According to View from the Wing Brazilian airline GOL is in trouble and Delta could be on the hook with them. The article states back in 2015 Delta airlines guaranteed a 5 year $300 million dollar loan for their then partner airline Gol. The problem is the loan is due August 2020, and according to View from the Wing if Gol defaults on the loan Delta is on the hook for the entire $300 million dollars.

Is this true and if it is and Gol defaults what are Delta's options to keep from having to pay $300 million dollars in August?

Mods if this has already been discussed please delete I couldn't find any topic on this subject.

https://viewfromthewing.com/delta-air-l ... s-partner/

Very interesting.

The article says Delta is negotiating repayment delays with creditors. On the one hand, that sounds like it could give Gol more time to repay the loan themselves. On the other, by doing this Delta would appear to acknowledge liability for the loan.

Besides Covid, Gol is also affected by the MAX situation.

Delta’s equity partnership strategy is looking expensive at the moment. In addition to this possible $300M Gol loan, there is the $2.3B investment in LATAM at risk in bankruptcy, $360M investment in Virgin Atlantic would be at risk if it reorganized plus a $200M debt, etc.

That’s over $3B in cash they could really use right now.

These stakes looked brilliant at the time. But the history of foreign ownership stakes worldwide shows many failures. They’re often a short term play.

You have to wonder whether there will be consequences for this.

Bloomberg has more detail on this problem:

https://www.bloomberg.com/news/articles ... an-payment

jayunited wrote:

Is this true and if it is and Gol defaults what are Delta's options to keep from having to pay $300 million dollars in August?

Bloomberg says DL is negotiating with Gol creditors to get a payment extension. Normally that would be routine but these are not normal times. UA already wrote down some significant Avianca-related debt.

Hate to tell you, but AA bonds for 2025 have been trading at a bigger discount (implying a greater likelihood of non-payment) than are Gol's bonds.

https://news.bloomberglaw.com/bankruptc ... l-collapse

Oh my

Not too familiar with how these things work, but GOL is expected to pay the $300M in one fell swoop? Wouldn't they have been paying it down since 2015 and therefore the balance would be less than $300M? I guess not.

If Delta is the guarantor, then it has the obligation to repay if the primary debtor was not able to. That said, the lenders are usually flexible. Their interest is best served if a compromise is reached with the debtor. Their goal is not to bankrupt the debtor.

MIflyer12 wrote:

Hate to tell you, but AA bonds for 2025 have been trading at a bigger discount (implying a greater likelihood of non-payment) than are Gol's bonds.

https://news.bloomberglaw.com/bankruptc ... l-collapse

Note that it's news from May 14, when the market was at the height of the panic. The same 2025 bond the article was talking about (which I think is USU0242AAD47), is trading at $62 today. It's still a far cry from its par value of $100, but it has recovered a lot from the price range around $30 back in May.

Please keep this thread on topic and discuss AA bonds, if desired, in a separate thread. Thanks.

maverick4002 wrote:

Oh my

Not too familiar with how these things work, but GOL is expected to pay the $300M in one fell swoop? Wouldn't they have been paying it down since 2015 and therefore the balance would be less than $300M? I guess not.

No, what you have in mind is a "mortgage". Most business loans or a publicly traded bond do not work like a mortgage. During the term of the loan, the debtor will pay interest (usually every 6 months) only, and then the principle is repaid in one go (along with the last round of interest payment) at the end of the term of the loan.

There are loans that work like mortgage, but they are rarer. Publicly traded debt that works like mortgage (i.e. with a portion of principle being repaid along the way) is mostly Asset Backed Securities (i.e. ABS).

The reason why business loans or public bonds demand interest payment only for the duration of the term is because usually companies would just borrow a new loan or issue a new bond at the end of the existing loan or bond to cover that large principle repayment. That's called "rollover". But I guess no lenders are going to rollover GOL's debt under current circumstances. If anyone is willing to lend money to GOL for them to rollover the debt, the interest rate would have been prohibitively high.

MIflyer12 wrote:

Hate to tell you, but AA bonds for 2025 have been trading at a bigger discount (implying a greater likelihood of non-payment) than are Gol's bonds

Apples and oranges.

There is no record of successful reorganization in Brazil.

So this difference probably says that Gol’s risk of liquidation is lower than AA’s risk of reorganization.

