary and
because the prices of the Backstop Agreements are grossly over market.
The Committee also contends that the Court should not approve the Backstop
Shareholders Backstop Agreement. See Committee Obj. ¶¶ 71–73. It contends that although that
agreement does not call for the payment of a “backstop fee,” it would provide the Backstop
Shareholders with broad indemnification rights and obligate the estates (and ultimately impaired
creditors) to pay these shareholders’ fees and expenses arising from these Chapter 11 Cases,
which while undisclosed would be at least in the tens of millions of dollars. Id. ¶ 71. Moreover,
the Committee contends that the Backstop Shareholders are not proposing to “backstop”
anything at all, because the equity investment they purport to backstop is one that they have
vigorously sought the exclusive right to make for the entire duration of these Chapter 11 Cases.
Id. ¶ 72. Further, it asserts that one hundred percent of the securities the Backstop Shareholders
purport to “backstop” are reserved exclusively for those insiders themselves, with the technical
(though not meaningful) caveat that the Class B Notes offering is subject to minority
shareholders’ preemptive rights. Id. It contends that there is no need for the Debtors to agree to
pay the Backstop Shareholders’ fees and expenses in connection with these cases, or to agree to
the A&P Ad Hoc Group. See Trial Ex. 5, Revised Expert Report of Joshua S. Scherer, Ducera Partners LLC –
February 7, 2022 (the “Scherer Report”) at 4. BancoEstado relies on the testimony of their expert Rodi Blokh. Mr.
Blokh is a Director in the Turnaround & Restructuring Services Group at AlixPartners, LLP, and serve as financial
advisor to BancoEstado. See Trial Ex. 191, Declaration and Expert Report of Rodi Blokh (the “Blokh Decl.”) ¶ 1.
BancoEstado also relies on their expert, Pedro Pablo Gutierrez, who opines solely on issues of Chilean law. Mr.
Gutierrez is a Chilean lawyer and senior partner of Gutiérrez, Waugh, Jimeno & Asenjo, a Chilean law firm. See
Trial Ex. 192, Declaration of Pedro Pablo Gutierrez Regarding Certain Chilean Law Issues (the “Gutierrez Decl.”) ¶
1.
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broad indemnification provisions, to induce the Backstop Shareholders to make the investments
that they have always wanted to make. Id.
The Court considers those matters below.
The Backstop Agreement
Whether the Debtors Followed a Fair Process
In Negotiating the Backstop Agreements
The Objectors contend that in pursuing the Backstop Agreements, the Debtors did not
conduct arm’s-length negotiations with third parties for the best financing terms possible, but,
instead, settled for an unreasonable deal with the Commitment Creditors which vastly
overcompensates them with special treatment, generous fees, and steep discounts to divert
money to the Debtors’ controlling shareholders and procure votes by the Commitment Creditors
in favor of the Plan. See, e.g., Committee Obj. ¶ 3. They insinuate that this is evident because the
Commitment Creditors hold roughly 70% of the Debtors’ general unsecured claims and, as such,
is collectively a key voting bloc needed to approve the Plan. The Objectors contend that the
Debtors failed to conduct a fair process in negotiating the Backstop Agreements because they (i)
limited their pool of prospective counterparties for the Backstop Agreements to the RSA
Shareholders and a handful of large creditors; (ii) failed to respond to a competing backstop
financing proposal from Ducera; and (iii) failed to subject the Commitment Creditors Backstop
Agreement to market competition. They also assert that the LATAM Parent board lacked
sufficient information to properly vet the Backstop Agreements. The Court considers those
matters below.
Turning first to the last point, the Court is satisfied that the process that the Debtors
employed to vet the agreements with the LATAM Parent board and audit committee was
adequate and appropriate and is consistent with the process they have employed throughout the
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case. The independent directors who serve on LATAM Parent’s audit committee were kept fully
apprised as to the status of negotiations of the Plan and Backstop Agreements and met with the
Debtors’ advisors more than two dozen times during the negotiation process. Herlihy Decl. ¶ 26.
Mr. Herlihy met with the audit committee and conveyed to the committee his belief that the
terms of the Backstop Agreements, including the fees called for under the agreements, were
within the range of comparable transactions. See Trial Ex. 196, Jan. 31, 2022 Herlihy Deposition
(the “Jan. 31 Herlihy Dep.”) at 176:15-24. See also id. at 218:15-25 (“we discussed [the size of
the termination fees]. I believe we included it in slides we provided to the Independent Directors
Committee and we absolutely discussed it with them.”). Once the parties finalized the terms of
the Backstop Agreements, the agreements were subject to the review of the independent directors
serving on the audit committee. Herlihy Decl. ¶ 26. After reviewing the terms of the Backstop
Agreements, these independent directors recommended approval of the agreements by the full
LATAM Parent board of directors. Id. 24
The Objectors note that the record shows that in June 2021, the Debtors distributed an
illustrative plan term sheet (Trial Ex. 114, Term Sheet at Bates 2316-22), but that the distribution
was limited to the lenders under the DIP Facility, the RSA Shareholders not party to the DIP
Facility, and certain of the Debtors’ major creditor constituencies. See Jan. 31 Herlihy Dep. at
84:18-85:17; Trial Ex. 116, LATAM - Board - Discussion Materials at Bates 0682. See also
Committee Obj. ¶ 26. They say that other than this initial outreach to pre-existing major
shareholders and creditors, the Debtors did not send the term sheet to any other sources. See Jan.
31 Herlihy Dep. at 92:18-93:7. Moreover, it is undisputed that when the Debtors finalized their
24 	Messrs. Enrique Cueto, Ignacio Cueto and Henri Reichstul, the Costa Verde nominated directors, Ms. Sonia
J.S. Villalobos, and Mr. Enrique Ostalé, the Delta-nominated directors, and Mr. Alexander Wilcox, the Qatar-
nominated director, did not vote on the Backstop Shareholders Backstop Agreement. See Herlihy Decl. ¶ 26 n.11.
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backstop proposal with the Commitment Creditors, they took no steps to “solicit additional
proposals” in the market that might have been superior. Id. at 108:3-23. The Objectors maintain
that the Debtors did not subject the Commitment Creditors Backstop Agreement to market
competition. See Committee Obj. ¶¶ 26-27.
However, in making those arguments, the Objectors fail to acknowledge that the Plan is a
product of the mediation process which focused in part on issues of Chilean securities law and
Chilean shareholder rights in these Chapter 11 Cases. The Debtors have structured the Plan –
based on the RSA and Backstop Agreements that were negotiated and agreed to during the
Mediation – with the understanding that they must obtain the requisite shareholder consents to
permit them to access the Chilean capital markets without running afoul of Chilean securities
laws. Moreover, Mr. Alfonsin testified that the Plan is the “best alternative” for the Debtors to
emerge from these Chapter 11 Cases after the Debtors “explored a number of restructuring
proposals” during the pendency of these Chapter 11 Cases. Alfonsin Decl. ¶¶ 9–10;25 see also id.
¶ 8 (testifying that the Plan and the Backstop Agreements “represent the product of extensive
good faith, arm’s-length negotiations among the Debtors and their key stakeholders”). Mr.
Alfonsin’s conclusion is largely borne out by aspects of Mr. Herlihy’s testimony which speak to
the fairness of the process. Mr. Herlihy testified that (1) the Debtors contacted 45 investment
funds and other entities in an effort to raise capital, including members of the Parent GUC Ad
Hoc Group, the Moelis Group, the Backstop Shareholders, the DIP Loan providers and Chilean
bondholders, see Jan. 31 Herlihy Dep. at 81:9-82:11; (2) the Debtors received and considered a
proposal from entities with no connection to the Debtors or key shareholders, including one from
25 	See Trial Ex. 6, Declaration of Ramiro Alfonsin Balza in Support of the backstop Agreements Motion (the
“Alfonsin Decl.”).
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a group advised by Pericles,26 and (3) the Debtors’ financial condition was open and obvious,
suggesting that parties with workable financing offers had the opportunity to come forward and
work with the Debtors. See id. at 39:24-40:3; see also Reply ¶ 14 (citing, inter alia, public
securities filings). Of the entities the Debtors contacted, the Debtors ultimately received initial
proposals or responses from the Parent GUC Ad Hoc Group, the Moelis Group, and the
Backstop Shareholders in August and September 2021. See Jan. 31 Herlihy Dep. at 85:23-25. He
also testified that the Debtors engaged each of the entities that provided proposals, encouraged
follow up from each, and did so with an eye towards reaching a proposal that allowed them to
emerge from the Chapter 11 Cases. See Feb. 10, 2022 Hr’g Tr. at 219:7-20 [ECF No. 4373]. As
noted, this process occurred against the backdrop of a vigorous, hard-fought and lengthy
mediation overseen by Judge Gropper, which produced the Backstop Agreements and the RSA,
which were finalized in the face of the worldwide surge in COVID-19 infections spurred by the
emergence of the Omicron variant. See Parent GUC Ad Hoc Group Statement ¶ 15; see Trial Ex.
195, Jan. 29, 2022 Alfonsin Deposition (the “Jan. 29 Alfonsin Dep.”) at 139:24-140:7 (“Q. Mr.
Alfonsin, were every single one of the conversations about the [Commitment Creditors] backstop
fee in November [2021] part of the mediation process?” A. “In my understanding, we were
under mediation and we sat with [Judge Gropper] day in, day out. So, yes, I believe that was all
part of the mediation.”).
By letter dated January 26, 2022, Joshua Scherer submitted to the Debtors an alternative
financing commitment letter (the “Ducera Proposal”), on behalf of the Ad Hoc Group of
Unsecured Claimants. Trial Ex. 190, Ducera Proposal. In his letter, Mr. Scherer represented that
26 	Mr. Herlihy testified that the proposal from Pericles was not actionable for the Debtors because it only
purported to provide approximately $300 million, whereas the Debtors seek to raise over $5 billion in capital. See
Jan. 31 Herlihy Dep. at 96:6-22, 97:2-14.
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the Ducera Proposal provides “significant enhancements to LATAM’s current filed Plan of
Reorganization” including:
1. A reduction of the backstop fee to 15% (from 20%);
2. No priority allocation, with all participating claimants receiving a ratable
allocation to Class C Notes; and
3. An oversubscription mechanism to allow all interested claimants to increase
participation in unallocated Class C Notes.
Ducera Proposal at 1. He explained that the proposal “includes a Commitment Schedule which
provides the names of the 17 institutions providing the backstop commitments for the proposed
transaction[,]” and that he expected the list of backup parties to grow because “[w]e continue to
have discussions with other institutions potentially interested in participating[.]” Id. at 1-2. The
A&P Ad Hoc Group contends that the Ducera Proposal is “facially superior” to the Commitment
Creditors Backstop Agreement since it “matches the new money commitments of the
[Commitment Creditors] on a standalone basis while, at the same time, it reduces the backstop
fee that would be payable to the . . . backstop parties from 20% to 15% and eliminates the 50%
direct allocation of [Class C Notes] to the backstop parties.” Committee Obj. ¶ 28. The Debtors
did not respond to the proposal. The Objectors contend that the failure to do so provides
additional grounds for the Court to conclude that the Debtors have failed to meet their burden of
demonstrating that the Court’s approval of the Commitment Creditors Backstop Agreement is in
the best interests of the Debtors, their estates, and creditors. Id. ¶ 29.
The Debtors contend, and the Court agrees that the Objectors overstate the significance of
the Ducera Proposal for the following reasons:
First, it does not provide sufficient committed capital. Although it purports to
cover the amounts backstopped by the Commitment Creditors, it does not include
funding to cover the approximately $1.8 billion commitment by the Backstop
Shareholders.
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Second, it has an expansive due diligence condition that would allow the A&P Ad
Hoc Group to withdraw its proposal at any time, at its sole discretion.
Third, the proposal does not provide a secure path to confirmation.
Fourth, although the Ducera Proposal lists parties that would provide funding, it
does not state the amounts that each party would individually contribute.
Finally, the proposal is an unsigned letter, offering no binding commitments.
Reply ¶ 71 (citations omitted).
The Court finds that the proposal falls short of a viable alternative or substitute for the
Backstop Agreements. No entity sought to provide the Debtors with backstop proposals that
would provide a framework to permit the Debtors to raise a level of capital they believe to be
necessary to emerge from the Chapter 11 Cases and the evidence before the Court undermines
the Objectors’ argument that the Debtors did not appropriately or sufficiently seek other partners
beyond the parties to the Backstop Agreements. See Parent GUC Ad Hoc Claimant Group
Statement ¶ 13 (“There are simply no other viable transactions that would solve the Debtors’
substantial funding needs and satisfy the requirements of both the Bankruptcy Code and Chilean
law”).
The Debtors’ negotiations with the Commitment Creditors also belie the Objectors’
insinuation that the Debtors blindly accepted all of their terms in an effort to gain their support
for the Plan. There is no evidence demonstrating that the Debtors’ pre-determined to partner with
the Commitment Creditors to raise the funds they need to exit chapter 11. See Jan. 29 Alfonsin
Dep. at 78:25-79:8 (“We carried out a very long and detailed due diligence process with many
counterparts. I believe that we received proposal from the Evercore Group, from Moelis Group,
from Moelis Group, [and] from the shareholders.”) Indeed, Mr. Alfonsin testified that the
Debtors met with a myriad of funds multiple times over a two-month period as they attempted to
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locate suitable proposals. See id. at 79:20-25 (“We met with Knighthead, we met with Oaktree,
we met with Apollo, we met with many funds, a couple of banks [] also participated and
participated in the due diligence . . . process . . . there were two months with an enormous
amount of meetings every time representing the business plan and encouraging people to present
a business plan for the exit.”). That process lead the Debtors to execute nearly 60 non-disclosure
agreements with prospective partners. See Jan. 31 Herlihy Dep. at 82:18-24. Moreover, once the
Debtors received the initial proposal from the Commitment Creditors, the negotiations suggest
an arm’s-length process by which the Debtors received concessions from the Commitment
Creditors since the start of their negotiations. See, e.g., id. at 140:10-142:3 (describing how the
Commitment Creditors ultimately agreed to change certain termination events into conditions
precedent that did not simply allow the Commitment Creditors to walk away if a condition
precedent is unmet by the targeted closing date); id. at 113:10-19, 237:5-15 (explaining that the
Commitment Creditors initially proposed a 20% “alternative transaction” termination fee, which
the parties later negotiated down to 10%, as reflected in the Commitment Creditors Backstop
Agreement).
