Legal questions about the government loan to Avianca

On Saturday, August 29, it was announced that the State, through the Emergency Mitigation Fund (FOME), would lend Avianca the sum of up to three hundred and seventy million dollars (today equivalent to 1.4 billion pesos). This news came as a surprise for many reasons that will be analyzed below, but above all because a considerable amount of money would be concentrated in a foreign company, with foreign shareholders, whose viability is uncertain. In view of the uncertainty surrounding the above, since the Government has not yet given a concrete explanation on the terms under which this loan would be carried out, the purpose of this column is to expose the legal doubts that -to date- surround this corporate rescue operation.

The answers to these questions will probably be given by the Minister of Finance to the Senate Board of Directors in the political control debate to which he was summoned for this decision.

The first doubt that arises is whether aviation is an activity "of national interest". This is because Decree 444 of 2002, which created the FOME, established that it could "invest in capital or debt instruments issued by private, public or mixed companies that develop activities of national interest". Although in principle it could be considered as such, since the country depends on this activity for interconnection (and Avianca has approximately 45% of the market), this decree did not define what should be established as such, nor did Decree 811 of 2020, which established measures related to the investment and disposal of the State's shareholding, in the framework of the pandemic. Thus, in the absence of a previous decree that sets forth the list of activities that may be considered as of "national interest", the Government cannot allocate resources from the FOME for this purpose. Likewise, Decree 444 of 2020 establishes that "For the correct administration of the resources, the decisions on the resources of the FOME must be evaluated jointly and in context with its object, not for the performance of an individual operation but as part of an integral policy to solve social and economic needs caused by the situation [of pandemic]".  The question would then be: does this integral policy exist? does it contain the definition of "activities of national interest"? where is this policy set out?

The second doubt has to do with the right of Avianca's competitors to be able to opt for a similar credit (keeping the proportions, according to objective factors such as losses due to the pandemic, etc.), especially when this is a typical "state aid". Law 1340 of 2009, in its article 32, establishes that "The State may intervene when there are situations external or alien to the national producers, which affect or distort the conditions of competition in the markets of national products. If this is done, such intervention shall be carried out through the competent Ministry, through the implementation of measures that compensate or regulate the market conditions, guaranteeing the equity and competitiveness of the National production". The question here would be: is Avianca a national producer (given that it is domiciled in Panama, its operations in many other countries, its shareholders are mostly foreigners, and its reorganization is made under the jurisdiction of another country)? The Superintendence of Industry and Commerce (SIC) is the national authority that, in a privative manner, must supervise that these state aids are made guaranteeing the "equity and competitiveness of national production". If such aid does not promote the right to compete freely in a market, such entity will have the obligation to order the immediate suspension of the operation.

The third doubt has to do with the guarantee that, in the context of a bankruptcy proceeding in the United States, the company has the operating capacity to repay a loan of up to 370 million dollars within 18 months. The same Unaudited Interim Condensed Condensed Consolidated Financial Statements of Avianca, as of March 31, 2020, contain, in the Statutory Auditor's opinion, a caveat stating "the existence of a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern". Although Decree 444/2020 allows that from the salvage operations "adverse financial results are expected or that they have returns equal to zero or negative", it is not clear that these operations can be made if the company is financially unviable, since what this salvage measure intends to avoid is the illiquidity generated by the effects of the pandemic and not the recovery of companies whose insolvency has intrinsic causes prior to the same. In the same sense, it is worth asking what assets of the company -easily liquidatable- can efficiently support a debt of such value, and if this is allowed by the American legislation under an insolvency process in that country? Finally, it is valid to ask why, if the company has a valuation (before the loan) of US$51.9 million, is it being lent 7.13 times that value? Would it not have been a better deal to acquire control of the company for a value approximating its market value and thus have Avianca as a truly national airline?

These are just questions because I do not know the answers.