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

n9801f wrote:

Very interesting.

The article says Delta is negotiating repayment delays with creditors. On the one hand, that sounds like it could give Gol more time to repay the loan themselves. On the other, by doing this Delta would appear to acknowledge liability for the loan.

Besides Covid, Gol is also affected by the MAX situation.

Delta’s equity partnership strategy is looking expensive at the moment. In addition to this possible $300M Gol loan, there is the $2.3B investment in LATAM at risk in bankruptcy, $360M investment in Virgin Atlantic would be at risk if it reorganized plus a $200M debt, etc.

That’s over $3B in cash they could really use right now.

These stakes looked brilliant at the time. But the history of foreign ownership stakes worldwide shows many failures. They’re often a short term play.

You have to wonder whether there will be consequences for this.

Delta already wrote off its stock ownership in VS, LATAM and AeroMexico over $2 billion.

Back in July.

https://www.cnbc.com/amp/2020/07/14/pan ... llion.html

LAXintl wrote:

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

Ouch. Annul the relationship and still get stuck with the back due payment.

This is funny... in a "She wrecked my car" kind of way...

Lightsaber

Didn't the VS rescue package requires DL to come with more cash injection?

lightsaber wrote:

This is funny... in a "She wrecked my car" kind of way...
Lightsaber

... if "she" was the girlfriend you jilted just before the accident...

chonetsao wrote:

Didn't the VS rescue package requires DL to come with more cash injection?

No, as part of the CAREs act DL can’t inject cash into foreign airlines.

This is different, as this is a private loan that Delta backed for GOL. DL were essentially a guarantor. If GOL can’t pay debtors will turn to DL.

LAXintl wrote:

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

Is there really nothing Delta can do to force GOL to pay this loan? GOL has had years to make payments and they wait until the last moment and now if they fail to pay (the article paints the picture it is almost certain they will default), then Delta has to come up $300 million dollars. Delta really has to be pissed off about this and from the article it doesn't seem like GOL is even interested in negotiating. Also the Brazilian government has authorized loans for GOL but is refusing to release the money because they want the loan to be use for airline operations and not to repay creditors.

Boof02671 wrote:

Delta already wrote off its stock ownership in VS, LATAM and AeroMexico over $2 billion.
Back in July.
https://www.cnbc.com/amp/2020/07/14/pan ... llion.html

GOL was not included in DL's Q2 write downs.

jayunited wrote:

GOL was not included in DL's Q2 write downs.

That’s because Delta sold their GOL stake late last year after announcing the LATAM deal. There’s no GOL equity to write down.

jayunited wrote:

Boof02671 wrote:

Delta already wrote off its stock ownership in VS, LATAM and AeroMexico over $2 billion.
Back in July.
https://www.cnbc.com/amp/2020/07/14/pan ... llion.html

GOL was not included in DL's Q2 write downs.

Those were write-downs of equity stakes. DL had sold its Gol equity stake.

Could DL have reserved for this, effectively forecasting that Gol was going to default? (I don't know about that.)

Maybe Delta shouldn't terminate their agreement with GOL just yet. Delta should absolutely takeover the Smiles program so that later they can sell it to the American-GOL partnership at a premium in the not too distant future.

jayunited wrote:

LAXintl wrote:

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

Is there really nothing Delta can do to force GOL to pay this loan?

It looks like you're ignoring this element referenced in both the original Reuters story and the Skift replay, which is quite a wrinkle:

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

MIflyer12 wrote:

jayunited wrote:

LAXintl wrote:

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

Is there really nothing Delta can do to force GOL to pay this loan?

It looks like you're ignoring this element referenced in both the original Reuters story and the Skift replay, which is quite a wrinkle:

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

I bet that delta will take the stake if Gol defaults even if their confident doing so will kill gol because when your choices are lose 300 million dollars, or maybe lose 130 million plus potentially lose three 300 million they will choose to to gamble besides it makes the point clear to other airline delta has cosigned for, we will take all options to protect ourselves if you don't pay up.

MIflyer12 wrote:

Could DL have reserved for this, effectively forecasting that Gol was going to default? (I don't know about that.)

I just took a look at the last 10-Q. They recorded an immaterial reserve in other accrued liabilities and restructuring charges on the income statement due to the declining Smiles share price. Based on how it is written I believe they’ll still take a material hit it GOL does actually default.

