Ad Hoc Group of Bondholders in Azul Financing and Restructuring

Cleary Gottlieb is representing an ad hoc group of existing bondholders of Azul S.A. (Azul), the largest airline in Brazil by number of flight departures and cities served, in an agreement to provide up to $500 million of funding to Azul and to carry out a broader restructuring of its capital structure, including in connection with existing bond debt, convertible debentures, and obligations to lessors and original equipment manufacturers (OEMs), among other stakeholders.

The ad hoc group is comprised of 28 leading financial institutions, including several of the largest hedge funds in the United States.

Azul, certain of its subsidiaries, and its main controlling shareholder entered into a transaction support agreement, dated October 27, 2024, with members of the ad hoc group, which hold more than 66.7% of each of Azul’s existing 2028 first out secured notes, 2029 second out secured notes and 2030 second out secured notes, and 95.6% of Azul’s existing convertible debentures. The agreement provides for the ad hoc group to support transactions including the new financing; exchange offers for existing 2028, 2029, and 2030 notes; issuance of various new bond debt and convertible instruments; the partial equitization of Azul’s second out notes, renegotiated OEM obligations; and new governance terms, among other things, in each case, subject to the finalization of certain terms and the negotiation of definitive documentation.

The potential phased equitization of up to $806.5 million of existing second out bond debt into preferred shares and ADRs, part of which is conditioned on cash flow improvements of $100 million per year, could reduce interest payments by up to almost $100 million annually. Further, 52.5% of the principal amount of the new second out secured notes will be exchanged into new 2L exchangeable notes with a novel back-to-back structure, which Azul can mandatorily exchange into ADRs no earlier than the first anniversary of the closing date upon the satisfaction of certain conditions. Based on the achievement of the conditions to conversion and reasonable assumptions, bond and existing convertible debenture holders of Azul, including members of the ad hoc group, and lessors and OEMs would own a majority of the company’s equity.

Under the transaction support agreement, the ad hoc group provided an initial $150 million in bridge financing with a 90-day maturity. As of the maturity, Azul will pay off the bridge financing with the proceeds of the $500 million in new superpriority financing and implement the restructuring transactions described above.

Azul Secured Finance II LLP will serve as issuer, with guarantees by Azul S.A. and certain of its subsidiaries. The collateral for the new financing consists of, among other things, the Azul Cargo business; the shared collateral that currently secures the existing 2028, 2029, and 2030 notes and convertible debentures; and the notes issued by Transportes Aéreos Portugueses, SGPS S.A. (TAP) and held by Azul. The superpriority funding will be ahead of the existing 2028, 2029, and 2030 notes in priority of payment from the relevant collateral.

In 2023, Cleary also represented an ad hoc group of Azul’s bondholders in the out-of-court restructuring of approximately $1.5 billion of indebtedness and a new money raise of $800 million. These creative and ground-breaking transactions demonstrate Cleary’s experience in the airline industry and Latin America. Since the COVID-19 pandemic, Cleary has played a leading role in the restructurings of LATAM Airlines, Aeroméxico, Garuda, SAS AB, and GOL, while also representing the U.S. Treasury in connection with its Payroll Support Program and Rescue Plan funding to the airline industry.