================================================================= VARIG BANKRUPTCY NEWS Issue Number 1 ----------------------------------------------------------------- Copyright 2005 (ISSN XXXX-XXXX) June 18, 2005 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 215-945-7000 FAX 215-945-7001 ----------------------------------------------------------------- VARIG BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 572 Fernwood Lane, Fairless Hills, Pennsylvania 19030, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. New issues are prepared by Juan Adolfo T. Amor, Christopher G. Patalinghug, Frauline S. Abangan and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of VARIG BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00000] HOW TO SUBSCRIBE TO VARIG BANKRUPTCY NEWS [00001] BACKGROUND & DESCRIPTION OF VARIG [00002] VARIG & AFFILIATES' RESTRUCTURING DATABASE [00003] LIST OF VARIG'S 29 AIRCRAFT LESSORS [00004] OVERVIEW OF BRAZIL'S NEW BANKRUPTCY & RESTRUCTURING LAW [00005] VARIG OBTAINS INITIAL NBRL STAY ORDER [00006] FOREIGN REPRESENTATIVE'S MOTION TO ENJOIN U.S. CREDITORS [00007] FOREIGN REPRESENTATIVE'S MOTION FOR JOINT ADMINISTRATION KEY DATE CALENDAR ----------------- 06/17/05 Voluntary Petition Date in Brazil 06/17/05 Section 304 Petition Date 06/17/05 Entry of Interim NBRL Order in Brazil 06/17/05 Entry of TRO in U.S. Sec. 304 Proceeding 06/20/05 Hearing on Extension of U.S. Preliminary Injunction __/__/05 Deadline for VARIG to Propose a Restructuring Plan __/__/05 Expiration of Initial NBRL Stay in Brazil ----------------------------------------------------------------- [00000] HOW TO SUBSCRIBE TO VARIG BANKRUPTCY NEWS ----------------------------------------------------------------- VARIG BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. New issues are published on an ad hoc basis as significant activity occurs (generally every 10 to 20 days) in the Debtors' chapter 11 proceedings. The subscription rate is US$45 per issue. Newsletters are delivered via e-mail; invoices, transmitted following publication of each newsletter issue, arrive by fax. Re-mailing of VARIG BANKRUPTCY NEWS is prohibited. Distribution to multiple individuals at the same firm is provided at no additional charge; folks outside of your firm should set-up and pay for their own subscriptions. Subscriptions may be canceled at any time without further obligation. To continue receiving VARIG BANKRUPTCY NEWS, please complete the form below and return it by fax or e-mail to: Bankruptcy Creditors' Service, Inc. 572 Fernwood Lane Fairless Hills, PA 19030 Telephone (215) 945-7000 Fax (215) 945-7001 E-mail: peter@bankrupt.com We have published similar newsletters tracking billion-dollar insolvency proceedings since 1990, starting with Federated Department Stores. Currently, we provide similar coverage about the restructuring proceedings involving ATA Airlines, US Airways, UAL Corporation and United Airlines, Air Canada, Collins & Aikman Corporation, Meridian Automotive Systems, Inc., Tower Automotive Inc., Federal-Mogul Corporation, TECO Energy Inc.'s Panda Gila River and Union Power subsidiaries, Winn-Dixie Store, Inc., Kmart Corp., Ames Department Stores, Spiegel, Inc. (and its Eddie Bauer and Newport News subsidiaries), Yukos Oil Company, Mirant Corp., PG&E National Energy Group, Pacific Gas and Electric Company, Enron Corp., NRG Energy, Covanta Energy Corp., ANC Rental, the Roman Catholic Church in the United States, Trump Hotels & Casino Resorts, Inc., Interstate Bakeries Corporation, Pegasus Satellite, RCN Corporation, Adelphia Communications and Adelphia Business Solutions, WorldCom, Global Crossing and Asia Global Crossing, Winstar, 360networks, Solutia, W.R. Grace & Co., Owens Corning, Armstrong World Industries, USG Corporation, Safety- Kleen, Laidlaw, Halliburton's DII Industries and Kellogg, Brown & Root units, Parmalat Finanziaria, S.p.A., Vlasic Foods, Bethlehem Steel, Weirton Steel, Kaiser Aluminum, WestPoint Stevens, Pillowtex, Burlington Industries, Hayes Lemmerz, Exide Technologies, National Century Financial Enterprises, Integrated Health Services, Mariner Post-Acute & Mariner Health, American Business Financial Services, Inc., Reliance Group Holdings & Reliance Financial, The FINOVA Group, Inc., and Loewen Group. ================================================================= [ ] YES! Please enter my personal subscription to VARIG BANKRUPTCY NEWS at US$45 per issue until I tell you to cancel my subscription. Name: ---------------------------------------------- Firm: ---------------------------------------------- Address: ---------------------------------------------- ---------------------------------------------- Phone: ---------------------------------------------- Fax: ---------------------------------------------- E-Mail: ---------------------------------------------- (Distribution to multiple professionals at the same firm is provided at no additional cost.) VARIG BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. New issues are published on an ad hoc basis as significant