The Court is satisfied that the evidence demonstrates that the Debtors engaged in arm’s-
length negotiations with the Commitment Creditors and employed a fair and reasonable process
in negotiating and executing the Backstop Agreements. The Court finds that these factors weigh
towards finding that the Debtors acted fairly and reasonably in entering into the Backstop
Agreements.
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Whether The Debtors Can Justify Making
The Backstop Payment For The Class C Notes
Part of the Debtors’ rationale for agreeing to make the Backstop Payment to the
Commitment Creditors and to hold back the Direct Allocation Securities for their benefit is that
the Commitment Creditors face particularly acute “economic, market, and commercial risks” in
their backstop commitment because of the “continued uncertainty due to the ongoing global
COVID-19 pandemic” and the extended period the commitments must remain in place. See
Motion ¶ 41. Thus, the Debtors reason that the costs and fees they are agreeing to pay to the
Commitment Creditors, and that, under the agreement, they will earn upon the approval of the
agreement, are commensurate with the risks that the Commitment Creditors assume entering into
the agreement. The Objectors contend that the Debtors overstate that risk. They assert that while
the Commitment Creditors may retain some risk of a broad economic downturn or business
downturn specific to the Debtors, the terms of the Commitment Creditors Backstop Agreement
insulate them from the risk that they will be called on to perform under the agreement. As
support they point to the “Conditions To The Obligations Of The Parties” set forth in Article VII
of the agreement. In particular, they maintain that sections 7.1(e), 7.1(f) and 7.1(u) of the
Commitment Creditors Backstop Agreement specifically guard against risks to the Commitment
Creditors in providing a backstop commitment here and, as such, the proposed Backstop
Payment and other consideration to be paid under the agreement dwarf the actual risk profile of
the commitments. A&P Ad Hoc Group Obj. ¶¶ 47–51.
Sections 7.1(e) and 7.1(f) contain Forward Net Booking and Minimum Liquidity
conditions, respectively. By application of section 7.1(e), if, immediately before the intended
Closing of the Backstop Commitment, the short-term outlook for LATAM’s passenger business
(measured by the total number of passengers booked for travel within the next 30 days) is weaker
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than the outlook on the same day of 2019 by a specific margin, then the Debtors either would not
be able to close on the offerings or would require a waiver from the Commitment Creditors to do
so (the “Forward Net Bookings Condition”).27 Pursuant to section 7.1(f), to close, the
Reorganized Debtors must satisfy required levels of minimum liquidity amounts based on the
Effective Date (the “Minimum Liquidity Condition”).28 The Backstop Agreements provide that
they will close “on the date on which all of the conditions set forth in Article VII shall have been
satisfied or waived . . . .” Commitment Creditors Backstop Agreement § 2.5(a) (defining the
“Closing Date”). If the Closing Date does not occur by the Outside Date, the agreement is
subject to termination by either the Debtors or the Commitment Creditors. See id. § 9.1(b)(i).
The Outside Date is September 30, 2022. See id. § 1.1. That date is subject to extension in the
event of a Backstop Party Default, see id. § 2.3, or the designation of a variant of the SARS-
27 	Section 7.1(e) of the Commitment Creditors Backstop Agreement states, as follows:
Forward Net Bookings. As of the date that is five (5) Business Days prior to the Closing Date, the
Forward Net Bookings (as defined in Exhibit B) exceed the Net Booking Threshold (as defined in
Exhibit B) (such condition, the “Forward Net Booking[s] Condition”).
28 	Section 7.1(f) of the Commitment Creditors Backstop Agreement states, as follows:
Minimum Liquidity. After giving pro forma effect to the occurrence of the Effective Date and
related transactions, including the entry into, and borrowings to be made (and letters of credit
issued) on the Effective Date under, the Exit Financing, the Reorganized Debtors shall have
minimum liquidity (consisting of unrestricted cash and cash equivalents, plus proceeds from the
Offerings and the Unsubscribed Securities purchased pursuant to the Backstop Commitment net of
repayment of all DIP Claims and other uses of proceeds plus amounts available to be drawn under
any revolving facilities (but excluding increases to liquidity resulting from (x) material asset sales
or financings not contemplated by the Base Business Plan or (y) incurrence of indebtedness for
borrowed money other than the Exit Financing) on the Effective Date of no less than (i) $2.20
billion if the Effective Date takes place in June 2022; (ii) $2.15 billion if the Effective Date takes
place in July 2022; (iii) $2.05 billion if the Effective Date takes place in August 2022; (iv) $1.95
billion if the Effective Date takes place in September 2022; (v) $1.9 billion if the Effective Date
takes place in October 2022 and (vi) $1.85 billion if the Effective Date takes place in November
2022. For the purposes of this Section 7.1(f), Exit Financing shall be calculated such that (A) (I)
notes or term loans do not exceed $2.250 billion plus (II) an amount not to exceed $500 million of
additional notes or term loans incurred in lieu of the exit revolving commitments in the succeeding
clause (B), (B) exit revolving commitments do not exceed $1.100 billion less any amount of
additional notes or term loans incurred pursuant to the foregoing item (A)(II), and (C) the
Company’s Spare Engine Facility (as defined in the Restructuring Support Agreement) does not
exceed $273 million.
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CoV-2 virus a “variant of concern” (“VOC”) or a “variant of high consequence” (“VOHC”) by
the World Health Organization (“WHO”) or the U.S. Center for Disease Control (“CDC”) within
45 days prior to a proposed Closing Date. See id. § 7.1(u).
In the event that a VOC or VOHC is designated in such forty-five-day period, the Closing
Date shall be suspended for forty-five days (the “COVID Suspension Period”). See id. If, at the
conclusion of the COVID Suspension Period the conditions in Article VII are met, the Closing
will occur. If not, the Closing will not occur.29 In the event the WHO or CDC declares a VOC or
VOHC during this period, the Outside Date may be extended as late as November 30, 2022. See
id. If the Commitment Creditors Backstop Agreement is terminated because it does not close by
the Outside Date, the Debtors shall pay the Commitment Creditors a Termination Payment of
10% of the Backstop Payment (if the agreement is terminated prior to an order of this Court
confirming the Plan) or 15% of the Backstop Payment (if the agreement is terminated after the
Court confirms the Plan). See id. § 9.2(b)(ii) (setting forth termination payments “[i]n the case of
any termination of th[e Commitment Creditors Backstop Agreement] other than a termination
described in [section 9.2(b)(i)]”).
29 	Section 7.1(u) of the Commitment Creditors Backstop Agreement states, as follows:
Variant of Concern. Neither the World Health Organization or the U.S. Centers for Disease
Control shall have designated or characterized any variant of SARS-CoV-2 (i.e., the virus that
causes COVID-19) as a [] VOC or [] VOHC (or such other designations as may be used by them
with similar effect after the date hereof) within such period that begins forty-five (45) days prior to
and through a proposed Closing Date; provided if the condition set forth in this Section 7.1(u) is
not satisfied as of a proposed Closing Date, such Closing Date shall be suspended for a period of
forty-five (45) days (which period may be waived or shortened by the Requisite Backstop Parties,
(the “COVID Suspension Period”) in which case, if the Outside Date occurs during the COVID
Suspension Period, the Outside Date (and, if applicable, the End Date) shall be extended until the
earlier of the end of the COVID Suspension Period or November 30, 2022 without any
requirement for payment of an extension fee by the Company. If, as of the conclusion of the
COVID Suspension Period, the conditions set forth in Article VII hereof (including Section 7.1(e))
are met (and this Agreement has not otherwise been terminated in accordance with its terms), then
the suspension of the Closing Date shall terminate and the Closing Date shall occur.
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BancoEstado contends that the Forward Net Bookings Condition imposes a risk that the
Commitment Creditors Backstop Agreement will not close because the Debtors’ passenger ticket
sales are highly sensitive to the emergence of a new COVID-19 variant. BancoEstado Obj. ¶ 17.
It maintains that if a future COVID-19 variant induces national governments to reinstate travel
restrictions or burdensome quarantine requirements, then there is a significant risk that the
Debtors will not meet the Forward Net Bookings Condition. Id. It asserts that the Debtors’ own
analysis shows that they would have failed the Forward Net Bookings Condition during certain
periods of 2021. Id. BancoEstado maintains that the Debtors do not have to return to the depths
of 2020’s COVID-19 booking underperformance to fail to satisfy the Forward Net Bookings
Condition, they need only to look to last year’s levels. Id. It also argues that because the Forward
Net Bookings Condition in section 7.1(e) applies at the end of any COVID Suspension Period
under section 7.1(u), the Debtors could satisfy the Forward Net Bookings Condition on the cusp
of the Closing Date only to have a COVID Suspension Period imposed, thus delaying the
Closing Date for 45 days in which the Debtors’ Forward Net Bookings may plummet because of
the announcement of a new COVID-19 variant. Id. ¶ 19. It asserts that the Debtors may find that
once the COVID Suspension Period is over, they will be unable to satisfy the Forward Net
Bookings Condition, and worse, should these delays occur near the Outside Date under the
agreement, the Debtors run the risk (despite the extension of the Outside Date under section
7.1(u) to November 30, 2022) that Closing will have failed to occur prior to the Outside Date,
thus allowing the Commitment Creditors to terminate the agreement, and leading to a 10% or
15% Termination Payment becoming payable in favor of the Commitment Creditors. Id. Finally,
BancoEstado contends that the Forward Net Bookings Condition appears unprecedented,
including in the recent, post-COVID-19 airline cases of Avianca and Aeromexico. Id. ¶ 17.
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The A&P Ad Hoc Group contends that these provisions insulate the Commitment
Creditors from economic, market and commercial risk because they would prevent a Closing on
the Backstop Commitment (and free them from any obligation thereunder) in the event that a
VOC, VOHC, or other material disruption upends the Debtors’ business outlook. See A&P Ad
Hoc Group Obj. ¶ 48; see also Scherer Report at 28 (“LATAM may continue to face economic,
market, and commercial risks during the pendency of the chapter 11 process, but the
Commitment Creditors Backstop Agreement has hedged the Commitment Creditors against these
risks in a manner that does not justify the contemplated Commitment Creditors Backstop Fees”).
Because the Debtors’ proposed order provides that the Commitment Creditors receive and retain
the Backstop Payment even if these conditions precedent are not met, the A&P Ad Hoc Group
contends the Commitment Creditors Backstop Agreement could provide the Commitment
Creditors with an unreasonable windfall, which further demonstrates that the Court should deny
the Motion. A&P Ad Hoc Group Obj. ¶ 48 (citing Motion, Ex. A, Proposed Order ¶ 5 (Backstop
Payment “shall be fully earned, nonrefundable and non-avoidable upon entry of this Order.”)).
Like BancoEstado, the A&P Ad Hoc Group notes that the Aeromexico and Avianca equity raises
in connection with their chapter 11 restructurings did not include similar provisions despite
facing the same risks brought on by the COVID-19 pandemic in the same industry. A&P Ad Hoc
Group Obj. ¶ 50.
The Debtors maintain and have demonstrated that despite the Objectors’ professed
concern about the Debtors’ ability to satisfy these and other conditions precedent set forth in
Article VII of the Commitment Creditors Backstop Agreement, none of the Objectors’ experts
evaluated the conditions precedent to assess whether any of them pose a genuine risk to the
Debtors. See, e.g., Trial Ex. 2, Feb. 4, 2022 Deposition of Rodi Blokh (the “Feb. 4 Blokh Dep.”)
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at 26:9-31:6 (testifying that “I can’t really answer that question. I don’t have an answer” in
response to being asked whether the Forward Net Bookings Condition introduces “significant or
insignificant” “uncertainty into the backstop agreement.”); Trial Ex. 3, Feb. 5, 2022 Deposition
of Joshua Scherer (the “Feb. 5 Scherer Dep.”) at 121:9-12 (“Q. But other than [your opinion that
these conditions precedent are broader than what you typically see is a backstop agreement] you
have no opinion with respect to the risk that any of these actually get triggered? A. That’s
correct”); Trial Ex. 1, Feb 3, 2022 Deposition of Elizabeth La Puma (“Feb 3 LaPuma Dep.”) at
338:24-339:4 (“Q. ‘Yes’ or ‘no’ you agree that you don’t presently have sufficient information
to determine whether some of the conditions precedent are likely to be met? A. Yes.”). “At the
end of the day, . . . not one of the Objectors’ Experts could testify that he or she had performed
any analysis enabling one to conclude that the Debtors faced any genuine risk from a single one
of the closing conditions.” Reply ¶ 66.
The Debtors further maintain that the limited analysis the Objectors performed provides
no meaningful measure of the likelihood of the Debtors’ failure to meet the conditions precedent
because it rests on outdated information and assumptions. Id. ¶ 67. For example, they point to
Mr. Blokh’s argument that because he estimated that the Debtors would have failed to meet the
Forward Net Bookings Condition for a period in 2021, there is a significant risk that they would
not do so in late 2022 when the closing condition must be met. Id. (citing Blokh Decl. ¶ 29). The
Debtors dispute that contention. They note that their capacity in 2022 is higher than it was in
2021, and that every single day in 2021 that Mr. Blokh cites to in support of his argument,
occurred at a time when Chile—and many other countries in which the Debtors operated—faced
government-mandated lockdowns that prohibited air travel, as well as a low COVID-19
vaccination rate. Id. ¶ 67; Jan. 29 Alfonsin Dep. at 212:20-23. They imply that those hurdles are
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not present today, at least not to the same degree. See, e.g., Jan. 29 Alfonsin Dep. at 213:3-4
(“[s]o the restrictions of operations are much more limited.”).