TYWoolman wrote:

Maybe Delta shouldn't terminate their agreement with GOL just yet. Delta should absolutely takeover the Smiles program so that later they can sell it to the American-GOL partnership at a premium in the not too distant future.

There’s basically zero chance of the LATAM joint venture being approved while Delta has an agreement with GOL.

MIflyer12 wrote:

jayunited wrote:

LAXintl wrote:

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

Is there really nothing Delta can do to force GOL to pay this loan?

It looks like you're ignoring this element referenced in both the original Reuters story and the Skift replay, which is quite a wrinkle:

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

Maybe little strategic value in the long-term, but Smiles has value in that it will hold interest to American. Perhaps forcing American to the table here.

TYWoolman wrote:

MIflyer12 wrote:

jayunited wrote:

Is there really nothing Delta can do to force GOL to pay this loan?

It looks like you're ignoring this element referenced in both the original Reuters story and the Skift replay, which is quite a wrinkle:

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

Maybe little strategic value in the long-term, but Smiles has value in that it will hold interest to American.

Not necessarily. As mentioned it is unlikely LATAM-DL would get approval as long as DL has control of Smiles. AA would probably call their bluff- they don’t have to buy the program.

In reference to post above by Polot: Probably right. Better to hold on to the big boy down in South America. Only thing Delta can do is stall it so that with due respect to GOL they enter in administration like the rest of their brethren in that hemisphere.

jayunited wrote:

Is there really nothing Delta can do to force GOL to pay this loan? GOL has had years to make payments and they wait until the last moment and now if they fail to pay (the article paints the picture it is almost certain they will default), then Delta has to come up $300 million dollars. Delta really has to be pissed off about this and from the article it doesn't seem like GOL is even interested in negotiating.

It common in loans like this not to pay off the balance until the end. Delta, while no doubt annoyed they will have to assume responsibility, has no one else to blame. This is the risk you take when you back loans.

If you want all the upsides of strategic investments (loan backing, equity stakes, etc) you need to be prepared to take the punches too when things don’t work out (having to pay loans you backed, investment write offs, etc).

quote="TYWoolman"]In reference to post above by Polot: Probably right. Better to hold on to the big boy down in South America. Only thing Delta can do is stall it so that with due respect to GOL they enter in administration like the rest of their brethren in that hemisphere.

Then Smiles is worthless and DL lost ~$300 mil anyways, and depending on events with GOL play out potentially pissed off the Brazilian government (who they need approval from). GOL is also still partners with many of DL’s partners, such as AF/KLM.

jayunited wrote:

LAXintl wrote:

Looks like Delta will have to honor the debt on Gol’s behalf, repaying a $300 million loan due next week that the U.S. carrier guaranteed.

Cash-Strapped Delta Faces Repaying $300 Million on Behalf of Struggling Brazilian Carrier Gol
https://skift.com/2020/08/27/cash-strap ... rrier-gol/

Is there really nothing Delta can do to force GOL to pay this loan? GOL has had years to make payments and they wait until the last moment and now if they fail to pay (the article paints the picture it is almost certain they will default), then Delta has to come up $300 million dollars. Delta really has to be pissed off about this and from the article it doesn't seem like GOL is even interested in negotiating. Also the Brazilian government has authorized loans for GOL but is refusing to release the money because they want the loan to be use for airline operations and not to repay creditors.

Boof02671 wrote:

Delta already wrote off its stock ownership in VS, LATAM and AeroMexico over $2 billion.
Back in July.
https://www.cnbc.com/amp/2020/07/14/pan ... llion.html

GOL was not included in DL's Q2 write downs.

Delta doesn’t have an ownership stake in GOL. Apples and oranges. Delta was a loan guarantor, not a stock stake 12/19.

“ Dec 11 (Reuters) - Brazil’s GOL Linhas Aereas Inteligentes SA said late Tuesday that Delta Air lines Inc has sold more than 32.9 million shares it held in the company, a few months after the Atlanta-based airline announced its decision to exit stake.

