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Varig Seeks Creditor Protection

The airline is the first to utilize Brazil's week-old bankruptcy law as it tries to restructure debt.

June 18, 2005|From Bloomberg News

Viacao Aerea Rio-Grandense, Latin America's biggest airline and the carrier responsible for most of the international flights from Brazil, filed for protection Friday from creditors in Brazil and the U.S. as it seeks to restructure $2.8 billion of debt.

The airline, known as Varig, will operate normally for the next 180 days, executives said. The company, a member of the Star Alliance group of airlines, also said the filing won't affect its frequent flier program.

Varig carries 13 million passengers annually and has 11,456 full-time employees. The company provides service to 36 cities in Brazil and destinations in 20 additional countries, according to court papers.

"The filing for bankruptcy protection will create conditions for Varig to negotiate all its debts and that will increase its chances of survival," said Amarillys Romano, an airline industry analyst at Sao Paulo-based Tendencias Consultoria. "It will also allow the company to get access to credit again."

Varig, founded 78 years ago, is the latest of several major airlines in the Americas that have filed for bankruptcy protection in the last two years as competing low-cost airlines cut into sales and rising fuel prices boost costs. Varig posted annual profit only twice since 1990, accumulating the equivalent of $2.66 billion of losses in the period.

Varig is the first company to seek protection under Brazil's week-old bankruptcy law, said Charles Gruenberg, a bankruptcy lawyer in Sao Paulo. Under the new law, a distressed company is allowed to offer creditors alternative plans to stay in business and pay its debts in a process overseen by a judge. The plan could include restructuring obligations or selling assets to raise cash. Varig will have 60 days to present creditors and the court with its plan, said Varig's lawyer, Sergio Bermudes.

Varig has $2.8 billion in balance sheet debt and $2 billion in debt that is not included in its balance sheet, according to documents filed in the U.S. court.

The carrier has no significant fixed assets, according to court papers in the U.S. All of its aircraft are leased.

Varig sought protection in the U.S. to bar creditors there from interfering with restructuring in Brazil. The filing under Section 304 of the U.S. Bankruptcy Code, will enable Varig "to avoid a piecemeal distribution of its assets, prevent substantial litigation costs, and prevent creditors from attaching any assets in the U.S.," airline lawyer Vicente Cervo said in papers filed with the U.S. Bankruptcy Court in New York.

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