Ad Hoc Bondholder Group in Azul Capital Solutions and Out-of-Court Restructuring

Cleary Gottlieb is representing an ad hoc cross-holder group of first- and second-lien bondholders of Azul S.A. (Azul), the largest airline in Brazil by number of cities served, in the successful closing of its capital solutions and comprehensive out-of-court restructuring, including $525 million of new money, superpriority secured financing.

The ad hoc group, ultimately comprised of nearly 50 leading financial institutions and some of the largest U.S.-based hedge funds, is a cross-holder group consisting of holders of Azul’s first-lien notes, second-lien notes, and secured convertible debentures. Achieving this innovative capital solution required cooperation and concessions from all key stakeholders, including holders of existing bonds and convertible debentures, as well as lessors, original equipment manufacturers (OEMs), shareholders, management, and others.

A steering committee of the ad hoc group entered into a transaction support agreement with Azul on October 27, 2024, and provided $150 million in interim bridge financing on October 30, 2024, in order to help finance the company’s operations while the terms of the restructuring were being finalized.

The restructuring was implemented through a unique series of transactions including, among others, the issuance of secured superpriority notes (backstopped by members of the steering committee); multiple exchange offers and consent solicitations; the phased partial equitization of second-lien notes; the issuance of various series of exchangeable notes and back-to-back structured instruments; agreements implementing significant concessions with lessors and OEMs; complex intercreditor arrangements between secured debt holders, including Azul’s largest lessor; and substantial changes to the company’s governance and share structure:

• Superpriority Notes: Azul, through its subsidiary, issued $525 million of superpriority notes to holders of existing notes that participated in the exchange offers, as well as holders of its convertible debentures. Part of the proceeds repaid the $150 million bridge financing. Azul and substantially all of its subsidiaries guarantee the superpriority notes, which enjoy priority over a comprehensive shared collateral package.
• Exchange Offers and Consent Solicitations: The issuer also issued approximately $1.8 billion of new senior secured notes with a range of maturities in exchange for its existing notes. The new notes include $1 billion in principal amount of 11.93% senior secured first-lien notes due 2028, $238 million in principal amount of 11.5% senior secured second-lien notes due 2029, and $547 million in principal amount of 10.875% senior secured second-lien notes due 2030. Azul stripped substantially all of the restrictive covenants, most events of default, and the collateral of the existing notes not participating in the exchange. Over 95% of first-lien noteholders and second-lien noteholders participated in the exchange offers, respectively.
• Equitizations: The new instruments provide that 35% of the new second out 2029 and 2030 notes will be equitized into ADSs or preferred shares by no later than April 30, 2025, and 12.5% equitized following the completion of an equity offering for net proceeds of at least $200 million. The remaining 52.5% of the new second out notes will be exchanged into new exchangeable notes due 2030 with a novel Brazilian law governed back-to-back structure, in order to allow notes exchangeable into shares of a Brazilian issuer to be governed by New York law. Upon the achievement of certain events that are conditions to the exchange into equity, holders of the new notes and convertible debentures of Azul, including members of the ad hoc group and lessors and OEMs, are expected to own a majority of the company’s equity.
• Lessor and OEM Agreements: As a condition for it to fully access the proceeds of the superpriority notes, Azul and its lessors, OEMs, and other suppliers reached agreements that will enhance its cash flow by over $150 million in the short term, with additional improvements of over $300 million across 2025 through 2027.
• Governance: Azul’s controlling shareholders entered into a shareholder support agreement with respect to the restructuring and the company’s governance arrangements. Notably, the agreement provides for the appointment of two new directors selected by certain members of the ad hoc group, the approval of a new management incentive plan, and the implementation of a single-class share capital structure that will combine Azul’s existing preferred and common shares into one series.

These groundbreaking transactions are the most recent examples of the Firm’s deep experience in helping stakeholders navigate the ups and downs of the aviation sector. Since the onset of the COVID-19 pandemic, Cleary has played a leading role in the restructurings (or other transformative transactions) of LATAM Airlines, Aeroméxico, Garuda, SAS AB, Nordic Aviation, Asiana Air, Jet Blue, and the U.S. Treasury in connection with its Payroll Support Program and Rescue Plan, providing over $30 billion across 13 different financings for U.S. airlines.