Delta’s decision to sell its stake was expected, following its acquisition of a 20% stake in GOL competitor LATAM Airlines Group SA for $1.9 billion in September.”

https://www.reuters.com/article/delta-a ... SL4N28L16T

TYWoolman wrote:

Maybe Delta shouldn't terminate their agreement with GOL just yet. Delta should absolutely takeover the Smiles program so that later they can sell it to the American-GOL partnership at a premium in the not too distant future.

Delta already terminated its agreement with GOL. Only thing left is the loan guarantor

Polot wrote:

jayunited wrote:

Is there really nothing Delta can do to force GOL to pay this loan? GOL has had years to make payments and they wait until the last moment and now if they fail to pay (the article paints the picture it is almost certain they will default), then Delta has to come up $300 million dollars. Delta really has to be pissed off about this and from the article it doesn't seem like GOL is even interested in negotiating.

It common in loans like this not to pay off the balance until the end. Delta, while no doubt annoyed they will have to assume responsibility, has no one else to blame. This is the risk you take when you back loans.

If you want all the upsides of strategic investments (loan backing, equity stakes, etc) you need to be prepared to take the punches too when things don’t work out (having to pay loans you backed, investment write offs, etc).

quote="TYWoolman"]In reference to post above by Polot: Probably right. Better to hold on to the big boy down in South America. Only thing Delta can do is stall it so that with due respect to GOL they enter in administration like the rest of their brethren in that hemisphere.

Then Smiles is worthless and DL lost ~$300 mil anyways, and depending on events with GOL play out potentially pissed off the Brazilian government (who they need approval from). GOL is also still partners with many of DL’s partners, such as AF/KLM.

I was referring that probably best for Delta to just stick with LATAM (the big boy) rather get involved with Smiles. Delta's only option would then be to stall the loan payback when there is nothing guaranteeing that GOL will not end up in administration anyways.

dstblj52 wrote:

MIflyer12 wrote:

jayunited wrote:

Is there really nothing Delta can do to force GOL to pay this loan?

It looks like you're ignoring this element referenced in both the original Reuters story and the Skift replay, which is quite a wrinkle:

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

I bet that delta will take the stake if Gol defaults even if their confident doing so will kill gol because when your choices are lose 300 million dollars, or maybe lose 130 million plus potentially lose three 300 million they will choose to to gamble besides it makes the point clear to other airline delta has cosigned for, we will take all options to protect ourselves if you don't pay up.

If they kill GOL, they’ll still lose 300 million. The frequent flier program will be worthless without an airline.

It’s not like GOL is choosing not to pay the loan because they feel like it. The industry is in freefall and all the airlines are broke. There’s no point in Delta needing to send a message to anyone; you can’t draw blood from a stone.

OB1504 wrote:

dstblj52 wrote:

MIflyer12 wrote:

It looks like you're ignoring this element referenced in both the original Reuters story and the Skift replay, which is quite a wrinkle:

If Gol fails to make the payment and Delta is forced to step in, Delta will have the option of seizing the Brazilian airline's stake in its publicly traded loyalty program, Smiles Fidelidade, which secured the loan.

But Gol's stake in Smiles is only worth 954 million reais ($170.04 million). And the loyalty program has little strategic value given that Delta ditched Gol for LATAM Airlines.

"If Delta does that, it will strangle Gol's cash position, put Gol's survival at risk and become a shareholder of Smiles, a company that itself needs Gol to be successful," said Ricardo Fenelon, a former head of Brazil's aviation regulator ANAC.

I bet that delta will take the stake if Gol defaults even if their confident doing so will kill gol because when your choices are lose 300 million dollars, or maybe lose 130 million plus potentially lose three 300 million they will choose to to gamble besides it makes the point clear to other airline delta has cosigned for, we will take all options to protect ourselves if you don't pay up.

If they kill GOL, they’ll still lose 300 million. The frequent flier program will be worthless without an airline.

It’s not like GOL is choosing not to pay the loan because they feel like it. The industry is in freefall and all the airlines are broke. There’s no point in Delta needing to send a message to anyone; you can’t draw blood from a stone.

Heres the thing there are two options from deltas point of view one of which loses three hundred million and one of which has a chance to recover some of that money, its pretty clear which is the better option.

Can somebody please explain to me in which way the smiles are valuable. (Serious question)

Lot of scheming going on here. But there is a law. Delta has to pay and they get the smiles.
Afterwards they can decide what they want to do with it.
The time for scheming was before backing the loan, not now.