Moreover, the Debtors correctly contend that the A&P Ad Hoc Group misreads the VOC
condition in section 7.1(u). See Reply ¶ 68. This condition precedent serves merely to postpone
the Closing Date by affording the Debtors additional time to meet the Forward Net Bookings
Condition and Minimum Liquidity Condition, among other things, if they cannot meet them by
the proposed Closing Date. The Backstop Parties are not permitted to terminate the Backstop
Agreements based on the Debtors’ inability to satisfy these conditions unless the conditions
remain unsatisfied as of the Outside Date (which may be extended under certain circumstances
(see Commitment Creditors Backstop Agreement § 1.1 (defining the Outside Date)) or one of the
defined Termination Events occurs in the interim (see id. § 9.1). Application of section 7.1(u)
will not cancel the agreement; rather, if invoked, it will extend the closing for an additional 45
days. See id. § 7.1(u) (“provided if the condition set forth in this Section 7.1(u) is not satisfied as
of a proposed Closing Date, such Closing Date shall be suspended for a period of forty-five (45)
days . . .”). The Court finds no merit to the A&P Ad Hoc Group’s objection to this aspect of the
agreement.
The Debtors also challenge the Objectors’ assertions that there is a high risk that they will
not be able to satisfy the Forward Net Bookings Condition and Minimum Liquidity Condition.
As support, they point to Mr. Alfonsin’s testimony concerning the differences between the
Debtors’ financial performance in 2021 and their outlook for 2022 as indicative of the likelihood
that that the Debtors will meet the Forward Net Bookings Condition. See Jan. 29 Alfonsin Dep.
at 212:12-215:24. Moreover, Mr. Alfonsin explained that the Debtors plainly would not have
agreed to the same Forward Net Bookings Condition and Minimum Liquidity Condition in early
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2021 given their significantly different capacity and level of operations (and which, as noted,
was a pre-vaccination and mass lockdown environment). Reply ¶ 69; see Jan. 29 Alfonsin Dep.
at 215:19-23 (“if I was standing in 2021 I would have asked for a different threshold vis-à-vis
2019, because the sizing of the company was completely different”).
Mr. Herlihy concedes that some of the conditions precedent in Article VII are unique to
the Commitment Creditors Backstop Agreement. See, e.g., Feb. 10, 2022 Hr’g Tr. at 179:8-12,
205:5-13 [ECF No. 4373] (testifying that he is personally not aware of any airline industry
backstop agreements with a condition precedent relating to forward net bookings or any backstop
agreements in general containing a condition precedent relating to COVID-19 variants).
Nonetheless, the Objectors have not demonstrated that those conditions insulate the
Commitment Creditors from risk of loss. Moreover, as set forth above, the Debtors have
demonstrated that there is a significant likelihood that they will be able to meet the conditions
precedent necessary to hold the Commitment Creditors to the funding requirements under the
agreement. See, e.g., id. at 238:2-11 (Mr. Herlihy testifying that the Debtors “gained comfort”
about the conditions precedent through “extensive discussions with management,” including
with respect to the Forward Net Bookings Condition, “consider[ing] where the company is
today, what we expect under the business plan, and how significant of a drop would need to
occur for the [condition precedent to fail]”); id. at 238:12-25 (Mr. Herlihy testifying that the
invocation of the COVID Suspension Period “does not create significant additional
conditionality” for the Debtors because it merely “pause[s]” the effective date of the Backstop
Agreements and does not, by itself, prevent closing).
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The Objectors also contend that the Backstop Payment is unreasonable and unnecessary
because the economics of the Plan guarantee full participation of the Class C Notes. They note
that the Plan allocates over 85% of the Class C Notes to the Commitment Creditors and that
given the materially higher recovery provided for Class C Notes under the Plan, as compared to
Class A Notes, the other Class 5 Creditors will most certainly opt into Class 5b Treatment of
their Class 5 Claims and acquire the remaining (approximately) 15% of the Class C Notes. A&P
Ad Hoc Group Obj. ¶ 42. They contend that even if the Debtors are correct that there is a risk
that the Class C Notes would not be fully subscribed, then not only should the Commitment
Creditors encourage the participation of all similarly situated creditors, but the New Convertible
Notes Offering Procedures should be altered to permit oversubscription by all parties entitled to
subscribe. Id. ¶ 45. They assert that oversubscription would, in effect, provide for an equitable,
pro rata backstop by all eligible Holders of LATAM Parent General Unsecured Claims who
already have the incentive to participate, and avoids the unjustified diversion of value from the
approximately twenty-nine percent (29.0%) of Holders that were excluded from the opportunity
to participate as Commitment Creditors. Id.
The Committee also argues that the Court should assess the reasonableness of the
Backstop Payment by measuring it against the “uncommitted portion” of the backstopped
offering. Committee Obj. ¶ 53. It contends that since the Plan allocates $2.791 billion of Class C
Notes to the Commitment Creditors, they are actually backstopping only $478 million of the new
money for the Class C Notes. The Committee contends that the nearly $654 million fee for doing
so (i.e., 20% of the $3.269 billion) represents a 136.8% fee on the $478 million unallocated “at
risk” portion of the Class C Notes. Id. ¶ 54. The Committee further contends that when viewed
together with the ERO Rights Offering, the Commitment Creditors’ $734 million fee to backstop
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$878 million in new money investments, represents an 83.6% fee on the unallocated at risk
portion of the offerings. Id. ¶ 55.
The Debtors’ take issue with that methodology because neither the Commitment
Creditors Backstop Agreement nor the Plan obligates the Commitment Creditors to subscribe for
and purchase the Class C Notes. Direct allocations options are commonplace in backstop
agreements as potential compensation to a backstop party. See Jan. 30 Herlihy Dep. at 196:11-18
(“The [holdbacks on the chart of comparable transactions] are direct allocations, similar to the
50% that you see in the LATAM case with respect to the Convert C. In other cases . . . perhaps
more than half of them, there is a similar concept of a direct allocation or holdback.”). Here, the
Commitment Creditors Backstop Agreement merely provides that “the Backstop Parties shall be
offered the Direct Allocation Securities.” Commitment Creditors Backstop Agreement §
2.1(a)(ii). The Plan gives effect to that provision. It accounts for the Direct Allocation but does
not obligate the Backstop Parties to subscribe for and purchase those securities. See Plan § 5.10
(providing for allocation of the Class C Notes that remain after reductions in the pool made by
the Commitment Creditors on account of their Direct Allocation and the pro rata share of their
claims). Likewise, the Plan does not obligate the Holders of Allowed Class 5 Claims to opt into
Class 5b Treatment of their claims. In contrast, under the agreement the Commitment Creditors
are obligated to purchase up to $3.269 billion of Unsubscribed New Convertible Notes Class C
and up to $400 million in ERO New Common Stock. As parties to the agreement, the
Commitment Creditors are exposed to risk from the full amount of the offerings – that they do
not otherwise have – because they hold the right, not the obligation, to claim their contractual
Direct Allocation and pro rata share of the Class C Notes, which they may decline if the Debtors’
business takes a turn for the worse. The Direct Allocation and the Class 5b Treatment provide
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upside benefits by giving the Commitment Creditors the right to purchase the underlying
securities. The downside under the Commitment Creditors Backstop Agreement is the same for
the Commitment Creditors whether or not they purchase the securities – they are obligated to
purchase 100% of the Class C Notes and up to $400 million of the ERO New Common Stock.
As parties to the agreements, the Commitment Creditors are assuming the risk that they will be
called upon to purchase the entire $3.669 billion in securities that they have agreed to backstop;
not merely the new money that would be provided by other investors if the Commitment
Creditors elected their Direct Allocation and pro rata share of the Class C Notes.
The Objectors assert that any risk to the Commitment Creditors is technical and small.
See, e.g., A&P Ad Hoc Group Obj. ¶ 30. They contend that the Commitment Creditors bargained
for the Direct Allocation of 50% of the Class C Notes, plus their 70.74% pro rata share for the
remaining half of the Class C Notes because it is a good deal economically and, as such, they
will exercise their rights to subscribe to and purchase the Class C Notes. See, e.g., Committee
Obj. ¶ 68; see also RSA, Ex. D, Offering of New Convertible Notes Class C Due Dec. 31, 2121
at 1 n.1. The Committee asserts that the Court should assess the reasonableness of a backstop fee
is by measuring the fee against the uncommitted portion of the offering. See Committee Obj. ¶
53. As support it cites to a bench ruling by Judge Drain in Momentive. See June 19, 2014 Hr’g
Tr. at 198:6-11, Momentive Performance Materials Inc., v. Bank of N. Y. Mellon Tr. Co.
(“Momentive”), No. 14-08227 (RDD) (Bankr. S.D.N.Y Jun. 23, 2014), [ECF No. 28] (requiring
that the proposed backstop fee arrangement only be calculated against uncommitted portions of a
rights offering). But that overstates the import of Momentive. While Judge Drain there expressed
reluctance to approve a backstop payment based on the entire commitment amount, he also noted
that he did not have evidence concerning the market reasonableness of paying a fee like the one
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the debtors proposed. See id. at 112:13-17. The backstop parties subsequently reached an
agreement with the objectors. Accordingly, Judge Drain never reached the issue on a full record,
and ultimately approved the backstop with an even higher so-called “at-risk” fee – in other
words, as a percentage fee based on the total commitment and not just the unspoken for portion.
See Order Authorizing and Approving the Debtors’ (I) Entry Into, and Performance Under the
Backstop Commitment Agreement, (II) Payment of related Fees and Expenses, and (III)
Incurrence of Certain Indemnification Obligations. In re MPM Silicones, LLC, No. 14-22503
(Bankr. S.D.N.Y. June 23, 2014), [ECF No. 509].
The Objectors also rely on Pacific Drilling to suggest that the Backstop Payments run
afoul of the Bankruptcy Code. See Pacific Drilling S.A. (“Pacific Drilling”), No. 17-13193
(MEW) (Bankr. S.D.N.Y 2018). However, that case is distinguishable. In Pacific Drilling, the
court ultimately approved a Plan which offered a 46.9% discount on equity in the reorganized
debtor, but prior to doing so, stated that it would not approve other benefits afforded to the
backstop parties, such as a private placement. See Sept. 25, 2018 Hr’g Tr. at 22:22-25-23:1,
Pacific Drilling, [ECF No. 634]. The court also questioned the backstop payment in light of the
significant discount on equity. See id. at 20:5-11 (questioning fee in light of “very large”
discount). See also Sept. 18, 2018 Hr’g Tr. at 21:22-25, Pacific Drilling [ECF No. 622]
(expressing concern over discount to plan value for the rights offering and private placement); id.
at 77:22-24 (questioning discount). Here, the Commitment Creditors Backstop Agreement
provides the Commitment Creditors with the opportunity to acquire equity in the reorganized
LATAM at a discount rate of 20.7%. See Herlihy Decl., Chart. Taken together, the provisions
here represent substantially less compensation than the benefits provided in the plan approved by
Judge Wiles in Pacific Drilling. See id. Moreover, the agreement to backstop the Plan for eight
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months is substantially longer than the two-month commitment of the backstop parties in Pacific
Drilling and, as such, exposes them to significantly more risk.
At the Hearing on the Motion, counsel for the Commitment Creditors advised that since
executing the Backstop Agreement on January 12, 2022, the Commitment Creditors have
earmarked and reserved the entire $3.669 billion for the backstop commitment. See Feb. 11,
2022 Hr’g Tr. at 34:20-23 [ECF No. 4381]. She explained that those funds would remain
earmarked and at risk under the Backstop Agreement for a minimum of several months after the
Debtors confirm their Plan. She reasoned that the process for registering the Plan Securities with
the CMF and giving effect to the preemptive rights of the Eligible Equity Holders to acquire Plan
Securities as required under Chilean law and the Plan likely would not be completed until two or
three months after confirmation of the Plan. See id. at 32:1-7. At that time, the Commitment
Creditors would be offered the opportunity to acquire the Direct Allocation Securities. As
counsel explained, those creditors are under no obligation to acquire any of those securities. Id.
at 32:19-21 (“They could take up zero, they could take up twenty percent, they could take up
fifty percent. But whatever they elect to do, they will have the right to do that.”). At that point,
the Holders of Allowed Class 5 Claims (including the Commitment Creditors) can elect Class 5b
Treatment under the Plan and acquire the remaining Class C Notes. However, they are not
required to do so. Id. at 32:23-33:7.
Plainly, until the rights and notes offerings close, the Commitment Creditors are exposed
to the risks of material changes in the Debtors’ business outlook which could negatively impact
the price of the Debtors’ stock. As the Debtors note, potential downfalls in the Debtors’ business
outlook are not mere abstractions, as Mr. Alfonsin testified about multiple factors that could
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adversely impact the Debtors’ future performance, including the “variance of the Omicron
variants” and volatile fuel prices—e.g., some of the same variables that have plagued the
aviation industry the onset of the COVID-19 pandemic. See Jan. 29 Alfonsin Dep. at 183:18-24,
182:6-16, 184:14-24. As parties to the Backstop Agreement, the Commitment Creditors must
acquire the securities, irrespective of the trading price. The Backstop Payments to the
Commitment Creditors provide consideration in exchange for that substantial capital
commitment to backstop the entire $3.669 billion new money investment for the entire
commitment period—a period that is potentially longer than any backstop period identified by
the experts as a comparable transaction. See Herlihy Decl. ¶ 30; id., Chart. The Court finds that
the Commitment Creditors are subject to meaningful risk on the entire portion of the rights
offerings they are backstopping.
