By Gabriel Araujo

SAO PAULO (Reuters) -Azul has reached a deal with its bondholders to obtain additional financing of up to $500 million, the Brazilian airline said on Monday, as part of restructuring it expects to ease market concerns about its debt load.

Azul, which dominates Brazil’s airline industry along with LATAM and Gol, has managed to avoid the fate of a number of Latin American carriers who filed for bankruptcy after the COVID-19 pandemic, including its two main rivals.

Sao Paulo-traded shares of the company soared more than 10% after the deal was announced, making them the top gainers in Brazil’s benchmark stock index Bovespa, which was up 0.8%.

The announcement comes after Reuters reported last week, citing sources, that Azul was in talks with multiple parties – including its bondholders and lender Jefferies – to raise about $400 million in fresh capital via debt financing, and an agreement was near.

The fresh capital was a condition of Azul’s recent deal with lessors to scrap nearly $550 million in obligations in exchange for an equity stake of around 20% of the firm, which analysts see as fundamental to strengthen the airline’s cash position.

“We expect a positive market reaction as the announced terms have ruled out Chapter 11 proceedings,” Bradesco BBI analysts said in a note to clients.

Under the deal with bondholders, the carrier said in a securities filing it will receive $150 million this week and another $250 million by year end in fresh debt, totaling $400 million which it had been targeting.

QUICK DELEVERAGING

The agreement, Azul added, may include another $100 million in financing and a potential debt-for-equity swap of as much as $800 million if the company manages to further improve its cash flow by reducing costs by around $100 million per year.

“It will allow for a quick deleveraging of Azul,” Chief Executive John Rodgerson said in an interview. “They say ‘we are creditors but want to be equity holders if we have this cost reduction’. It is an option, but I’m confident we’ll take it.”

He noted that among the ways for Azul to reach the proposed cost reductions are negotiations with lessors and manufacturers such as Embraer, Airbus, GE and RTX’s Pratt & Whitney.

Rodgerson acknowledged the deals imply an equity dilution, but shrugged off concerns on that front. “It’s obvious that there will be dilution, but of a much stronger company. It is better to have a smaller piece of a much larger cake,” he said.

Monday’s announcement also includes an agreement to improve cash flow by $150 million by reducing certain lessor and equipment manufacturer obligations over the next 18 months.

Azul has renegotiated 98% of its obligations with lessors and manufacturers as part of a previously announced deal that has now been finalized, it noted.

(Reporting by Gabriel Araujo; Editing by Sharon Singleton and David Holmes)

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