Wasn't like there was ever any bad blood between GOL and Delta, it was a good relationship just it wasn't powerful enough if that's a nice way to put it. When opportunity knocks to take it to the chin of AA, you have to strike.

Right decision to work a payment plan.

Sokes wrote:

Can somebody please explain to me in which way the smiles are valuable. (Serious question)

Lot of scheming going on here. But there is a law. Delta has to pay and they get the smiles.
Afterwards they can decide what they want to do with it.
The time for scheming was before backing the loan, not now.

Loyalty programs are often incredibly profitable for airlines https://crankyflier.com/2020/06/23/how- ... of-united/ especially in markets without regulated interchange at the banks and so smiles have value based purely on its earnings and margins or at least the potential to make lots of money.

dstblj52 wrote:

OB1504 wrote:

dstblj52 wrote:

I bet that delta will take the stake if Gol defaults even if their confident doing so will kill gol because when your choices are lose 300 million dollars, or maybe lose 130 million plus potentially lose three 300 million they will choose to to gamble besides it makes the point clear to other airline delta has cosigned for, we will take all options to protect ourselves if you don't pay up.

If they kill GOL, they’ll still lose 300 million. The frequent flier program will be worthless without an airline.

It’s not like GOL is choosing not to pay the loan because they feel like it. The industry is in freefall and all the airlines are broke. There’s no point in Delta needing to send a message to anyone; you can’t draw blood from a stone.

Heres the thing there are two options from deltas point of view one of which loses three hundred million and one of which has a chance to recover some of that money, its pretty clear which is the better option.

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

lightsaber wrote:

dstblj52 wrote:

OB1504 wrote:

If they kill GOL, they’ll still lose 300 million. The frequent flier program will be worthless without an airline.

It’s not like GOL is choosing not to pay the loan because they feel like it. The industry is in freefall and all the airlines are broke. There’s no point in Delta needing to send a message to anyone; you can’t draw blood from a stone.

Heres the thing there are two options from deltas point of view one of which loses three hundred million and one of which has a chance to recover some of that money, its pretty clear which is the better option.

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

usflyer msp wrote:

lightsaber wrote:

dstblj52 wrote:

Heres the thing there are two options from deltas point of view one of which loses three hundred million and one of which has a chance to recover some of that money, its pretty clear which is the better option.

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

The program is apparently worth $225 million. Delta could sell it to a hedge fund. If Delta pays $300 million, the loyalty program is theirs.

https://www.theguardian.pe.ca/business/ ... ce-469945/

One way or the other, Delta must reduce their cash outflow. One would hope for a negotiated solution.

This is big business. If Brazil courts strike down the clause, then suddenly such collateral is worthless in business deals in Brazil... The stakes are interestingly high. Much higher than $300 million in fact. Have you read the excellent books on economics by Bernstein?

Lightsaber

Lootess wrote:

Wasn't like there was ever any bad blood between GOL and Delta, it was a good relationship just it wasn't powerful enough if that's a nice way to put it. When opportunity knocks to take it to the chin of AA, you have to strike.

Right decision to work a payment plan.

Except for the whole "thanks for the memories and all the hard work bringing us closer... We're going to invest in $2B in LATAM". I'd say that probably left a bad taste in Gol's mouth...

n9801f wrote:

Very interesting.

The article says Delta is negotiating repayment delays with creditors. On the one hand, that sounds like it could give Gol more time to repay the loan themselves. On the other, by doing this Delta would appear to acknowledge liability for the loan.

Besides Covid, Gol is also affected by the MAX situation.

Delta’s equity partnership strategy is looking expensive at the moment. In addition to this possible $300M Gol loan, there is the $2.3B investment in LATAM at risk in bankruptcy, $360M investment in Virgin Atlantic would be at risk if it reorganized plus a $200M debt, etc.

That’s over $3B in cash they could really use right now.

These stakes looked brilliant at the time. But the history of foreign ownership stakes worldwide shows many failures. They’re often a short term play.

You have to wonder whether there will be consequences for this.

Why not barter the loan guarantee with some of Delta's surplus planes?

edealinfo wrote:

Why not barter the loan guarantee with some of Delta's surplus planes?

Because nobody wants planes right now ?

jetwet1 wrote:

edealinfo wrote:

Why not barter the loan guarantee with some of Delta's surplus planes?

