Varig agrees to sell unit to MatlinPatterson in exchange for $48 million in loans

By Caroline Salls

Pittsburgh, Aug. 24 - Varig SA has reached a preliminary interim financing agreement with an affiliate of MatlinPatterson Global Advisers LLC under which Matlin will loan Varig $38 million toward debt payments and $10 million to prepay the company's receivables from airfare sales through VISA cards, according to a Wednesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

Under the agreement, Matlin would loan Varig $38 million, which would eventually be used by Matlin to buy 95% of the stock of Varig Logistica SA, a wholly owned subsidiary of Varig.

Matlin would also pay a $10 million advance of the $65 million owed on the VISA receivables, with the balance being held as loan collateral to be paid when the Varig Logistica stock is sold to Matlin.

Matlin will also provide a loan of up to $15 million through the discount of VISA receivables.

According to the filing, immediately after Varig filed for reorganization under Section 304, its main vendors, which until then granted Varig a time period in which to pay its debt, started to demand payment of the debts.

"Any break in the supply of fuel or food catering services, as well as the cancelled authorizations for landing and take-off at certain airports, would cause the petitioners' activities to come to an immediate halt," the filing said.

In addition, after the bankruptcy filing was announced, credit-card administrators in Brazil, which account for a significant portion of Varig's airfare sales, started demanding increased escrow deposits, which caused an impact of about R$25 million per month on the company's cash flow.

Also, Banco do Brasil, which had been discounting Varig's receivables with Companhia Brasileira de Meios de Pagamento -VISA, suddenly halted that operation, which had been allowing the company the possibility of anticipating future credits and allowed for a better management of their cash flow.

Because of a mismatch of revenues and expenses, Varig is in arrears on the payment of R$28 million in employees' wages.

"For obvious reasons, the risk of a workers' strike, with the airline's activities being consequently stalled, is imminent," the filing said. The filing also warned that Varig's aircraft could be seized at any time they land on U.S. soil.

The airline's international and aircraft lessors' overdue and unpaid debt has reached $20 million.

The company requested a hearing be held on the interim financing within five days to avoid repossession of aircraft.

Varig, a Rio de Janeiro, Brazil-based air carrier, filed for Section 304 bankruptcy on June 20. Its case number is 05-14400.

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