Whether The Fees Charged Under
The Backstop Agreement Are Reasonable
The Objectors challenge the reasonableness of the Backstop Payment and other fees,
costs and expenses under the Commitment Creditors Backstop Agreement in several ways. They
contend that the Court should not approve the agreement because the Termination Payments and
Expense Reimbursement provisions are excessive, the agreement fails to include a meaningful
“fiduciary out” provisions for the Debtors, and the Indemnification Provisions are overly broad
and run afoul of Chilean law. They assert that the Herlihy Implied Discount analysis fails to
account for the fact that the Backstop Payment is a cash payment, and relies on a skewed set of
comparables. Finally, they contend that the Court should reject the Implied Discount
Methodology because it does not isolate the costs associated with the Commitment Creditors
Backstop Agreement. The Court considers those matters below.
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The Termination Payments
Article IX of the Commitment Creditors Backstop Agreement contains the agreement’s
“Termination” provisions.30 Section 9.1 lists the “Termination Rights” of the parties, while
Section 9.2 addresses the “Effect of Termination.” Section 9.2(b) regulates the “Termination
Payments” obligation that arises upon the termination of the agreement. It calls for a payment
equal to 10%, 15%, 40% or 50% of the Backstop Payment, depending on the Termination Right
exercised under section 9.1 of the agreement.
The Committee acknowledges that as a general matter, termination fees, are common
aspects of backstop agreements. See LaPuma Decl. ¶ 51. However, it maintains that the
Termination Payments under the agreement are excessive and unreasonable. Id. As support, the
Committee notes that the Commitment Creditors Backstop Agreement provides for termination
fees as high as 8% or 10% of the total offering, depending on whether the agreement is
terminated before or after plan confirmation, and that on a percentage basis, that greatly exceeds
the mean and median from the PJT Comps Set (6.2% and 6%). Id. Moreover, it contends that the
PJT Comps Set demonstrate that the size of termination fees on a percentage basis tends to be
smaller when the equity offerings are larger. Id. ¶ 52. It notes that every example Mr. Herlihy
provides in which termination fees of 10% or higher were permitted were for offerings of $720
million or less (and often much less). Id. In contrast, the $3.669 billion offerings that the
Commitment Creditors seek to backstop is more than five times larger than the largest of the
other offerings where similar termination fees (on a percentage basis) were permitted. Id. It
contends that in the Hertz bankruptcy, which is the only comparable with a similarly-sized equity
offering, the termination fees were a mere 3%. Id. The Committee contends that Mr. Herlihy
30 	There are no termination fees in the Backstop Shareholders Backstop Agreement.
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conceded that the Termination Payments, on a percentage basis, exceed the mean and median
amounts in other backstop agreements and that, on a dollar basis, they are the highest termination
fees he has observed (other than in PG&E, which involved a $12 billion offering.) Committee
Obj. ¶ 15. Even if the Commitment Creditors Backstop Agreement is terminated through no fault
of the Debtors, the Debtors would still be obligated to pay fees totaling $147 million or $220
million (i.e., 2-3% of the total amounts backstopped), which also exceeds the termination
payments in other agreements on a dollar basis except for PG&E. Id.
BancoEstado likewise complains that the Termination Payments are excessive. It
contends that if it is approved the Termination Payment will create untoward pressure in favor of
confirmation of the Plan, because the entry of an order denying the Plan would allow the
Commitment Creditors to terminate that agreement and charge a fee of 10% of the Backstop
Payment (or $73.4 million). Commitment Creditors Backstop Agreement §§ 9.1(c)(xiii)(A)-(C),
9.2(b)(ii)(A). It contends that parties in interest that would otherwise object to or vote against the
Plan will be faced with the prospect of either asserting their rights, on the one hand, or, on the
other hand, potentially contributing to a failure of confirmation and the resultant expense of
millions of dollars of termination fees for nothing. See, e.g., BancoEstado Obj. ¶ 45. Moreover,
and in any event, BancoEstado asserts that the justification for providing termination or break-up
fees is to induce bidding by parties that would otherwise refrain from purchasing a debtor’s
assets or funding its reorganization. See Jan. 12, 2007 Hr’g Tr. at 118:10-18, In re Delphi Corp.,
No. 05-44481 (Bankr. S.D.N.Y. Jan 12. 2007) [ECF No. 7118] (“alternative transaction fees and
the like” were not appropriate where “stalking horse bidders were so imbedded in the capital
structure already that they did not need further incentive to make their proposal.”). It says that
rationale does not apply to the Commitment Creditors because they are prepetition creditors
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whose investment in the Debtors will allow them to obtain superior recoveries on their
prepetition claims of over 60%. BancoEstado Obj. ¶ 44. In short, it maintains that there is no
reason to provide those creditors with additional inducement.
The Debtors focus on the Termination Fee in the Commitment Creditors Backstop
Agreement on a percentage basis as compared to the termination fees in other comparable
backstop agreements. See Reply ¶ 87. They contend that the Objectors and their experts simply
assert that the fee is too high without considering that the fee of 8-10% of the new money
commitment only applies in some circumstances, while the 2-3% fee applies in others—both of
which are aligned with those in the market and, indeed, are far lower than the fees in other
backstop agreements. See id. ¶ 87 (noting that the court in the Aeromexico restructuring approved
a termination fee of 15% of the total amount backstopped); Commitment Creditors Backstop
Agreement §§ 9.2(b)(i) (describing the Termination Fee of 8-10% of new money commitment
under certain terminations), 9.2(b)(ii) (describing Termination Fee of 2-3%). See also Herlihy
Decl. ¶ 28. The Debtors point to the fact that while the termination fee in the Commitment
Creditors Backstop Group could be as high as 10% of the new money commitment in some
circumstances (i.e., 50% of the backstop fee), this compares favorably to the termination fees in
Carlson Wagonlit, Gulfport, Chesapeake, 24 Hour Fitness, Hornbeck Offshore Services, Ultra
Petroleum, Quorum Health, Hexion, Windstream Communications, Claire’s Stores, Fieldwood
Energy, Expro International Group, Pacific Drilling, and Toys R Us—14 of the comparable
transactions analyzed by Mr. Herlihy—each of which had termination fees in excess of 50% of
the backstop fee. See Reply ¶ 87.
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The Court finds the termination fee in the Commitment Creditors Backstop Agreement is
reasonable as drafted. The termination payment to the Commitment Creditors ranges from 2% to
10% of the new money to be provided by the Commitment Creditors—i.e., 10% to 50% of the
backstop fee. Termination payments to entities providing backstop commitments are common
aspects of backstop agreements– the Objectors do not claim otherwise. Mr. Herlihy has
demonstrated that, on a percentage basis, the termination payment ranges are commensurate with
those in his chart of 28 comparable backstop fees in 26 cases. See Herlihy Decl., Chart. Even the
highest termination fee, 10% of the new money offering, is less than or equal to six of the 28
comparable transactions. See id. While the Objectors disagree that the termination fee ranges are
reasonable, none of their experts actually opined otherwise or critiqued this aspect of the Herlihy
Declaration. Moreover, the fact that the dollar amount of the termination fee well exceeds that of
the comparable backstops Mr. Herlihy analyzed is immaterial because many those transactions
involved much smaller offerings.
Expense Reimbursement Provisions
In the Backstop Agreements, the Debtors agree (regardless of the consummation of the
transactions contemplated by the Backstop Agreement) to pay:
The Reimbursable Expenses of the Backstop Parties in an aggregate amount of up
to $3 million, and the uncapped professional fees (including success/completion
fees) incurred by the AHG Advisors (i.e., Kramer Levin, Evercore, Coeymans
Edwards Poblete & Dittborn and Bofill Silva Escobar Abogados).
The uncapped reasonable and documented fees and expenses, including
professional fees of (a) Costa Verde (represented by Wachtell, Lipton, Rosen &
Katz and Cuatrecasas); (b) Delta (represented by Davis Polk & Wardwell LLP,
Barros & Errázuriz Abogados, and Perella Weinberg Partners, L.P. (“Perella
Weinberg”); and (d) Qatar (represented by Alston & Bird LLP, Carey Abogados
and HSBC). In addition, the Debtors have agreed to pay the fees of Greenhill,
which represents Costa Verde, Delta, and Qatar collectively.
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See Commitment Creditors Backstop Agreement § 3.3; Backstop Shareholders Backstop
Agreement § 3.1. BancoEstado notes that this group of advisors includes four U.S. law firms,
five Chilean law firms, and four U.S. financial advisory firms, and that separate
success/completion fees will be charged by at least three of the financial advisory firms–
Evercore ($18.5 million), Greenhill ($7 million), and Perella Weinberg — in connection with the
same transaction.31 BancoEstado Obj. ¶ 47 (internal citations omitted). It maintains that
according to documentation produced in discovery, the Debtors estimated in December 2021 that
the total expected fees of the Backstop Parties’ advisors would reach $60.6 million, without
including the fees of Greenhill, Perella Weinberg, and HSBC, which at the time of the Debtors’
estimate were still “TBD.”32 Id. BancoEstado complains that the professional fees the Debtors
propose to pay are duplicative, excessive, and unsupported by any evidence or even estimates in
the Motion or Herlihy Declaration of what the final amount of the Expense Reimbursement
Payment will actually be, or what fees were charged in comparable cases. Id. ¶ 48. It contends
that the Debtors make no arguments specific to the Expense Reimbursement Payment, but
simply argue using boilerplate language that the Expense Reimbursement Payment, along with
the Backstop Payment and indemnification provisions, are “commonly used” and “necessary
inducements” to compensate the Backstop Parties. See Id. (citing Motion ¶ 40). It argues that
given the numerous professional firms the Debtors propose to pay, including enormous
success/completion fees with respect to the same transaction, the Backstop Agreements should at
the very least be revised to include caps on the fees payable to the professionals of the Backstop
31 	BancoEstado contends that these fees are in addition to the success/completion fee of $17.5 million the Debtors
will need to pay their own financial advisor, PJT Partners. See BancoEstado Obj. ¶ 47 n.65.
32 	See Declaration of Will Clark Farmer in Support of Objection (the “Farmer Declaration”) Ex. A
(LATAM_C11_BE_00002196) (“RSA Party Professional Fee Build (Dec. 2021)”). The Farmer Declaration is
annexed to the BancoEstado Obj.
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Commitment Parties. The Committee complains that the potential fees are “extraordinary” (see
Committee Obj. ¶ 60) and the A&P Ad Hoc Group says that the Debtors should not pay the fees
because the Backstop Parties have not made a “substantial contribution to the bankruptcy cases.”
A&P Ad Hoc Group Obj. ¶ 53.
The Court finds no merit to the objections. The reimbursement of the Backstop
Commitment Parties’ expenses is limited to “reasonable expenses.” See Backstop Shareholders
Backstop Agreement § 3.1; Commitment Creditors Backstop Agreement, § 3.3. Further courts in
this district approve the “reasonable fees and expenses” of the “advisors and consultants” of
backstop parties as actual, necessary costs under Section 503(b). See, e.g., Order Granting
Debtors’ Motion For Order Pursuant To Bankruptcy Code Sections 105(a), 363 And 365,
Bankruptcy Rule 6006, And Local Bankruptcy Rules 6006-1 And 9013-1 (I) Authorizing The
Debtors To Assume The Restructuring Support Agreement, (II) Authorizing The Debtors To (A)
Assume The Backstop Agreement, (B) Pay The Backstop Commitment Fee, And (C) Incur
Certain Indemnification Obligations, And (III) Granting Related Relief, In re Roust Corp., No.
16-23786 (RDD), at ¶ 12 (Bankr. S.D.N.Y. Jan. 10, 2017) [ECF. No. 40]. The Objectors’ experts
concede that that courts considering backstop agreements “frequently reimburse[] reasonable
expenses.” Feb. 3 LaPuma Dep. at 297:14-15. The reimbursement and indemnification
provisions were integral in obtaining the financing commitments from the Backstop Parties. See
Motion ¶ 41; Herlihy Decl. ¶ 47 (“The Expense Reimbursement and the Indemnification
Obligations are essential components of the Backstop Agreements . . . . The Backstop
Commitment Parties have required these obligations, as applicable, as a condition to providing
the commitments under the Backstop Agreements, and entry into the Backstop Agreements is
required under the RSA.”); see also Jan. 29 Alfonsin Dep. at 93:17-24. As such, and given “the
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significant benefit to the Debtors’ estate of having a definitive binding commitment to fund the
Debtors’ restructuring,” the Court approves the indemnification and reimbursement provisions as
“actual, necessary” costs of preserving the Debtors’ estates. See, e.g., Order (I) Authorizing
Debtors to (A) Enter into Backstop Purchase Agreement, (B) Pay Specified Payment and Related
Expenses, (C) Provide Indemnification to Certain Parties and (II) Granting Related Relief, In re
21st Century Oncology Holdings, Inc., No. 17-22770 (RDD), at 2 (Bankr.S.D.N.Y. Sept. 20,
2017) [ECF. No. 443]; Order Authorizing (I) The Debtors Entry into the Backstop Commitment
Agreement and (II) Payment of Related Fees and Expenses, In re Windstream Holdings, Inc.,
No. 19-22312 (RDD), at ¶ 5 (Bankr. S.D.N.Y. May 12, 2020) [ECF. No. 1806].