Because nobody wants planes right now ?

In addition the desirable planes (as desirable as a plane can be during the pandemic) may already be collateral on other loans.

Most of the free and clear planes are going to be older undesirable planes that have little worth.

lightsaber wrote:

usflyer msp wrote:

lightsaber wrote:

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

The program is apparently worth $225 million. Delta could sell it to a hedge fund. If Delta pays $300 million, the loyalty program is theirs.

https://www.theguardian.pe.ca/business/ ... ce-469945/

One way or the other, Delta must reduce their cash outflow. One would hope for a negotiated solution.

This is big business. If Brazil courts strike down the clause, then suddenly such collateral is worthless in business deals in Brazil... The stakes are interestingly high. Much higher than $300 million in fact. Have you read the excellent books on economics by Bernstein?

Lightsaber

This seems like a similar situation to AC and Aeroplan where Gol has all the cards and Delta finds itself with collateral that really isn't worth anything now that Skypesos and Smiles have zero value between each other.

usflyer msp wrote:

lightsaber wrote:

dstblj52 wrote:

Heres the thing there are two options from deltas point of view one of which loses three hundred million and one of which has a chance to recover some of that money, its pretty clear which is the better option.

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

Could they offer this to AA, for say $20M (we are all just making things up)? My point, could another airline be interested.

I mean, $20M is better than 0. AA taking this is a different story.

kondoo wrote:

usflyer msp wrote:

lightsaber wrote:

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

Could they offer this to AA, for say $20M (we are all just making things up)? My point, could another airline be interested.

I mean, $20M is better than 0. AA taking this is a different story.

AA is not interested in that. They are trying to conserve cash, not waste it.

dstblj52 wrote:

Loyalty programs are often incredibly profitable for airlines https://crankyflier.com/2020/06/23/how- ... of-united/ especially in markets without regulated interchange at the banks and so smiles have value based purely on its earnings and margins or at least the potential to make lots of money.

I read the article, but I didn't understand it.
Frequent flyer program sounds like a liability to me.
Is this another accounting magic trick?

kondoo wrote:

usflyer msp wrote:

lightsaber wrote:

Exactly. The loyalty program, while not worth $300 million, is worth half the debt.

If GoL refuses a repayment program and DL forms a JV, this is an easy way to make that JV worth more.

Long term, of immense strategic value to DL. Nice clause for DL to add to the guarantee.

Lightsaber

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

Could they offer this to AA, for say $20M (we are all just making things up)? My point, could another airline be interested.

I mean, $20M is better than 0. AA taking this is a different story.

The loan company is owed $300 million.
If Delta must pay, they own GoL's FF program that, per my previous link, was hocked for a $225 million loan. So it is no longer colateral.
DL will not give up a more valuable asset for free. They will probably have to sell it, but they will do so in a way to maximize value for Delta.

This is real money. Small hopes and whims go away. Compared to the end game, a couple million in attorney fees is nothing. This is not the time to play nice.
This involves legal issues that could wreck havoc on more than GoL. Contract law is very important. When mucked with, there are permanent and long term consequences within a whole nation. The 2nd credit bubble is over. I think after two in a row, lenders might learn their lessons and that will really impact airlines.

Lightsaber

lightsaber wrote:

kondoo wrote:

usflyer msp wrote:

There is no way the DL/LA JV gets approved with DL owning G3's loyalty program. The JV is worth a lot more than the measly 170M stake.

Could they offer this to AA, for say $20M (we are all just making things up)? My point, could another airline be interested.

I mean, $20M is better than 0. AA taking this is a different story.

The loan company is owed $300 million.
If Delta must pay, they own GoL's FF program that, per my previous link, was hocked for a $225 million loan. So it is no longer colateral.
DL will not give up a more valuable asset for free. They will probably have to sell it, but they will do so in a way to maximize value for Delta.

This is real money. Small hopes and whims go away. Compared to the end game, a couple million in attorney fees is nothing. This is not the time to play nice.
This involves legal issues that could wreck havoc on more than GoL. Contract law is very important. When mucked with, there are permanent and long term consequences within a whole nation. The 2nd credit bubble is over. I think after two in a row, lenders might learn their lessons and that will really impact airlines.