activity occurs (generally every 10 to 20 days) in the Debtors' chapter 11 proceeding. The subscription rate is US$45 per issue. Newsletters are delivered via e-mail; invoices, transmitted following publication of each newsletter issue, arrive by fax. Re-mailing of VARIG BANKRUPTCY NEWS is prohibited. Distribution to multiple individuals at the same firm is provided at no additional charge; folks outside of your firm should set-up and pay for their own subscriptions. Subscriptions may be canceled at any time without further obligation. ----------------------------------------------------------------- [00001] BACKGROUND & DESCRIPTION OF VARIG ----------------------------------------------------------------- VARIG, S.A. (Viacao Aerea Rio-Grandense) Avenida Almirante Silvio de Noronha, 365 Rio de Janeiro, RJ 20021-010 Brazil http://www.varig.com/ VARIG, S.A. is Brazil's largest air carrier and the largest air carrier in Latin America. Founded in 1927 as Brazil's first airline, VARIG's 78-year history of continuous operation makes it one of the oldest airlines in the world. Ownership Structure Since 1945, VARIG has been majority owned by the Ruben Berta Foundation, a not-for-profit foundation formed in 1945 to provide health, financial, social and recreational benefits to the employees of the companies, which controls VARIG through a holding company, FRB-Par Investimentos S.A. Through FRB-Par, RBF also controls VARIG Pariticipacoes em Transportes Aereos S.A., and VARIG Participacoes em Servicos Complementares S.A. Although the Brazilian State of Rio Grande do Sul holds a minority interest in VARIG of less than 1%, VARIG has been managed and operated as a private business enterprise since its formation. Rio-Sul Linhas Aereas S.A. and Nordeste Linhas Aereas S.A., Brazilian domestic airlines, are subsidiaries of VPTA. In the year ending December 31, 2004, the Debtors generated total operating revenues of $3.407 billion, of which approximately $3.153 billion was attributable to flight operations and the remainder to ancillary activities. Business and Operations VARIG's principal business is the transportation by air of passengers and cargo on domestic routes within Brazil and on international routes between Brazil and North and South America, Europe and Asia. Combined with Rio-Sul and Nordeste, VARIG carries approximately 13 million passengers annually and employs approximately 11,456 full-time employees. Together with Rio Sul and Nordeste, VARIG operates the largest and most complete network of routes in Brazil, with service to 36 cities in Brazil. Outside Brazil, VARIG offers service to 25 destinations in 20 countries on 4 continents. The companies combined have approximately 2,068 domestic departures per week and VARIG offers 321 international departures per week. VARIG principal destinations are located in: -- Sao Paulo -- Rio de Janeiro -- Porto Alegre -- Montevideo -- Buenos Aires -- Santiago -- Cordoba -- La Paz -- Lima -- Bogota -- Caracas -- Aruba -- Cancun -- Mexico City -- Miami -- New York -- Los Angeles -- Lisbon -- Madrid -- Paris -- Milan -- Frankfurt -- London -- Amsterdam -- Copenhagen -- Tokyo For the three-month period ending March 31, 2005, VARIG, Rio-Sul and Nordeste, together, occupied approximately 30.7% of the Brazilian domestic air passenger market, on the basis of Revenue Passenger Kilometers. Although other Brazilian and foreign airlines currently compete in Brazil's international air market, in 2004, VARIG occupied approximately 85% of the international market provided by Brazilian carriers and, with respect to Brazilian and foreign carriers as May 31, 2005, approximately 43% of the South American market, approximately 17% of the United States market, 35% of the European market and 48% of the Asian market. As of May 31, 2005, VARIG operated approximately 87-jet aircraft with an average age of 13.2 years and had approximately 2,068 domestic and 321 international departures per week. In 1997, VARIG joined Star Alliance, a global alliance of 15 airline companies including: -- Air Canada (Canada), -- Air New Zealand (New Zealand), -- All Nippon Airways (Japan), -- Asiana Airlines (Korea), -- Austrian Airlines (Austria), -- British Midland BMI (Great Britain), -- Lufthansa (German), -- LOT Polish Airlines (Poland), -- Scandinavian Airlines (Scandinavia), -- Singapore Airlines (Singapore), -- Spanair (Spain), -- Thai International (Thailand), -- Tap (Portugal), -- United Airlines and U.S. Airways (United States), -- Blue (Finland), -- Croatia Airlines (Croatia), and -- Adria Airlines (Slovenian). The Star Alliance network serves 755 airports around the world with operations in 132 countries and 14,000 daily flights. VARIG is the only Brazilian airline in the Star Alliance and the only South American member. Description of Fleet As of May 31, 2005, VARIG's operational fleet of approximately 87 aircraft consisted of 76 passenger aircraft and 11 cargo aircraft, having an average age of 13.2 years. Of VARIG's 87 aircraft, 83 are operated under operating leases and 4 are operated under