Alternative Transactions Proposals
Section 6.7 of the Commitment Creditors Backstop Agreements addresses “Alternative
Transaction Proposals”. Section 6.7(a) provides the general rule that from the date of the
agreement until the earlier of the termination of the agreement in accordance with its terms and
the Closing Date, each Debtor agrees, without limitation, that it will not seek, solicit, encourage,
propose, assist, consent to, vote for, or participate in the formulation or preparation of any
Alternative Transaction and enter into any agreement to pursue any Alternative Transaction. See
Commitment Creditors Backstop Agreement § 6.7; Backstop Shareholders Backstop Agreement
§ 6.7. Each Debtor also agrees that if any of the Debtors receive an unsolicited bona fide
proposal or expression of interest regarding any Alternative Transaction it shall promptly inform
the Backstop Parties of any Alternative Transaction and any offer or agreements related to any
Alternative Transaction that such Debtor becomes aware of and promptly provide counsel to the
Backstop Parties with a summary of the material terms thereof. For these purposes, an
“Alternative Transaction” is a transaction that is outside of the scope of the Restructuring
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Transactions under the RSA. See Commitment Creditors Backstop Agreement § 1.1 (providing,
in substance, that the terms “Restructuring Transactions” and “Alternative Transaction” have the
meanings set forth in the Restructuring Support Agreement).
Section 6.7(b) of the agreement modifies section 6.7(a). In substance, it provides that to
the extent any of the Debtors’ boards of directors reasonably determines in good faith on the
advice of legal counsel with respect to their “Exercise of Fiduciary Obligation” that the Debtors’
fiduciary obligations under applicable law require the Debtors to take any action or refrain from
taking any action with respect to the Restructuring Transactions or that such action or inaction
would violate applicable law, including actions or inactions that would constitute a breach under
the agreement, the Debtors may terminate the agreement pursuant to section 9.1(d)(ii) without
incurring any liability to any one or more of the Backstop Parties under this agreement (other
than payment of the Expense Reimbursement and any payments to be made in connection with
the Indemnification Obligations under Article VIII); provided that the Debtors shall be required
to terminate this agreement pursuant to section 9.1(d)(ii) and to pay all fees, expenses and other
obligations in accordance with section 9.2. Id. § 6.7(b). Thus, section 6.7(b) of the agreements
allows the Debtors to do (or not do) what their fiduciary duties or applicable law require in
respect of their deal with the Backstop Parties on the Restructuring Transactions. BancoEstado
notes that nothing in section 6.7(b) expressly overrides the restrictions imposed on the Debtors in
section 6.7(a) from considering an Alternative Transaction Proposal, which by definition is a
deal outside the scope of the Restructuring Transactions. It contends that this imposes a
Hobson’s choice on the Debtors. If the Debtors receive an Alternative Transaction Proposal, they
cannot consider it without violating section 6.7(a) because nothing in section 6.7(b) expressly
allows them to do so in their “Exercise of Fiduciary Obligations.” BancoEstado Obj. ¶ 42.
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The Plan is the product of the RSA that the Debtors formulated during the Mediation. It
is based on the Debtors’ reasoned determination that they are best able to raise the substantial
amounts of capital they require to exit these Chapter 11 Cases and operate their businesses in the
future through the transactions called for under the Plan including the proposed notes and rights
offerings in Chile. The terms of the RSA reflect the Debtors’ commitment to that strategy. The
Court recognizes that it should not sanction provisions of a backstop agreement that
unreasonably interfere with the Debtors’ exercise of their fiduciary obligations. See In re
Innkeepers USA Tr., 442 B.R. 227, 235 (Bankr. S.D.N.Y. 2010). Under the facts of this case, the
provisions in section 6.7(b) do not do so here. While the Debtors cannot actively seek an
Alternative Transaction or engage in substantive negotiations with respect to an Alternative
Transaction without terminating the Backstop Agreements, the Backstop Agreements do not
prevent the Debtors from reviewing Alternative Transactions as they are presented to the
Debtors. Section 6.7 is reasonably tailored to balance the interests of the Debtors and their
estates against the commitments to the backstop arrangements in light of the Backstop Parties’
commitment of their own capital for several months in support of the Plan.
Indemnification Obligation
Section 8.1 of the Backstop Shareholders Backstop Agreement governs the Debtors’
obligation to indemnify Costa Verde, Qatar and Delta, as the Backstop Parties under the
agreement. In part, that section provides that the Debtors “shall jointly and severally, indemnify
and hold harmless each Backstop Commitment Party, its Affiliates, shareholders, members,
partners and other equity holders, general partners, managers, directors and its and their
respective Representatives, agents and controlling persons” from losses “arising out of or in
connection with this Agreement, the Plan and the transactions contemplated hereby and thereby .
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. . .” Backstop Shareholders Backstop Agreement § 8.1. BancoEstado contends that the Court
cannot approve this provision because it violates Chilean law. BancoEstado Obj. ¶ 50. The
Committee likewise raises the issue. Committee Obj. ¶ 61. As support, BancoEstado relies on the
unchallenged testimony of Pedro Pablo Gutierrez. See Gutierrez Decl. In support of
BancoEstado’s contention that Chilean law prohibits indemnification of shareholder designees
on the Debtors’ board of directors, Mr. Gutierrez notes that Article 41 of the Law No. 18,046 of
1981, as amended, on stock corporations (Ley Sobre Sociedades Anónimas, the “Chilean
Corporations Law”) states, as follows:
Directors must employ in the exercise of their functions the care and
diligence that men employ ordinarily in their own businesses and will be
jointly and severally liable for the damages caused to the company and to the
shareholders by their fraudulent or negligent actions.
It is void any provision of the bylaws and any resolution of the shareholders'
meeting that tends to release or limit the liability of the directors referred to
in the preceding paragraph.
See id. ¶ 14. He explained that in addition to Article 41’s “golden rule”, Article 42 Nos. 1 and 7
of the Chilean Corporations Law “forbids corporate directors from the exercise of acts that are
illegal or against the bylaws or the social interest (interés social) of a corporation, or using
his/her office to obtain undue advantages for themselves or for related parties that are detrimental
to the social interest.” Id. ¶ 15. He asserted that “[t]he Chilean securities regulator (i.e., the CMF)
has examined the Chilean Corporations Law and has concluded that corporations cannot
contractually indemnify ‘a director who has incurred an expense by reason of an action that, in
turn, constitutes a loss to the company he administers, insofar as said action, and the consequent
payment for it, bear no relationship whatsoever to the corporate interest.’” Id. ¶ 16 (citing Oficio
No. 13057 dated April 5, 2017 of the CMF). Based on the foregoing, Mr. Gutierrez concluded
that “[i]n sum, Chilean law prohibits a corporation from indemnifying its own directors.” Id. In
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response, the Debtors contend that the agreement does not purport to indemnify the directors in
their capacities as “directors,” and, as such, the “golden rule” does not apply. Reply ¶ 99.
Moreover, they assert that the resolution of that issue is best left to the Chilean courts - if the
issue arises at all. See Feb. 11, 2022 Hr’g Tr. at 278:16-25 [ECF No. 4381]. The Court concurs
with the Debtors.
BancoEstado also contends that indemnifying claims of non-Debtors “in connection with
the Plan,” would effectively provide non-Debtors with an improper third-party release by making
the Debtors financially responsible for claims against third parties that may have nothing to do
with the Backstop Agreements, but arguably are claims “in connection with the Plan.”
BancoEstado Obj. ¶ 51. It asserts that if creditors like BancoEstado or holders of Chilean Bonds
assert claims against non-Debtors covered by the proposed indemnification, then the Debtors are
likely to argue that such claims should be stayed or enjoined based on the financial impact of
such claims on the Debtors. It asserts that the Court can resolve this problem by removing the
reference to the term “Plan” in the indemnification. Id. As support, BancoEstado contends that
indemnification language without such a reference to plan-related claims can be found in a
number of recent cases. Id. ¶ 51 n.73.33 The Court finds, as the Debtors urge, that given the
interrelationship of the Backstop Agreement and the Plan and the other transactions
contemplated by the Plan, it is reasonable and proper for the indemnity to encompass claims
relating to the Plan. Other courts have likewise extended indemnities to cover matters relating to
33 	As support, and without limitation, BancoEstado cites to the following: Avianca Equity Commitment
Agreement, In re Avianca Holdings S.A., No. 20-11133 (MG) (Bankr. S.D.N.Y. Sept. 15, 2021), [ECF No. 2134] §
6.1 (indemnifying claims “asserted by a third-party in connection with this Agreement or the transactions
contemplated hereby, including the Equity Conversion or Equity Raise”); Debt Backstop Commitment Agreement,
In re Hexion Holdings LLC, No. 19-10684 (KG) (Bankr. D. Del. Apr. 25, 2019), [ECF No. 198-4] Equity Backstop
Agreement § 8.1 (indemnifying claims “arising out of or in connection with this Agreement, including the Rights
Offering Backstop Commitment, the Rights Offering, the payment of the Commitment Premium or the use of the
proceeds of the Rights Offering”).
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the reorganization plan. See, e.g. Order Authorizing and Approving the Debtors’ (I) Entry into
and Performance Under the Backstop Commitment Agreement, (II) Payment of Related Fees and
Expenses, and (III) Incurrence of Certain Indemnification Obligations, In re MPM Silicones,
LLC, No. 14-22503 (RDD) (Bankr. S.D.N.Y. June 23, 2014) [ECF No. 509]; see also Order
Authorizing (I) The Debtors Entry into the Backstop Commitment Agreement and (II) Payment
of Related Fees and Expenses, In re Windstream Holdings, Inc., No. 19-22312 (RDD) (Bankr.
S.D.N.Y. May 12, 2020), [ECF No. 1806] (indemnifying backstop parties for claims and losses
“arising out of or in connection with the [backstop agreement], the plan, or the transactions
contemplated hereby . . .”). The Court overrules this aspect of BancoEstado’s and the
Committee’s objection to the Motion.
Failure To Account For Backstop Cash Payment
The Objectors contend that the Implied Discount improperly equates backstop
arrangements paid in equity to the cash Backstop Payment and in doing so, understates the cost
to the Debtors. BancoEstado contends that the cash backstop payment is more expensive than
one paid in equity because the Debtors must raise additional cash in their rights offering to pay it.
BancoEstado Obj. ¶ 26. The Debtors challenge those contentions. It contends that the Objectors
disregard the fact that backstop fees that are paid in equity are grossed up to plan value by
increasing it based on the plan discount. Reply ¶ 54 (“Thus, for example, if a $70 million
backstop fee is paid in equity in connection with a plan in which securities are discounted by
30%, $100 million in equity would be paid to the backstop parties.”) (citation omitted).
Moreover, the Debtors note that consideration paid by a debtor in cash may ultimately be more
or less valuable than the consideration paid in equity at plan value, depending on how well the
debtor ultimately performs. Id. ¶ 56 (noting that the soaring plan value post-approval is what
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resulted in the higher backstop fees in Chesapeake Energy – one of the PJT Comps Set - because
they were paid in equity). The Court credits the Debtors’ analysis.
The PJT Comps Set
The parties agree that regardless of the metric used for comparison purposes, the starting
point for a comparative analysis is the collection of data from a comparable set of transactions.
See, e.g., Feb. 5 Scherer Dep. at 25:7-22; see also id. at 54:7-57:9 (noting that the selection of an
initial set of comparable transactions should be based upon objective data such as transaction
size, recency, existence, or absence of disruptive events (such as the 2008 financial crisis or the
COVID pandemic)). As noted, Mr. Herlihy’s objective criteria focuses on equity backstop
arrangements for amounts of at least $200 million over a five-year period before the backstop
hearing (i.e., since February 10, 2017), as well as equity backstop arrangements of more than $50
million that have been executed since the beginning of the COVID-19 pandemic. Herlihy Decl. ¶
38; Jan. 31 Herlihy Dep. at 177:3-8, 20-25, 178:2-179:4. Mr. Sherer noted that the PJT Comps
Set is “robust.” Feb. 5 Scherer Dep. at 58:21-22. Although the Objectors challenge the use of
certain of the comparables, none of the Objectors’ Experts propose a new data set on which to
conduct an analysis of the Backstop Payment.34
The PJT Comps Set includes Seadrill, Hexion and Chesapeake Energy. Mr. Herlihy
includes Seadrill and Hexion twice, because the backstop agreements in those cases had different
terms for different backstop parties. See Jan. 31 Herlihy Dep. at 194:17-21. The Objectors’
experts all claim that Seadrill should be eliminated, in part, because it included the highest
backstop of all comparables in the PJT Comps Set, and because it includes two backstop
34 	Other than excluding certain of the transactions from the PJT Comps Set and in some instances adding
Avianca to the PJT Comps Set (as discussed below), the Objectors’ experts all rely on the same set of comparables.
See Blokh Decl., Adjusted Ex. 1 at 19; Scherer Report, App’x. A, B at 31-32; LaPuma Decl., Exs. A, B at 25-26.
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payments. They say that including it twice overstates its relative comparable impact (and thus
inflates the average of the comparable transactions). See LaPuma Decl. ¶ 33; Blokh Decl. ¶ 10;
Scherer Report at 20. They make the same argument for Hexion. See Reply ¶ 38; LaPuma Decl.
¶ 33 (“By double counting . . . Mr. Herlihy inflates the mean implied discount from his
comparable agreements”); Blokh Decl. ¶ 10; Scherer Report at 20. The Objectors assert that by
eliminating the “double count” on these two comparable transactions, the resulting average
backstop will be more accurate. See, e.g., Scherer Report at 20 (“eliminating the double-counting
by removing the lower of the two backstop fees for each of Seadrill and Hexion reduces the
average All-In Backstop Fee at Plan Value to 17.9%. A 17.9% backstop fee on the Convert C
and Commitment Creditors’ portion of the ERO would imply a $657 million fee, $77 million
lower than the proposed Commitment Creditors Backstop Fees”). Mr. Scherer wants to delete
Chesapeake Energy from the PJT Comps Set because in that case, the plan valuation increased
between approval of the backstop and confirmation of the plan, which effectively transformed a
10% backstop fee into the 46.1% All-In Backstop Fee at Plan Value Mr. Herlihy listed in his
comparable transactions. Chesapeake Energy is the second highest backstop fee—by
percentage—in his list. See Scherer Report at 22; Herlihy Decl., Chart.