Lightsaber

For clarification, DL will not own Smiles if GOL defaults - they will own GOL's share which is 53%. They still have to work with the other shareholders. However, if GOL does not own any part of Smiles, they are likely to just start their own competing FF program which would make Smiles effectively worthless. GOL has the upper hand in this, Delta will probably end up selling GOL's shares back to GOL for a very discounted price.

usflyer msp wrote:

lightsaber wrote:

kondoo wrote:

Could they offer this to AA, for say $20M (we are all just making things up)? My point, could another airline be interested.

I mean, $20M is better than 0. AA taking this is a different story.

The loan company is owed $300 million.
If Delta must pay, they own GoL's FF program that, per my previous link, was hocked for a $225 million loan. So it is no longer colateral.
DL will not give up a more valuable asset for free. They will probably have to sell it, but they will do so in a way to maximize value for Delta.

This is real money. Small hopes and whims go away. Compared to the end game, a couple million in attorney fees is nothing. This is not the time to play nice.
This involves legal issues that could wreck havoc on more than GoL. Contract law is very important. When mucked with, there are permanent and long term consequences within a whole nation. The 2nd credit bubble is over. I think after two in a row, lenders might learn their lessons and that will really impact airlines.

Lightsaber

For clarification, DL will not own Smiles if GOL defaults - they will own GOL's share which is 53%. They still have to work with the other shareholders. However, if GOL does not own any part of Smiles, they are likely to just start their own competing FF program which would make Smiles effectively worthless. GOL has the upper hand in this, Delta will probably end up selling GOL's shares back to GOL for a very discounted price.

You are correct, DL would only own GoL's portion.
It would be easier and cheaper for GoL to layoff everyone at the airline, return everything (including aircraft), and restart as a new airline than it would be to startup a competing loyalty program. You should read a bit about AA's and UA's programs in the link below.

https://www.forbes.com/sites/advisor/20 ... 34f1c514e9

So I disagree on GoL having the upper hand. GoL would not be wise to start a competing FF program. At that point, I'm fairly certain they would cease to be a going concern because leaving the prior FF program means losing your credit card processor, defaulting on obligations to that processor, and destroying the loyalty of your most valuable customers and losing out on the cash the FF program holds onto. Since other airlines make a 20% margin on the FF program above owning it (miles are bought at 20% above cost, see the link above), suddenly having a new program would make any buyer very hesitant to purchase miles and what credit card company would process for an airline that did that? Delta will lose money, but we'll have to see what is negotiated.

Lightsaber

PS
Recall GoL fired their auditor. They cannot be a bull in the china shop and survive this. A compromise will happen. How much in favor of one party or the other is the question.
https://simpleflying.com/gol-fires-auditors/

Sokes wrote:

dstblj52 wrote:

Loyalty programs are often incredibly profitable for airlines https://crankyflier.com/2020/06/23/how- ... of-united/ especially in markets without regulated interchange at the banks and so smiles have value based purely on its earnings and margins or at least the potential to make lots of money.

I read the article, but I didn't understand it.
Frequent flyer program sounds like a liability to me.
Is this another accounting magic trick?

Not really an accounting truck. Frequent flyer programs make a LOT of money from selling "miles" to third parties, most notably credit card companies but to a lessor extent other partners such as car hire and hotel loyalty programs that see value associating with the airline loyalty program.

When you earn United miles with your American Express card or Hertz 5 Star Rewards that's because United sold those miles to Amex or Hertz.

RyanairGuru wrote:

Not really an accounting truck. Frequent flyer programs make a LOT of money from selling "miles" to third parties, most notably credit card companies but to a lessor extent other partners such as car hire and hotel loyalty programs that see value associating with the airline loyalty program.

When you earn United miles with your American Express card or Hertz 5 Star Rewards that's because United sold those miles to Amex or Hertz.

Are American Express card users not flying Southwest?
As a credit card user I would consider it a waste of money. Do credit card users choose their credit card depending on airline?

Is American Express paying so much that not only their bought miles, but partly even miles from flying get paid with it?
How can such a program be valuable?

lightsaber wrote:

You should read a bit about AA's and UA's programs in the link below.

https://www.forbes.com/sites/advisor/20 ... 34f1c514e9

The loyalty program of the airline pays 1 cent/ mile to the airline.
So for a thousand miles flights, how many miles does the customer need to pay?