finance leases. Brazilian Domestic Service Although approximately 25 airlines currently compete in Brazil's domestic air market, two of these airlines (not including the Debtors), Gol Transportes Aereos and TAM Brazilian Airways, dominate the domestic market for passenger transport services. The Debtors currently occupy approximately 30% of the domestic air travel market. As of May 31, 2005, the Debtors provide air transport services to 36 cities in Brazil and have approximately 2,068 domestic flights per week. United States Operations VARIG began flying to the United States in 1955 and now provides approximately 18 weekly roundtrip flights to 3 United States cities -- New York, Miami and Los Angeles. In 2004, tickets sold in the United States accounted for approximately $163.9 million or 5.20% of VARIG's total flight revenues. Furthermore, all of VARIG's United States ticket sales are processed in the United States. Approximately 133 of VARIG's employees are employed in the United States, and 51 of those are employed in New York State and 8 in New York City at John F. Kennedy International Airport. Numerous other VARIG employees (including pilots and flight crews) regularly travel to and from New York with VARIG flights. By a variety of measures -- including book value of equipment (other than computer equipment) and investment in leasehold improvements -- VARIG's principal U.S. assets are located in New York. VARIG has a presence in New York with a daily flight to and from New York's John F. Kennedy Airport, a real property lease for 37,000 square feet of office space on Madison Avenue, and an additional office in New York as well. International Operations VARIG has a substantial international network, which is enhanced by its strategic global alliance with the Star Alliance. Currently, VARIG provides international air passenger service directly to approximately 25 cities in South America, North America, Europe and Asia and has approximately 321 flights per week. Government Regulation of Airlines in Brazil The Brazilian government must approve the acquisition of additional aircraft by VARIG as well as any opening of new routes and any increase in frequencies of flights on existing routes, and may permit other air carriers to obtain routes in direct competition with VARIG. Most importantly, the Brazilian government monitors fares which Brazilian airlines are permitted to charge on each domestic route. The Brazilian government's decision to permit air fares to be increased depends upon political, social and economic considerations over which VARIG has no control. ROAD TO BANKRUPTCY A. Competitive Landscape The Brazilian airline industry is highly competitive. In the Brazilian international market, VARIG competes with 6 airlines on its direct North American routes and several airlines on its other international routes. In the domestic national market, the Debtors compete with two other national airlines and in the domestic market it competes with approximately 25 smaller domestic airlines. In recent years, Brazil has seen the entrance of new lower-cost carriers like Gol Transportes Aereos and TAM Brazilian Airways. Both of these airlines have been able to take substantial market share from VARIG. VARIG's traditional rivals, VASP and Transbrasil have succumbed to the competitive pressure and have ceased operating. Furthermore, the retention of international route rights under which VARIG is permitted to conduct its international operations and the award of additional international route rights is regulated by treaties and related agreements between the Brazilian government and foreign governments which may be amended from time to time. Notwithstanding this, VARIG continues to dominate Brazil's international airline market. In 2004, VARIG's market share, measured as a percentage of total international RPK's of all Brazilian carriers was 85%. However, the airline industry is highly competitive and susceptible to price discounting. VARIG's competitors include carriers with greater financial resources and carriers with lower cost structures, particularly on Asian and North American routes. Furthermore, certain of VARIG's major foreign competitors are wholly or majority owned by their governments and may thus be able to call upon substantially greater financial resources (including direct state subsidies) than VARIG. VARIG is also subject to other Brazilian federal, state and local laws and regulations relating to protection of the environment, radio communications, labor relations and other matters. B. Financial Condition and Past Restructuring The Debtors' current financial situation consists of a negative net worth of approximately $2.5 billion, balance sheet debt of approximately $2.8 billion and off-balance sheet debt of approximately $2.0 billion. Furthermore, VARIG has no significant fixed assets (all aircraft are operated under operating leases). VARIG was required to restructure its debt in 1994. That restructuring did not involve a reduction in overall debt, just a deferral. In 1999, VARIG