The Debtors argue that Seadrill and Hexion are appropriately considered as comparable
transactions (as twice listed among the PJT Comps Set) because (1) each backstop agreement in
these cases had different terms for different backstop parties; (2) excluding Seadrill merely
because it is the highest backstop fee is unprincipled; and (3) Seadrill’s backstop agreements are
the third-closest to the Debtors’ Backstop Agreements in terms of offering size, making it more
analogous. See Reply ¶¶ 33-38; Jan. 31 Herlihy Dep. at 194:17-21. The Debtors assert that the
bankruptcy court approved the Chesapeake Energy backstop with a provision that allowed for
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the discount to float based on an increase in plan value, which was anticipated given the
tailwinds behind the energy market at the time. See Jan. 31 Herlihy Dep. at 367:22-368:18. The
Debtors argue that the Chesapeake Energy court was aware when it found a higher valuation that
the backstop fee percentage would increase from 10% to 46.1%, which validates including the
latter figure as the backstop fee in Mr. Herlihy’s analysis. See Reply ¶ 39; Herlihy Decl., Chart.
The Court finds merit in the Debtors’ contentions and disagrees with the Objectors’ contentions
that Seadrill, Hexion and Chesapeake Energy should be excluded from the PJT Comps Set.
Mr. Blokh contends that Avianca should be added to the PJT Comps Set. Mr. Herlihy
concedes that it falls within the criteria of the PJT Comps Set because the case was filed at the
advent of COVID 19 and/or was a bankruptcy within the past five years and that the case
includes a rights offering of $200 million or more. See Jan. 31 Herlihy Dep. at 248:21-249:2.
However, in Avianca, there was not a conventional backstop agreement. Instead, the Avianca
debtors could not repay their DIP, and converted the debt to equity with a direct commitment as
opposed to a traditional backstop agreement. The direct commitment parties would receive a 5%
fee in return for taking the equity. See Blokh Decl. ¶ 25; Feb. 5 Scherer Dep. at 91:5-9; Jan. 31
Herlihy Dep. at 246:11-25, 247:2-13. Mr. Herlihy acknowledges that Avianca fits within the
comparables, but explained that “[i]f I had included Avianca I wouldn’t have been able to
calculate some of the key metrics that I described because without a plan value you can’t
calculate a discount and once you can’t calculate a discount you can’t calculate certainly my
implied discount metric. And to the extent there was a holdback, you can’t calculate the value of
the holdback. So including Avianca without those data points, which were not part of the plan, at
least that's my understanding, would have rendered it a meaningless comp in my set.” Jan. 31
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Herlihy Dep. at 248:3-17. The Court finds merit to that explanation. The Debtors did not err in
excluding Avianca from the PJT Comps Set.
The Court finds no merit to the Objectors’ challenges to the PJT Comps Set.
The Implied Discount Methodology
As noted, Mr. Herlihy calculates the Implied Discount by considering: (i) the discount at
which the new money is being invested; (ii) the stated backstop fee; (iii) the value of the direct
allocation, or “holdback” amount reserved for the backstop parties; and (iv) typical
reimbursements of professional fees and expenses. See Herlihy Decl. ¶¶ 40–41. The Debtors
contend that it is an appropriate metric for measuring the reasonableness of the fees because it
measures the total economic cost of the Backstop Agreements to the estate. Reply ¶ 45–46; see
also Jan. 31 Herlihy Dep. at 186:21-187:10. They say that is so because each of the initial three
parts is integral to the securities offering–i.e., without any one of the parts, there could be no
securities offering and, as such, no possibility for the Debtors to raise the capital they require to
exit from the Chapter 11 Cases. Cf. Reply ¶ 48 (stating that “[w]ithout the backstop, there is no
offering, and the non-backstop parties will receive nothing in the offering”); see also Alfonsin
Decl. ¶ 12 (Commitment Creditors and Backstop Shareholder parties—the only entities that
provided an offer of sufficient financing for the Debtors to successfully emerge from Chapter 11
would not have agreed to provide any of their commitments under the Backstop Agreements
without the negotiated backstop fee and other benefits under the agreements).
Applying this methodology, Mr. Herlihy produced two sets of figures for both the
Backstop Agreements and the PJT Comps Set: (i) “Backstop Party Does 100% of New Money”
and (ii) the “Backstop Party Does Pro Rata Share of New Money.” See Herlihy Decl., Chart.
Those figures represent the “bookends of potential outcomes” for the Backstop Parties. See Jan.
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31 Herlihy Dep. at 190:5-7. The “100%” figure is the extreme high end: a backstop is called, and
the backstop party must purchase the entire part of their contractual commitment. See id. at
190:5-15. The “pro rata share” figure is the opposite extreme: the offering at issue is fully
subscribed, the backstop is not called and the backstop party merely purchases a section of the
offering they are entitled to under their pro rata share. See id. According to Mr. Herlihy, the
“outcome” for backstopping parties in practice “very likely lies somewhere in the middle.” Id. at
190:13-15. Mr. Herlihy’s analysis demonstrates, as follows:
Assuming a backstop party backstops and subscribes for 100% of the rights
offering (i.e., the “Backstop Party Does 100% of New Money”), the range of
Implied Discounts for the comparable figures stretched from 20% (25 th percentile)
to 34.5% (mean) to 38.1% (median) to 44.7% (75 th percentile). The Commitment
Creditors’ commitment with respect to the New Convertible Notes Class C is
31.6%--i.e., between the 25th percentile and the mean; their backstop
commitment with respect to the ERO is 20.6%--i.e., just above the 25 th percentile.
The “blended” figure is 26.2%--i.e., between the 25% percentile and the mean.
Assuming the backstop parties subscribe to their pro rata allocation of the new
money—in other words, when the rights offering is fully subscribed by eligible
parties (i.e., the “Backstop Party does Pro-Rata Share of New Money” column),
the range of Implied Discounts for the comparable figures stretched from 24.2%
(25 th percentile) to 36.7% (mean), to 39.4% (median), to 47% (median). The
Implied Discount of the Commitment Creditors’ commitment with respect to the
New Convertible Notes Class C is 33.1%--i.e., between the 25th percentile and the
mean; their backstop commitment with respect to the ERO is 26.6%--i.e., also
between the 25th percentile and the mean. The “blended” figure is 29.1%--i.e.,
between the 25th percentile and the mean.
See Herlihy Decl., Chart. Mr. Herlihy contends that using both metrics, the Commitment
Creditors’ backstop commitments fall within the range of fees paid in other comparable cases.
See id. ¶ 39. This data is central to the Debtors’ conclusion that the Court should find and
approve the Backstop Agreements as a reasonable and proper exercise of the Debtors’ business
judgment. See Reply ¶¶ 6–7 (“[t]he record provides overwhelming support for the Court to find
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the Backstop Agreements reasonable . . . [including that] [t]he Debtors’ Expert’s Implied
Discount Methodology is appropriate”).
The Objectors collectively reject this methodology. The crux of their criticism is that the
Implied Discount Methodology does not isolate the compensation paid to the backstop parties for
their commitment to fund the backstop. They say that is so because the Implied Discount
Methodology adds the value that the backstop provider receives through the new money discount
that is available to all creditors participating in the offering, including those without any
backstopping commitment. See Committee Obj. ¶ 35; A&P Ad Hoc Group Objection ¶¶ 35–37;
BancoEstado Obj. ¶ 31. They reject this “blending” of the unique benefits available to a
backstopping party (i.e., a holdback or Direct Allocation and a backstop fee) with the new money
discount available to all parties investing in the offering. See Committee Obj. ¶ 35; Blokh Decl.
¶¶ 16, 18. Mr. Scherer puts it this way: the Implied Discount Methodology focuses on the cost of
the rights offerings, not the costs of the backstops. See Scherer Report at 26.
The Objectors contend that Mr. Herlihy’s analysis of the Commitment Creditors
Backstop Agreement and the PJT Comps Set through the lens of the Implied Discount
Methodology distorts the cost of backstops. They say that is because many of the alleged
comparable offerings reflect a high Implied Discount on account of a large discount available to
all participants in an offering, not because of a large backstop fee or holdback (i.e., the specific
value provided specifically to the backstop party). See Committee Obj. ¶ 35.35 The Committee
contends that this apples-to-oranges comparison is the only way Mr. Herlihy has been able to
claim the backstop fees in the Commitment Creditors Backstop Agreement are reasonable. Ms.
35 	Using the Implied Discount methodology, a plan that provides a 5% discount to all new money equity
investors and a 95% backstop fee to the backstopping parties has the same implied discount as a plan that provides a
95% discount to all new money investors and a 5% backstop fee. See BancoEstado Obj. ¶ 31.
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LaPuma agrees that the Implied Discount Methodology fails to isolate the true backstop fee; she
contends that it is prone to manipulation. See LaPuma Decl. ¶ 34. She discusses the Toys R Us
comparable backstop as an example of how a low backstop fee can produce a high Implied
Discount and thus frame the backstop fees at issue here as more reasonable than they would
otherwise appear by failing to isolate the benefits the Commitment Creditors receive only on
account of their backstopping commitment. Id. ¶ 35. The Commitment Creditors Backstop
Agreement provides far larger backstop fees and holdback amounts for the Class C Notes
backstop (20% and 3.8% of the offering, respectively) than Toys R Us offered to its backstop
parties (6.5% and 0%, respectively). Yet, the Implied Discount for the Toys R Us backstop
dwarfs that of the Class C Notes backstop—48.4% to 49.7% versus 31.6% to 33.1%,
respectively.36 See id. According to Ms. LaPuma, the difference results solely from the fact that
the full offering in Toys R Us—none of which was allocated directly to the backstop parties (i.e.,
there was no holdback)—was offered at a discount rate of 45%, which more than doubles the
20.7% discount rate for the Class C Notes here.37 Id.; see also Herlihy Decl., Chart. She contends
that the large discount in Toys R Us was not consideration provided to the Toys R Us
backstopping parties on account of their backstop commitment and thus should not factor into
any calculation of the backstop fee. See LaPuma Decl. ¶ 35. This example illustrates that the
Implied Discount Methodology can be manipulated and does not provide the true cost of the
backstop to the Debtors because it does not isolate the fees being paid to the Backstop Parties on
36 	The two Implied Discounts for the Class C Notes backstop and Toys R Us backstop represent the figures when
the Backstop Parties’ backstop and subscribe for 100% of the rights offering versus when they subscribe to their pro
rata allocation of the new money (i.e., the rights offering is fully subscribed by eligible parties). See Herlihy Decl. ¶
42. See also id., Chart.
37 	Ms. LaPuma points to Mr. Herlihy’s calculations in the Gulfport Energy, Extraction Oil & Gas, Hexion
(Common), Hexion (Cash), and Pacific Drilling comparables as presenting the same misleading Implied Discounts
as she detailed in Toys R Us. LaPuma Decl. ¶ 36.
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account of the Backstop Agreements, but instead includes the benefit they receive by being
permitted to purchase shares at the discount on account of being a creditor.
In addition to calculating the Implied Discount for the Backstop Agreements and the PJT
Comps Set, Mr. Herlihy also calculates the “All-In Backstop Fee at Plan Value” for those
agreements. See Jan. 31 Herlihy Dep. at 198:22-24. He says that metric measures the sum of the
benefits to a backstop party, since it reflects the discounted shares that a backstop fee is paid in,
plus the value of the holdback. See id. at 311:16-24; see also Feb. 10, 2022 Hr’g Tr. at 200:12-16
[ECF No. 4373] (“Q. Mr. Herlihy, the all-in backstop plan value measures the backstop,
including in cases where the fee is paid in equity, offered at a discount plus any holdback value,
correct? A. That’s correct.”). He testified that the All-In Backstop Fee at Plan Value is a valid
metric to compare backstop fees. See Feb. 10, 2022 Hr’g. Tr. at 176:18-23 [ECF No. 4373]. Mr.
Blokh, on behalf of BancoEstado, endorses the methodology.38 See Blokh Decl. ¶ 17 (“the ‘All-
In Backstop Fee at Plan Value’ is the most appropriate figure to compare to comparable
transactions as it looks specifically at the Commitment Creditors’ backstop economics.”); Feb. 4
Blokh Dep. at 169:15-17 (“In this situation, I think all-in backstop fee at plan value is a good
metric to use to compare . . . to the comps”). Mr. Blokh says that is so because it removes
consideration of the Implied Discount, which Mr. Blokh contends cannot isolate the fees at issue
in the Backstop Agreements. Blokh Decl. ¶ 18 (“the all-in backstop fee at plan value [] focuses
solely on the fees at issue in the [Motion]”). According to Mr. Blokh, the Implied Discount
cannot isolate the value provided to a backstop party because it conflates the actual backstop fees
38 	So does Ms. LaPuma. See, e.g., Feb. 3 LaPuma Dep. at 225:16-20 (testifying that the All-In Backstop Fee at
Plan Value is an accurate value of the actual value the backstop party receives). Mr. Scherer does not opine on the
proper methodology to compare backstop fees. See, e.g., Feb. 5 Scherer Dep. at 29:12-17 (“Q. Your methodology
uses the fifth from the right column, which is the all-in backstop fee at plan value, right? A. Again, when you say
my methodology all I was doing was reviewing Mr. Herlihy’s report and critiquing it.”).
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with the benefit of the new money discount—a benefit that is compensation for new money
investments that is available to all investing parties in an offering, not solely to backstopping
parties as compensation for the backstop. See Feb. 4 Blokh Dep. at 172:2-9.39 Essentially, Mr.
