TAP SGPS defaults on debt to Azul

TAP SGPS, now known as SIAVILO, has formally defaulted on its bond loan to Azul. The resolution was approved at a bondholders’ meeting called by the issue’s fiduciary agent, at the request of the Brazilian company. Parpública voted against. At stake is a debt that already stands at 237 million euros.

The bonds convertible into shares were issued by TAP SGPS and subscribed by Azul and Parpública in 2016, at a time when businessman David Neeleman was both CEO and largest shareholder of the Brazilian carrier and, together with Humberto Pedrosa, the largest shareholder of the Portuguese company. Azul lent 90 million euros and the state-owned holding company 30 million. The bonds only mature in 2026 and have a high interest rate of 7.5%, which is also compounded, resulting in a sum that is already almost double the initial amount.

Since last summer, the two companies have been involved in a dispute over these bonds, which even went to court, with TAP filing a lawsuit in November. There were even negotiations between TAP and Azul’s lawyers, but according to what ECO has learnt, they were interrupted back in 2024, after that initiative on the part of the Portuguese carrier.

The case saw a new development in mid-April, with the approval at the extraordinary bondholders’ meeting of a resolution on “recognising the occurrence of Events of Default”, according to the minutes to which ECO had access. This item on the agenda was approved with the votes in favour of Azul (75%), while Parpública (25%) voted against.

The meeting, held on 15 April, also decided that “the Bonds are immediately due and repayable under the terms of Condition 11 of the Terms and Conditions of the Bonds”. The trustee — Bondholders, based in Valencia — was mandated to “enforce the terms of the Finance Documents as it deems appropriate”. Should it fail to do so, the possibility was also approved for Azul, as the majority bondholder, to “act directly against the Issuer”, in this case TAP SGPS, or another of the parties to the contract, which includes TAP SA, the owner of the airline.

As a result of the decision to default, the current value of the amount owed on the bonds will now have to be calculated, based on the formula stipulated in the bond contract. According to calculations provided to ECO, on 1 June the value of the bonds plus interest will total 237 million, of which 178 million are owed to Azul and 59 million to Parpública.

Debtor stripped of assets

The convening of the meeting, prepared on the basis of an information memorandum from Azul, refers in nine paragraphs to the alleged violations of the terms and conditions of the obligations that constitute events of default. The main argument relates to the “disposal of substantial assets” in breach of the contract or the failure to fulfil the “obligation to ensure that there is no substantial change in the nature of the activity” of the issuer.

TAP SGPS will no longer have any stake in TAP SA, which owns the airline, as of the end of December 2021, following several capital reduction and increase operations included in the State aid triggered by the pandemic. In January this year, it was announced that TAP SA would sell 100% of Portugália for 4.4 million euros, a 51% stake in Cateringpor and 100% of UCS, the company that provides health services to the group’s employees. The value of these last two transactions has not been revealed. The Cateringpor deal needs to be approved by the Court of Auditors.

The holding company also no longer has a stake in SPdH, the former Groundforce, now Menzies Aviation, which under the insolvency was also taken over by TAP SA. The remaining subsidiary, M&E Brasil, was put into liquidation after several years of chronic losses. At the end of 2022, according to the latest results available on the website, TAP SGPS had negative equity of 1,286.1 million euros.

At the same time as announcing the purchase of the assets by TAP SA, the government announced that TAP SGPS would be renamed SIAVILO SGPS. At the end of March, the separation between the former holding company and the airline also resulted in the resignation of directors, some of whom were also members of TAP’s board.

“The Issuer suffered an emptying of all material assets belonging to the Issuer to the state-owned TAP SA, reducing any capacity of the Issuer to conduct its business”, the notice states.

TAP considered the guarantees null and void

The dispute between the two companies began after Azul sent a letter to TAP last year proposing early repayment of the bond issue, at a time when it was going through a serious financial situation that forced it to renegotiate its debt with creditors. As well as not accepting the proposal, the Portuguese carrier replied that the guarantees claimed by the Brazilian company were not valid.

In the document for the 400 million euro debt issue, which took place at the end of October last year, TAP writes that the “board of directors believes that the guarantee rights provided for in the Blue Guarantee Contract are null and void”, as reported by ECO. The company claims, based on a legal opinion, that the obligations are equivalent to a “subordinated shareholder loan”, due to the fact that David Neeleman is a shareholder in TAP, through Atlantic Gateway, and simultaneously controls Azul. In practice, it is a shareholder loan, so the guarantees claimed would not apply.

The Brazilian airline disputes this interpretation and argues that the guarantees, which include TAP’s miles programme (formerly Victoria, now Miles & GO), remain valid. It also considers that TAP’s rejection of the guarantees represents yet another factor in the breach of contract. In the call it claims that “if the Issuer’s current position of qualifying the Bonds as a shareholder loan, and the invalidity of the Guarantee Package is sanctioned by a court, the Issuer would be prevented from fulfilling its obligations under the Finance Documents, and such default could reasonably be expected to have a Material Adverse Effect”.

The notice also mentions other defaults, such as TAP’s failure to maintain the minimum level of unrestricted cash defined in the agreements or to provide the required information reports, pointing out that in the event of default the “immediate maturity of the Bonds and their repayment at the Nominal Amount outstanding, together with the interest accrued up to the repayment date”.

ECO questioned the Ministry of Finance about whether the Directorate-General for Treasury and Finance (DGFT) will give an indication to SIAVILO to contest the resolution of the bondholders’ meeting or to proceed with payment, but received no reply by the time this article was published.

The CEO of the Brazilian airline, John Rodgerson, told Lusa in February that he believes the debt issue will be resolved, “because nobody questions that Azul gave money to TAP”. He also pointed out that the issue could “hinder” the privatisation of the Portuguese carrier, so it must be resolved before the operation goes ahead.

The dispute was discussed between the Portuguese and Brazilian governments when the Brazilian Minister of Ports and Airports, Sílvio Serafim Costa Filho, visited Lisbon in October. The Ministry of Infrastructure, in a response to Parliament in February, sided with TAP’s argument, considering these to be shareholder supplies. With the Executive in office, the response to Azul should be left to the next person who takes office.

The Brazilian company closed 2024 with unadjusted losses of 8,235 million reais (1.31 billion euros at the current exchange rate). Results recovered in the first quarter, with Azul reporting a net profit of 783 million reais (124.6 million euros).