was again required to restructure its debt, causing its debt burden and cash flow requirement to become greater. Because of the significant cash required to service its accumulated debt, VARIG is susceptible to even slight changes in revenues. The loss of market share to the low-cost carriers, the increase in fuel prices (particularly on long haul international flights) and the decline in value of the Brazilian Real against the dollar (from about 1 to 1 in 2000 to about 2.4 to 1 now) have put VARIG in a cash flow deficit. Furthermore, while most of the Debtors' debts are in US dollars, most of its revenues are in Brazilian currency. Accordingly, the continued devaluation of the Brazilian Real, has the concomitant effect of increasing the impact of the Debtors' debt burden. The purpose of the reorganization is to eliminate substantial portions of VARIG's debt (over half of which is owed to Brazilian Government controlled agencies and companies), so that VARIG has sufficient cash flow to make payments in respect of leased aircraft. C. High Operating Leverage The airline industry is characterized by a high degree of operating leverage. Due to high fixed costs, including labor costs, the expenses of each flight do not vary proportionately with the number of passengers carried and the fare structure of the flight. Accordingly, a decrease in the number of passengers carried or in passenger revenues results in a disproportionately greater decrease in profits. This high operating leverage is further affected by the cyclicality and seasonality present in the airline industry. D. Fuel Costs The cost of aviation fuel is VARIG's third largest operating expense after aircraft lease obligations and employee costs. Fuel costs represented approximately 38% of VARIG's operating costs for the three-month period ended March 31, 2005, compared to 34% for the year ending December 31, 2004. Under the system of fare regulation in Brazil, VARIG is not able to pass on increased fuel costs to its customers unless the airline industry as a whole obtains a rate increase from the Brazilian government. VARIG obtains its fuel supplies from a variety of local suppliers at airports throughout the world. Fuel supply in Brazil is currently linked to a price formula controlled by the Brazilian government. Substantial fuel price increases have had a material adverse impact on VARIG's profitability. E. Certain Aircraft Lessors Threaten Repossession In early June 2005, one or more of the Debtors' principal aircraft lessors, declared a default under various aircraft leases and ordered the Debtors to cease any further use or operation of the aircraft until all amounts due under the Leases had been paid. In addition, those lessors threatened to repossess a portion of the Debtors' fleet with immediate effect. The Brazilian Restructuring Proceeding On June 17, 2005, the Debtors filed applications in the Commercial Bankruptcy and Reorganization Court in Rio de Janeiro for the commencement of "judicial reorganization" proceedings pursuant to the New Bankruptcy and Restructuring Law of Brazil, Law No. 11.101, which became effective on June 9, 2005. Under the NBRL, the Debtors are permitted to remain in possession and control of their businesses and properties. In addition, as part of the judicial reorganization under the NBRL, most creditors are effectively prohibited from enforcing claims against the Debtors. If the necessary documents are presented, the Brazilian Court is required to grant the judicial reorganization and appoint a "judicial administrator." However, the judicial administrator does not replace the Debtors' management and governance. The judicial administrator's responsibilities are to inspect, monitor and report on the Debtors' activities and, if necessary and appropriate, to seek to convert the reorganization to liquidation. The judicial administrator does not operate or otherwise become involved in the business or governance of the Debtors. As noted, the NBRL is less than ten days old. The application of the Debtors may be the first, and is certainly the first internationally significant, case under the new law. In the absence of precedent under the NBRL, the Debtors were not certain that the Brazilian Court would immediately grant the judicial reorganization thereby establishing the prohibition of creditor enforcement actions. The Debtors therefore concurrently sought, interim relief in the form of a "medida liminar" which is equivalent to a temporary restraining order prohibiting aircraft lessors from taking action to seize, repossess or otherwise interfere with the Debtors' ability to operate and fly the aircraft. VARIG and its affiliates filed their initial application with the Brazilian Court on June 17, 2005. The Brazilian Court will verify the documents presented and, if satisfied all requirements are met, will grant an order authorizing the processing of the Judicial Reorganization, thereby staying all actions and proceedings against the Debtors. VARIG's obtained interim relief on June 17, 2005, from the Brazilian