Blokh contends that the Court should not utilize the Implied Discount Methodology evaluating
the Backstop Payment because it focuses on the benefit provided to the Commitment Creditors
on account of their status as creditors, not as backstopping parties.
By combining a stated backstop fee, the value of the holdback, and the value a backstop
party receives through the new money discount that is available to all creditors participating in
an offering, the Implied Discount Methodology focuses on the total cost of the rights offering to
the estate. See Reply ¶ 44-47. However, at issue here is whether the Backstop Payment in the
Commitment Creditors Backstop Agreement should be approved as “actual, necessary costs and
expenses of preserving the estates” under section 503(b)(1)(A) of the Bankruptcy Code. In doing
so, the Court will consider whether the cost of the Backstop Agreements is reasonable. Mr.
Herlihy concedes that he is aware of no court that has used the Implied Discount Methodology to
assess the reasonableness of a backstop fee and that he himself has never used it. See Jan. 31
Herlihy Dep. at 173:2-12. The parties agree that the All-In Backstop Fee at Plan Value
methodology provides a useful tool to evaluate backstop fees in rights offerings. Mr. Blokh
expressly adopts it, Ms. LaPuma calls it a “superior value”, and Mr. Herlihy describes it as a
“valid metric.” See Feb 10, 2022 Hr’g Tr. at 176:21-177:3 [ECF No. 4381]; Blokh Decl. ¶ 10
(any comparative analysis of a backstop fee should focus on the “All-In Backstop Fee at Plan
Value”); see e.g., Feb. 3 LaPuma Dep. at 225:2-20. In their Proposed Order the Debtors ask the
Court to find that “[e]ach of the Backstop Payments, Expense Reimbursement, and Backstop
39 	Mr. Herlihy concedes this point–he agrees that the All-In Backstop Fee at Plan Value figures showcases “value
that only goes to parties who are backstopping parties.” Jan. 31 Herlihy Dep. at 311:25-312:6.
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Indemnification Obligations . . . is reasonable and warranted. . . .”, see Proposed Order ¶ G, and
to “authoriz[e] and approv[e] . . . payment of the Backstop Payments.” Id. at 1–2.40 To make that
determination, the Court must review the consideration paid to the Commitment Creditors on
account of the Backstop Agreements. The Court will apply that methodology in assessing the
reasonableness of the of the Backstop Payment and related costs and expenses under the
Backstop Agreements.
In the Chart annexed to the Herlihy Declaration, Mr. Herlihy applies the All-In Backstop
Fee at Plan Value analysis to the Commitment Creditors’ agreement to backstop the New
Convertible Notes Class C and the ERO New Common Stock—both individually and “blended”
with each other and the New Convertible Notes Class B. See Herlihy Decl., Chart. The All-In
Backstop Fee at Plan Value for the New Convertible Notes Class C is 23.8%--i.e., the 20%
backstop fee as provided in the Commitment Creditors Backstop Agreement, plus the 3.8%
holdback value (or, the value of the Direct Allocation). See Commitment Creditors Backstop
Agreement § 3.1 (“. . . a backstop payment paid in cash equal to an aggregate of 20% of the
[Commitment Creditors backstop] commitment . . .”); Scherer Report at 16. The 3.8% holdback
value represents the incremental value provided to the Commitment Creditors through the Direct
Allocation relative to their pro rata share (approximately 70%) of the claims in the LATAM
Parent General Unsecured Claims Pool—i.e., in Class 5 treatment under the Plan. See Scherer
Report at 16.41 The result is $125 million of value to the Commitment Creditors due to the Direct
Allocation, or 3.8% of their backstop commitment on the New Convertible Notes Class C. Id. at
40 	A copy of the Proposed Order is annexed as Exhibit A to the Motion.
41 	See also Jan. 31 Herlihy Dep. at 202:9-19 (“the holdback value column takes the difference between what the
backstop group, the portion of the rights group would have been able to participate in based on their ownership of
the group that it’s offered to. The difference between that . . . participation level and the level that they’re able to
participate in due to the holdback and then it takes that amount of the new money and it multiples by the discount.”).
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16. Put simply, the holdback value of 3.8% is a measurement of the benefit that the Commitment
Creditors obtain from the discount on the portion of the offering they obtain in excess of their
pro rata share. For the New Convertible Notes Class C offering, the 23.8% All-In Backstop Fee
at Plan Value exceeds the 75th percentile backstop fee of 21.2% for the 28 comparable backstops
analyzed by Mr. Herlihy. See Herlihy Decl., Chart. It is higher than all but 5 of those 28
backstops. See id. The Objectors suggest that the All-In Backstop Fee at Plan Value strongly
demonstrates that the New Convertible Notes Class C backstop fee is unreasonably high.
With respect to the ERO New Common Stock, as set forth above, the Commitment
Creditors are only backstopping half of this $800 million offering in return for a 20% fee ($80
million) on the backstopped portion. See Commitment Creditors Backstop Agreement § 3.1. The
remaining $400 million of the ERO New Common Stock is backstopped by the Backstop
Shareholders without payment of any backstop fee. See Backstop Shareholders Backstop
Agreement § 2.2. The Commitment Creditors do not receive any holdback on the ERO Common
Stock. Accordingly, the aggregate, or “blended”, All-In Backstop Fee at Plan Value for the ERO
is 10%. See Herlihy Decl., Chart. This places the ERO backstop fee between the 25 th percentile
(7.9%) and the median (12.2%) of Mr. Herlihy’s comparable transactions. See id. It is well below
the mean of 20.2%. See id. Standing alone, the Commitment Creditors “20%” All-In Backstop
Fee at Plan Value exceeds the 75th percentile backstop fee of 21.2% for Mr. Herlihy’s
comparable transactions. See Herlihy Decl., Chart.
At the Hearing, counsel for the Debtors argued that the Backstop Agreements, including
payment of the Backstop Fee is reasonable under either the Implied Discount Method or the All-
In Backstop Fee at Plan Value metric. See Feb. 11, 2022 Hr’g Tr. at 201:6-202:9 [ECF No.
4381]. They cite to their chart created for the closing arguments. See Debtors’ Demonstrative for
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Closing Arguments (the “Demonstrative”). The demonstrative shows that applying the Implied
Discount Methodology to the Class C Notes and the ERO New Common Stock, on either a
blended or separately basis, that the Backstop Fee is under the average of 34% and the median.
See id. at 2; Herlihy Decl., Chart (noting the ERO under the Implied Discount Methodology
(Backstop Party Does Pro Rata Share of new Money) is 26.6% and the Covert C is 33.1%). The
Debtors value the ERO New Common Stock at 26.6%, which is under the average and is in the
2nd quartile and under the median of the PJT Comps Set. The Class C Notes are valued at 33.1%
which is also in the 2nd quartile but is right below median. The blended value is at 29.1% which
is also squarely in the 2nd quartile and below the median. The Debtors say that applying the
Implied Discount Methodology to the Backstop Payment shows that the proposed fee is
reasonable and within the range of other comparables.
They also say that even if the Court were to apply the All-In Backstop Fee at Plan Value
to the Backstop Payment, the fees would still be under the maximum but “a hair” above the 75th
percentile. See Feb. 11, 2022 Hr’g Tr. at 202:5-9 [ECF No. 4381] (“And even if the Court
decides to do the all-in fee plan value approach but uses Mr. Herlihy’s dataset rather than cherry-
pick one, you'll find it’s just a hair above average and it’s right around the seventy-fifth
percentile. Certainly within the range of reasonableness.”) The Demonstrative shows that in
applying the All-In Backstop Fee at Plan Value to the PJT Comps Set, the Backstop Fee on the
Class C Notes exceed the 3rd quartile and is the sixth highest fee based on the PJT Comps Set.
Under the All-In Backstop Fee at Plan Value metric, the average percentage is 20% and
the 3rd quartile is 21.2% with the maximum at 110.8%. See Demonstrative at 2; Herlihy Decl.,
Chart (noting the 25th percentile, the 75th percentile and maximum value under the PJT Comps
Set). The Debtors look at, and value the ERO New Common Stock and Class C Notes separately
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and also on a blended basis. When looked at separately, the Demonstrative shows that the ERO
New Common Stock is at 10% which is in the 2nd quartile, and below the average of 20%. The
Class C Notes are at 23.8%, which is above the 3 rd quartile. See Demonstrative at 2; Herlihy
Decl., Chart (noting the ERO New Common Stock under the All-In Backstop Fee at Plan Value
is 10% and the Covert C is 23.8%). In fact, the Class C Notes, valued by itself, is the sixth
highest comparable in the PJT Comps Set. See Demonstrative at 2 (noting that the only
comprables higher than the Class C Notes is Claire’s (25.2%), 24Hr Fitness (30.5%),
Chesapeake (46.1%), Seadrill (others) (91.5%) and Seadrill (Hemen) (110.8%)). The Debtors
also say that even if the ERO New Common Stock and Class C Notes were blended, the metric
would be 15.8%, which is below the average of 20%. They say that this demonstrates that when
taken together and viewed as one agreement, the fees on the ERO New Common Stock and
Class C Notes are in line with other comparables and are thus reasonable. The Court gives no
merit to the blended fee as it distorts the true cost to the Debtors’ estate.
Discussion
Pursuant to the Backstop Agreements, the Debtors seek to use property of the estate
“other than in the ordinary course of business,” therefore section 363 of the Bankruptcy Code
applies to the Motion. Section 363 provides that the “trustee, after notice and a hearing, may use,
sell, or lease, other than in the ordinary course of business, property of the estate. . . .” 11 U.S.C.
§ 363(b)(1). Pursuant to section 363(b)(1), a debtor may use property of the estate outside the
ordinary course of business if there is a sound business reason to do so. See Comm. of Equity
Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983) (requiring
“some articulated business justification” to approve the use, sale, or lease of property outside the
ordinary course of business); In re Ionosphere Clubs, Inc., 100 B.R. 670, 675 (Bankr. S.D.N.Y.
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1989) (noting that the standard for determining a section 363(b) motion is “good business
reason”). See also In re Genco Shipping & Trading Ltd., 509 B.R. 455, 464 (Bankr. S.D.N.Y.
2014) (“The standard used for judicial approval of the use of estate property outside of the
ordinary course of business is also the business judgment of the debtor.”) (citations omitted).
The business judgment rule “is a presumption that in making a business decision the
directors of a corporation acted on an informed basis, in good faith and in the honest belief that
the action taken was in the best interests of the company.” Official Comm. of Subordinated
Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y.
1992) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)). See also Official Comm.
Of Unsecured Creditors of Verestar, Inc. v. Am. Tower Corp. (In re Verestar, Inc.), 343 B.R.
444, 472 (Bankr. S.D.N.Y. 2006) (“[T]he business judgment rule . . . provides that in making
business decisions, there is a presumption that the directors of a corporation act on an informed
basis, in good faith and in the honest belief that the action taken is in the best interests of the
company.”) (citations omitted). When applying the “business judgment” standard, courts show
great deference to the debtor’s decision-making. See In re Riodizio, Inc., 204 B.R. 417, 424
(Bankr. S.D.N.Y. 1997) (“[A] court will ordinarily defer to the business judgment of the debtor’s
management.”). Thus, in applying that standard, courts will approve corporate actions unless
they “derive[] from bad faith, whim or caprice.” In re Helm, 335 B.R. 528, 538 (Bankr. S.D.N.Y.
2006) (quoting In re Cent. Jersey Airport Servs., LLC, 282 B.R.176, 183 (Bankr. D.N.J. 2002)
(internal quotations omitted)). “Generally, absent a showing of bad faith, or an abuse of business
discretion, the debtor’s business judgment will not be altered.” In re Old Carco LLC, 406 B.R.
180, 188 (Bankr. S.D.N.Y. 2009) (quoting In re G Survivor Corp., 171 B.R. 755, 757 (Bankr.
S.D.N.Y. 1994)). “Parties opposing the proposed exercise of a debtor’s business judgment have
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the burden of rebutting the presumption of validity.” In re Integrated Res., Inc., 147 B.R. 650,
656 (S.D.N.Y. 1992).
The business judgment rule is not applicable to transactions among a debtor and an
insider of the debtor. Rather, courts “have generally applied a heightened standard of scrutiny
when the transaction [in] question is with an insider of the debtor.” In re MSR Hotels & Resorts,
Inc., No. 13-11512 (SHL), 2013 WL 5716897, at *1 (Bankr. S.D.N.Y. Oct. 1, 2013) (citing In re
Innkeepers USA Tr., 442 B.R. 227, 231 (Bankr. S.D.N.Y. 2010). “In applying heightened
scrutiny, courts are concerned with the integrity and entire fairness of the transaction at issue,
typically examining whether the process and price of a proposed transaction not only appear fair
but are fair and whether fiduciary duties were properly taken into consideration.” In re
Innkeepers, 442 B.R. at 231. Section 101(31) of the Bankruptcy Code provides the relevant
definition of “insider”. The Bankruptcy Code defines the term “insider” to include an “affiliate,
or insider of an affiliate as if such affiliate were the debtor[.]” 11 U.S.C. § 101(31)(E). It defines
the term “affiliate” to mean, with an irrelevant exception, “an entity that directly or indirectly
owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting
securities of the debtor[.]” Id. § 101(2)(A). “Courts uniformly treat [section 101(31)] as
illustrative of types of insider relationships but not as exclusive, and instead refer to the
definition of insider contained in the legislative history: ‘one who has a sufficiently close
relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing
at arms[’]s[-]length with the debtor.’” O’Connell v. Shallo (In re Die Fliedermaus LLC), 323
B.R. 101, 111 (Bankr. S.D.N.Y. 2005) (quoting Pan Am. Corp. v. Delta Air Lines, 175 B.R. 438,
449 (S.D.N.Y. 1994)).