Court that stops its 29 Aircraft Lessors from taking any measures to seize or repossess the rented aircraft and equipment. The rented aircraft and equipment are essential for the operation of the Debtors. VARIG's Representative Similar to a chapter 11 debtor-in-possession under the United States Bankruptcy Code, under the NBRL, the Debtors remain in possession and control of the management of the Debtors during the pendency of the Judicial Reorganization unless removed for cause. Accordingly, pursuant to resolutions of the Boards of Directors of each of the Debtors, Vicente Cervo, the General Manager, North America of VARIG, S.A., has been duly authorized to act as the foreign representative of the Debtors and, specifically, to seek ancillary relief in the U.S. Court and other courts located in countries where the Debtors have assets including aircraft. Mr. Cervo will facilitate the reorganization and restructuring of the Debtors' businesses for the benefit of all creditors. Proposed Judicial Reorganization Plan As the economic environment continued to deteriorate, the Debtors, in conjunction with their advisors, began to explore the framework of a restructuring pursuant to the NBRL that would enable them to renegotiate their relationships with various of their stakeholders with a view to building an operational and capital structure that was more responsive to the immediate economic marketplace. The Debtors have been in discussions with a potential equity investor of substantial resources. These discussions are continuing, but any agreement clearly will be conditional on a successful restructuring of the business and a viable business plan and balance sheet. Despite the Debtors' best efforts and intentions, the NBRL filing became necessary, and the accompanying stay of proceedings will provide the Debtors with the "breathing space" and hopefully enough stability necessary to complete their restructuring and with the additional power to clean up their balance sheet. The Debtors anticipate that the Foreign Proceedings will result in a Judicial Reorganization Plan that provides for: (i) fair treatment of foreign creditors; (ii) a restructuring of the Debtors' capital structure under a plan approved by the creditors; and (iii) the creation of a financially sound reorganized VARIG. ----------------------------------------------------------------- [00002] VARIG & AFFILIATES' RESTRUCTURING DATABASE ----------------------------------------------------------------- NBRL Debtors: VARIG, S.A. (Viacao Aerea Rio-Grandense) Rio Sul Linhas Aerea S.A. Nordeste Linhas Aereas S.A. NBRL Petition Date: June 17, 2005 Brazilian Court: Commercial Bankruptcy and Reorganization Court Rio de Janeiro, Brazil Brazilian Proceeding No.: 2005.001.072887-7 Brazilian Judge: The Honorable Alexander dos Santos Macedo U.S. Bankruptcy Court: United States Bankruptcy Court Southern District of New York Alexander Hamilton Custom House One Bowling Green, 5th Floor New York, New York 10004-1408 Telephone (212) 668-2870 Petitioner's Sec. 304 Petition Date: June 17, 2005 U.S. Sec. 304 Proceeding No.: 05-14400 U.S. Judge: The Honorable Robert D. Drain Sec. 304 Petitioner: Vicente Cervo General Manager, North America of VARIG, S.A., In his capacity as Foreign Representative Debtors' Counsel in Brazil: Sergio Bermudes, Esq. Escritorio de Advocacia Sergio Bermudes Praca XV de novembro, no 2o 7o e 8o andares, Centro CEP: 20010-101, Rio de Janeiro BRAZIL Tel: 55-21-3981-0030 Fax: 55-21-2981-0031 Petitioner's U.S. Counsel: Rick B. Antonoff, Esq. Pillsbury Winthrop Shaw Pittman LLP 1540 Broadway New York, New York 10036 Tel: (212) 858-1000 Fax: (212) 858-1500 Total Assets at March 31, 2005: BRL2,979,309,000 Total Debts at March 31, 2005: BRL9,474,930,000 ----------------------------------------------------------------- [00003] LIST OF VARIG'S 29 AIRCRAFT LESSORS ----------------------------------------------------------------- ACG AQUISITIONS XXLLC 800 Newport Center Drive, Suite 425 New Port Beach, California 92660 WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION 299 South Main Street Salt Lake City, Utah 84111 BAVARIA INTERNATIONAL AIRCRAFT LEASING GMBH & CO. KG Ludwig - Ganghofr - Str. 6 82031 Grunwald, Germany U.S BANK TRUST NATIONAL ASSOCIATION 225 Asylum Street Hartford, CT 06103 AERCO LIMITED 22 Granville Street St. Helier, Jersey, JE4 8PX Channel Islands AIRCRAFT LEASE PORTIFOLIO SECURITIZATION 94-1 LIMITED 22 Greenville Street St. Helier, Jersey JE4 8PX Channel Islands EAST TRUST-SUB 3 1100 North Market Street Rodney Square North Wilmington, DE 19890 GATX THIRD AIRCRAFT CORPORATION Four Embarcadero Center, Suite 22000 San Francisco, CA 94111 ILFC INTERNATIONAL LEASE FINANCE CORPORATION 10250 Constellation Blvd., Suite 3400 Los Angeles, CA 90067 AIRCRAFT SPC-6 INC. 10 South New River Drive East, Suite 200 Ft. Lauderdale, Florida 33101 ANSETT AUSTRALIA LIMITED Level 29, 600 Bourke Street Melbourne VIC 3000, Australia BOEING AIRCRAFT HOLDING COMPANY PO Box 707 MC 6Y-12 Seattle, WA 98124-2207 SUNROCK AIRCRAFT CORPORATION LIMITED Russell House, Russell Court Hardcourt Street, Dublin 2 Ireland MCDONELL DOUGLAS INDONESIA LEASING INC. 20-25 Building 1901 Oakesdale Avenue S.W. Renton, Washington 98055 PEMBROKE ORLANDO LIMITED Pembroke House 33/41 Lower Mount Street, Dublin 2 Ireland KUTA-ONE AIRCRAFT CORPORATION LIMITED 20-25 Building 1901 Oakesdale Avenue S.W. Renton, Washington 98055 FINOVA CAPITAL CORPORATION 4800 North Scottsdale Road Scottsdale, Arizona, 85251 EUROATLANTIC AIRWAYS TRANSPORTES AEREOS S.A. Largo Antonio Nobre, NA 18 9000-022, Funchal, Portugal PEGASUS AIRCRAFT LEASE SECURITIZATION TRUST 1997-A 826 Meridien Ave. Miami Beach, FL 33139 BCC EQUIPMENT LEASING CORPORATION 500 Naches Avenue S.W., 3rd Floor Renton, Washington 98055 AMTEC CORPORATION 8081 N.W. 31st Street Miami, Florida 33122 ANSETT WORLDWIDE AVIATION S.A. 110 - 110th Avenue NE, Suite 410 Bellevue, Washington MITSUI & CO. LTD. 2-1 Ohtemachi 1-Chome Chiyoda-Ku, Tokyo, Japan NISSHO IWAI CORPORATION 4-5 Akasaka 2-Chome Minato-Ku, Tokyo, Japan ORIX CORPORATION World Trade Center Bld. 2-4-1 Hamamatsu-cho, Minato-Ku Tokyo, Japan FOCUS AVIATION 299 South Main Street, 12th Floor Salt Lake City, Utah 84111 PLM WORLD WIDE LEASING CORP. 450 Carillon Park Way, Suite 200 St. Petersburg, Florida 33716 AAR AIRCAFT & ENGINE GROUP INC. 1100 N. Wood Dale Road Wood Dale, Illinois 60191 WILLIS LEASE FINANCE CO. 2320 Marinship Way Sausalito, California 94965 ----------------------------------------------------------------- [00004] OVERVIEW OF BRAZIL'S NEW BANKRUPTCY & RESTRUCTURING LAW ----------------------------------------------------------------- VARIG's Brazilian counsel, Sergio Bermudes, Esq., at Escritorio de Advocacia Sergio Bermudes, in Rio de Janeiro, Brazil, provides a description of the procedures under the New Bankruptcy and Restructuring Law of Brazil, under which an insolvent corporation can effect a reorganization of its affairs by entering into a compromise or plan of arrangement with its creditors. A full-text copy of the NBRL is available for free at: http://bankrupt.com/misc/nbrl.pdf According to Mr. Bermudes, the NBRL, together with other statutes that have been recently enacted, reflect an effort of the Brazilian Federal Government to adapt the Brazilian Law to modernize international practices, encouraging investments, credit offer and generation of employment in Brazil. Proceedings under the NBRL are roughly analogous to chapter 11 proceedings of the United States Bankruptcy Code. Mr. Bermudes relates that the purpose of the NBRL is to permit an insolvent corporation to propose a plan of compromise or arrangement with its creditors or classes of creditors, overcome the economic-financial crisis, avoid liquidation, and maintain the rights of the creditors. If a Plan is approved by the requisite majority of creditors and sanctioned by Brazilian Court, the Plan becomes effective and the corporation is able to continue as a going concern. The NBRL directs the Brazilian Court to order a stay of proceedings for up to 180 days that operates to restrain attempts by creditors to enforce their claims against a debtor corporation while that debtor corporation is preparing the Plan, seeking approval from its creditors and the subsequent sanction of the Brazilian Court. The purpose of the NBRL is to facilitate a compromise or arrangement between an insolvent debtor company and its creditors and allow the company to continue its business. The NBRL is available to a company incorporated in Brazil with assets or business activities in Brazil that is not a public (owned by the Government) company or mixed capital company, public or private financial institution, credit cooperative, consortium, complementary pension institution and health assistance plan company, insurance company, capitalization company and other institutions legally equivalent to the formers. Initial Application NBRL proceedings are commenced by an initial application to the Brazilian Court. The Brazilian Court will order the suspension of actions and halt proceedings against the debtor for up to 180 days. The Plan As a general rule, the Initial Order will grant the debtor corporation leave to file a Plan with the Brazilian Court within 60 days from the public notice of that decision. Appointment of a Judicial Administrator The Brazilian Court will appoint a Judicial Administrator to monitor the debtor's activity and the compliance with the Plan. The Judicial Administrator may request bankruptcy in the event of non-compliance with obligations assumed in the Plan. The NBRL requires a debtor corporation to provide a Judicial Administrator with access to all the information required, to the extent necessary to adequately assess the debtor corporation's business and financial affairs. The Judicial Administrator is required to file a monthly report of the debtor's activity before the Brazilian Court. During the Judicial Reorganization, the debtor and its officers and directors will keep all the control and management of the company's activity, under the monitoring of the Judicial Administrator or