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The Committee suggests that the entire backstop transaction is subject to the “entire
fairness” standard. See Committee Obj. ¶¶ 3, 64. However, the Commitment Creditors are not
“insiders” of the Debtors as they fall outside of the scope of section 101(31).42 The Court will
apply the business judgment test in analyzing the Commitment Creditors Backstop Agreement.
Under the Backstop Shareholders Backstop Agreement, the Backstop Shareholders would
purchase (a) any unsubscribed portion of the Debtors’ issuance of $1.373 billion of the Class B
Notes, and (b) any unsubscribed shares of new common stock in an amount of up to $400
million, subject to the Backstop Shareholders Cap. They are doing it for no fee and for up to ten
months. Moreover, in the RSA, they have agreed to support the Plan by taking actions in Chile in
their capacity as shareholders in support of the ERO Rights Offering and New Convertible Notes
Offerings. No single Backstop Shareholder meets the definition of an “insider”, but together the
Backstop Shareholders own or control at least 51% of the Debtors’ common stock. Previously, in
assessing arm’s-length negotiations of the Tranche C Financing among the Debtor and Qatar,
Delta and Costa Verde, the Court applied the “entire fairness” test because, in the aggregate,
those shareholders own or control at least 51% of the common stock and were negotiating
directly with the Debtors. See In re LATAM Airlines Group S.A, 620 B.R. 722, 781 (Bankr.
S.D.N.Y. 2020). The Committee urges the Court to apply that standard here. See Committee Obj.
¶ 41.
However, the facts underlying this motion do not support application of the “entire
fairness” standard to the Backstop Shareholders Backstop Agreement. The key terms of the
agreement were negotiated during the weeks-long Mediation conducted by Judge Gropper and
42 	If the Court approves the Commitment Creditors Backstop Agreement, and the Debtors confirm the Plan and
the Plan goes effective, the Commitment Creditors will hold substantial interests in the Reorganized Debtors. That is
not grounds for applying the “entire fairness” test to the Commitment Creditors and Backstop Shareholders. See In
re LATAM Airlines Grp. S.A., No. 20-11254 (JLG), 2022 WL 272167, at *16 (Bankr. S.D.N.Y. Jan. 28, 2022).
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involved extensive, intense, and arm’s-length plan negotiations that included third-party creditors
that are members of the Parent GUC Ad Hoc Group. The Backstop Shareholders were each
represented by separate counsel and evaluated the Backstop Shareholders Backstop Agreement
independently. Further, in the agreement, the Backstop Shareholders disclaim membership in a
group and are not fiduciaries to one another. See Backstop Shareholders Backstop Agreement §
10.14 (noting that the “[p]arties do not constitute a ‘group’ within the meaning of Rule 13d-5
under the Securities Exchange Act of 1934, as amended, nor an ‘acuerdo de actuación conjunta’
within the meaning of Article 98 of Chilean Law No. 18,045” and do not owe “any fiduciary
duty, any duty of trust or confidence in any form, or other duties or responsibilities in any kind or
form to each other”). Where, as here, numerous non-insider stakeholders were involved in good
faith negotiations of a transaction or when an agreement “result[s] from a months-long, Court-
supervised mediation involving numerous parties” and “numerous proposed compromises and
settlements of billions of dollars of claims,” the “business judgment standard is appropriately
applied.” See In re Residential Capital, LLC, No. 12-12020, 2013 WL 3286198, at *19 (Bankr.
S.D.N.Y. June 27, 2013); see also June 9, 2014 Hr’g Tr., In re MPM Silicones, LLC, No. 14-
22503 (RDD) (Bankr. S.D.N.Y. July 7, 2014), [ECF No. 615] (applying business judgment
standard and declining to apply entire fairness standard to a transaction involving a party that
was both a creditor and controlling shareholder of the debtors but was one of many parties to the
transaction); In re Charter Commc’ns, 419 B.R. 221, 261 (Bankr. S.D.N.Y. 2009) (finding that
“entire fairness” standard did not apply in light of record showing that negotiations that resulted
in “settlement were initiated by Lazard for the benefit of the enterprise, not by Mr. Allen [an
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insider] for his benefit, and that the settlement was approved by independent members of
Charter’s board”).43
The Objectors have not rebutted the presumption that entry into the Backstop Agreements
is a proper exercise of the Debtors’ business judgment. Moreover, the facts demonstrate that the
Debtors have met that standard. As described above, the Debtors followed a fair process both
internally and externally in seeking sources of capital and, ultimately, negotiating the terms of
the RSA and Backstop Agreements, with the assistance of the Mediator. Moreover, the Debtors
have demonstrated that they have good business reasons for entering into the Backstop
Agreements. Without limitation, the Backstop Parties’ commitment of approximately $5.44
billion in new money investments for up to ten months
(i) ensures that the Debtors have sufficient cash to fund distributions under the
Plan,
(ii) facilitates the Debtors’ need to obtain exit debt financing on reasonable terms,
43 	In any event, the Debtors have demonstrated that they have satisfied the “entire fairness” standard entering into
the Backstop Shareholders Backstop Agreement. In applying the “entire fairness” standard previously in these cases,
the Court analyzed the integrity and fairness of the process that led to the transaction and the terms thereof, both of
which must “not only appear fair, but [be] fair.” In re LATAM Airlines Group S.A., 620 B.R. at 769 (citing In re
Innkeepers, 442 B.R. at 231) (“To demonstrate that they have satisfied the ‘entire fairness’ standard, the Debtors
must show that the Revised Credit Agreement . . . results from fair dealing and reflects a fair price.”); see also In re
Innkeepers, 442 B.R. at 231 (finding that transactions involving insiders may be subject to an entire fairness
standard and examining whether the process and price of a proposed transaction not only appear fair but are fair and
whether fiduciary duties were properly taken into consideration). The Debtors have satisfied both standards here. As
discussed above, the independent directors who serve on LATAM Parent’s audit committee were kept fully apprised
as to the status of the Plan and Backstop Agreements negotiations, meeting with the Debtors’ advisors more than
two dozen times during the negotiation process. Once the Backstop Shareholders Backstop Agreement was
finalized, it was subject to the independent review of the independent directors serving on the audit committee. Id.
After reviewing the terms of the Backstop Shareholders Backstop Agreement, these independent directors
recommended approval of the agreement by the full LATAM Parent board of directors. Thereafter, the full LATAM
Parent board was presented with the Backstop Shareholders Backstop Agreement. Ultimately it accepted the
independent directors’ recommendation and approved the Backstop Shareholders Backstop Agreement via a
unanimous vote of all voting directors. As noted previously, Messrs. Enrique Cueto, Ignacio Cueto and Henri
Reichstul, the Costa Verde nominated directors, Ms. Sonia J.S. Villalobos and Mr. Enrique Ostalé, the Delta-
nominated directors, and Mr. Alexander Wilcox, the Qatar-nominated director, did not vote on the Backstop
Shareholders Backstop Agreement. Further, the terms of the Shareholders Backstop Agreement represent a
substantial economic benefit to the Debtors given that the Backstop Shareholders are committing an aggregate of
approximately $1.77 billion in financing for up to ten months without demanding any backstop fee in return.
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(iii) serves as the linchpin for a Chapter 11 plan that affords the Debtors a feasible
post-emergence capital structure and restructuring as a going concern, and
(iv) otherwise protects against the contingency that insufficient funds are
generated by the New Convertible Notes Offering and Equity Rights Offering.
In short, the agreements reflect the Debtors’ exercise of prudent business judgment consistent
with their fiduciary duties.
Section 503(b)(1)(A) of the Bankruptcy Code provides that there shall be allowed
administrative expenses for “the actual, necessary costs and expenses of preserving the estate.”
11 U.S.C. § 503(b)(1)(A). “The words ‘actual’ and ‘necessary’ have been construed narrowly:
the debt must benefit [the] estate and its creditors.” In re TransAmerican Nat. Gas Corp., 978
F.2d 1409, 1416 (5th Cir. 1992) (quotation marks and citation omitted). Thus, “the allowability
of break-up fees, like that of other administrative expenses, depends on the requesting party’s
ability to show that the fees were actually necessary to preserve the value of the estate.” In re
O’Brien Env’t Energy, Inc., 181 F.3d 527, 535 (3d Cir. 1999); see also In re Reliant Energy
Channelview LP, 594 F.3d 200, 206 (3d Cir. 2010) (“courts do not have the authority to create
new ways to authorize the payment of fees from a bankruptcy estate, and the methods of
recovering fees from an estate are limited to the procedures established by the Bankruptcy
Code”). When authorized, courts in this jurisdiction regularly approve agreements to reimburse
reasonable fees and expenses and incur indemnification obligations associated with the
negotiation and execution of backstop purchase agreements. See, e.g., Order Authorizing (I) The
Debtors Entry into the Backstop Commitment Agreement and (II) Payment of Related Fees and
Expenses, In re Windstream Holdings, Inc., No. 19-22312 (RDD) (Bankr. S.D.N.Y. May 12,
2020), [ECF No. 1806] (authorizing the Debtors to reimburse all fees and expenses in connection
with the negotiation thereof and incur indemnification obligations); Order (I) Authorizing
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Debtors to (A) Enter into Backstop Purchase Agreement, (B) Pay Specified Payment and Related
Expenses, (C) Provide Indemnification to Certain Parties and (II) Granting Related Relief, In re
21st Century Oncology Holdings, Inc., No.17-22770 (RDD) (Bankr. S.D.N.Y. Sept. 20, 2017),
[ECF No. 443] (same); Order Granted Debtors’ Motion for an Order (I) Authorizing the Debtors
to Assume the Restructuring Support Agreement, (II) Authorizing the Debtors to (A) Assume the
Backstop Agreement, (B) Pay the Backstop Commitment Fee, and (C) Incur Certain
Indemnification Obligations, and (III) Granting Related Relief, In re Roust Corp., No. 16-23786
(RDD) (Bankr. S.D.N.Y. Jan. 10, 2017), [ECF No. 40] (same); Order Authorizing and
Approving the Debtors’ (I) Entry into and Performance Under the Backstop Commitment
Agreement, (II) Payment of Related Fees and Expenses, and (III) Incurrence of Certain
Indemnification Obligations, In re MPM Silicones, LLC, No. 14-22503 (RDD) (Bankr. S.D.N.Y.
June 23, 2014), [ECF No. 509] (same).
The Objectors contend that because the Debtors seek to enter into the Backstop
Agreements in connection with the Plan, the agreements must satisfy the requirements of section
1129(a)(4) of the Bankruptcy Code. See Committee Obj. ¶ 39; A&P Ad Hoc Group Obj. ¶ 1.
Under that section, to confirm a plan, among other things, the bankruptcy court must approve as
“reasonable” any payment called for by the debtor under the plan for costs and expenses in
connection with the plan. 11 U.S.C.§ 1129(a)(4). “This [section] mandates full disclosure of all
payments or promises of payment for services, costs, and expenses in connection with the case,
and subjects the reasonableness of such payments to the scrutiny and approval of the court.” In
re Trenton Ridge Invs, LLC, 461 B.R. 440, 473 (S.D. Ohio 2011) (internal quotation marks and
citation omitted). Section 1129(a)(4) is one of the conditions that must be satisfied to confirm a
chapter 11 plan. It is not relevant to the Motion and to the Court’s review of the Backstop
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Payment. The Motion seeks approval of a post-petition transaction that is outside the ordinary
course of the Debtors’ business. It is governed by sections 363 and 503. Section 1129(a)(4) is not
relevant to the Motion.
The Debtors contend that the Court should allow that fees and expenses under the
Backstop Agreements as administrative expenses because:
The fees and related payment obligations compensate the Backstop Parties for
their binding commitment to fully fund more than $5 billion in new money
investments to fund Plan distributions.
The fees to the Backstop Parties provide compensation for the opportunity cost
created by their commitment—a period potentially exceeding up to ten months
under the Backstop Agreements—during which the committing parties are
foregoing their ability to allocate the committed capital to other investments (and
forfeiting the potential returns on such other hypothetical investments in light of
their commitment).
The fees to the Backstop Parties compensate them for the economic, market, and
commercial risks during the extended period that such commitments remain in
place.
See Motion ¶¶ 40–45. The Court finds merit to those contentions. The Objectors assert that many
of the fees called for under the Backstop Agreements are unnecessary, unreasonable and over
market. The Court has addressed and rejected those arguments above. The Objectors focus
particularly on the Backstop Payment with respect to the Class C Notes and contend that it is
grossly over market. As noted previously, the Court finds that the All-In Backstop Fee at Plan
Value is the appropriate metric for assessing the reasonableness of the Backstop Payment.
Utilizing the PJT Comps Set, the Commitment Creditors “20%” All-In Backstop Fee at Plan
Value exceeds the 75th percent backstop fee of 21.2%. It is plainly among the highest fees on the
Chart. The Commitment Creditors have agreed to backstop $3.669 billion of Plan Securities in a
volatile industry (airlines) for a period that could reach ten months. As discussed, the Debtors
require the financing to exit chapter 11. They have demonstrated that they have sought out, but
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not located any other financing sources. They have also demonstrated that they engaged in
arm’s-length negotiations with the Commitment Creditors over the terms of the financing. Under
the circumstances of this case, the Court finds that the Backstop Payment is reasonable and
authorizes the Debtors to make payment and other payments called for under the Backstop
Agreement when, and if, necessary. In reaching this determination with respect to the Backstop
Payment under the Commitment Creditors Backstop Agreement, the Court finds no merit in the
Objectors’ objection to the Backstop Shareholders Backstop Agreement.
Conclusion
Based on the foregoing, the Court overrules the Objections and grants the Motion.
SETTLE ORDER.
Dated: New York, New York
March 15, 2022
/s/ James L. Garrity, Jr.
Hon. James L. Garrity, Jr.
U.S. Bankruptcy Judge
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