a creditor's committee appointed in accordance with the NBRL, unless they are removed from office. So, Mr. Bermudes says, the debtor-in-possession is the rule under the Brazilian law. Claims of Creditors All debts and liabilities, whether presently due or contingent, to which a debtor corporation is subject are deemed to be provided claims for the purposes of the NBRL. Under the NBRL, creditors with a commonality of interest generally are treated similarly. In determining "commonality of interest" for establishing classes of creditors, consideration is given to: (a) the nature of the debts; (b) the nature of the security and relative priority of that security; and (c) the nature of treatment of claims under the Plan. The procedure for submission of proofs of claim is typically set out by the NBRL in an order made after the Initial Order. Creditors will have the opportunity to file proofs of claim or oppose the amount registered under the name of other creditors. After the Judicial Administrator issues his opinion on the matter, the Brazilian Court will examine oppositions and decide whether the opposed credit should be allowed or not. Creditors may appeal against any adverse determination about the credit to the Rio de Janeiro State Court. Creditor Approval of the Plan In order for a Plan to proceed to the stage at which it can be sanctioned by the Brazilian Court, it must first be approved by three classes of creditors: (1) by a majority of voters present at the general meeting of creditors, irrespective of the value of their credits; (2) by creditors representing the majority of the total value of the credits present at the meeting; and, cumulatively, (3) by the simple majority of creditors present at the meeting. If the Plan is not approved by the three classes of creditors, but it obtains: -- the favorable vote of the creditors representing more than half the value of all the credits presents at the assembly, irrespective of the classes; -- the approval of two out of three classes of creditors or in a case where there are only two classes of voting creditors, the approval of at least one of them; -- in the class in which there was a negative vote, the favorable vote of at least 1/3 of the creditors, the Brazilian Court may also approve the Plan. After the approval of the classes of creditors, the Plan may be ratified by the Brazilian Court. The Brazilian Court will give notice of the order to the creditors. At the request of any class of creditors, the Brazilian Court will authorize the appointment of a creditors committee. Court Sanction of the Plan Once the Brazilian Court is satisfied that all the statutory requirements have been complied with and the Plan has been approved by the required number of creditors, the Brazilian Court will ratify the Plan and approve the Judicial Reorganization. However, the Judicial Reorganization will not be authorized by the Brazilian Court if the Plan unfairly treats creditors of the same class. Avoidance Actions The NBRL states that any fraudulent transactions involving the Debtors which is prejudicial to the creditors constitute a crime. A creditor who has been prejudiced as a result of preferences given or fraudulent conveyances made by a debtor corporation is entitled to bring an action for an order declaring the offensive transaction void. Bankruptcy If the Judicial Reorganization under the NBRL is terminated and the debtor corporation is petitioned into bankruptcy or makes a voluntary assignment into bankruptcy under the NBRL, the statute distributes the estate to labor (to a certain limited amount) secured, tax, preferred and ordinary unsecured creditors in a manner substantially similar to the manner contemplated under the Bankruptcy Code. Brazilian Courts Will Cooperate With U.S. According to Mr. Bermudes, Brazilian Courts follow principles of comity in connection with international insolvency proceedings. "For example, where a corporation foreign to Brazil is put into liquidation or bankruptcy in the place of its incorporation, a Brazilian Court will recognize the liquidator or trustee in bankruptcy appointed by the court of the place of incorporation as having the authority to act on behalf of the corporation." "I believe that the Brazilian Courts would be prepared to appropriately enforce orders if bankruptcy proceedings were commenced in the United States in respect of an American corporation upon the homologation of such decision by the Brazilian Superior Court of Justice. While the Brazilian Courts are not bound by a stay under United States law, I believe a Brazilian Court would do its utmost to cooperate with a United States Bankruptcy Court and avoid any action which might disturb the orderly administration of a United States corporation pursuant to chapter 11 of the Bankruptcy Code," Mr. Bermudes says. ----------------------------------------------------------------- [00005] VARIG OBTAINS INITIAL NBRL STAY ORDER ----------------------------------------------------------------- On June 17, 2005, Judge Alexander dos Santos Macedo of the Commercial Bankruptcy and Reorganization Court in Rio de Janeiro, Brazil, issued an interim order pursuant to the New Bankruptcy and Reorganization Law of Brazil that prohibits VARIG's 29 Aircraft Lessors from seizing, repossessing or otherwise interfering with VARIG, S.A., and its affiliates' leased aircraft. A copy of the Brazilian Court's Interim Order dated June 17, 2005, is available at no charge at: http://bankrupt.com/misc/VARIGInterimOrder.pdf The leases are important to the Debtors' continued operations. "[T]he seizure of aircraft would cause inestimable loss to the [Debtors]," Sergio Bermudes, Esq., at Escritorio de Advocacia Sergio Bermudes, in Rio de Janeiro, Brazil, told the . The Debtors have also requested judicial reorganization, which includes a stay or injunction for 180 days prohibiting actions by creditors to enforce rights and remedies on account of their claims. The Brazilian Court has yet to rule on the request. ----------------------------------------------------------------- [00006] FOREIGN REPRESENTATIVE'S MOTION TO ENJOIN U.S. CREDITORS ----------------------------------------------------------------- VARIG, S.A. and its affiliates have creditors located in the United States and they have assets located in the United States. Those assets include aircraft that fly in the United States, bank accounts in U.S. holding funds for the Debtors, receivables from ticket sales within the United States, a real property lease in Manhattan, and operations at airports, ticket sales outlets and executive offices located in the United States. Vicente Cervo, the Foreign Representative of VARIG, anticipates disruption in the orderly administration of the Debtors' bankruptcy proceedings in Brazil if U.S. creditors aren't restrained from commencing legal proceedings or taking other actions against the carrier. In this regard, the Foreign Representative seeks a temporary restraining order and preliminary injunction enjoining and restraining U.S. creditors from seizing VARIG's U.S. assets or repossessing aircraft landing in United States airports. Irreparable Harm Absent Injunctive Relief Rick B. Antonoff, Esq., at Pillsbury Winthrop Shaw Pittman LLP, tells Judge Drain that the Foreign Proceedings should result in a Judicial Reorganization Plan that provides for: (i) fair treatment of all creditors; (ii) a restructuring of the Debtors' capital structure under a plan approved by the creditors; and (iii) the creation of a financially sound reorganized VARIG. Accordingly, the Debtors need a "breathing spell" to negotiate and implement an appropriate Plan. To achieve this result, the Debtors should be able to protect their assets, wherever situated, thereby maximizing the value of the estate to be reorganized, for the benefit of their creditors worldwide. Part of this process is to reduce the costs of litigation by funneling all claims to the Brazilian Court for adjudication. This goal would be seriously undermined if creditors were permitted to proceed outside the Brazilian Court to pursue actions against the Debtors in the United States. Accordingly, injunctive relief is necessary to enable the Debtors to devote their limited time and resources to achieving a successful sale or reorganization of their businesses, to prevent the dissipation and piecemeal distribution of the Debtors' assets, and to prevent certain creditors from gaining an advantage over other creditors, including other creditors in the United States. Initial NBRL Stay Mr. Antonoff relates that the Debtors have requested judicial reorganization, which includes a stay or injunction for 180 days prohibiting actions by creditors to enforce rights and remedies on account of their claims. At the same time, and because the Debtors were not certain whether the Brazilian Court would immediately grant the judicial reorganization, the Debtors sought and obtained a limited interim relief under the New Bankruptcy and Reorganization Law of Brazil in the form of a "medida liminar", which is equivalent to a TRO. The Initial NBRL Order prohibits aircraft lessors from seizing, repossessing or otherwise interfering with the Debtors' leased aircraft. "The Foreign Representative requests the aid and recognition of [the U.S. Bankruptcy] Court to act in aid of and to be complementary to the Brazilian Court in carrying out the purposes of the NBRL," Mr. Antonoff says. * * * Judge Drain finds that entry of an injunction in the United States against U.S. creditors will contribute to an economical and expeditious administration of the Debtors' estates consistent with the relevant factors set forth in Section 304(c) of the Bankruptcy Code. Judge Drain finds that the NBRL provides for: (a) just treatment of all holders of claims against or interests in the estate; (b) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in the foreign proceeding; (c) prevention of preferential or fraudulent dispositions of property; and (d) distribution of proceeds of the estate substantially in accordance with the U.S. Bankruptcy Code; and principles of comity militate in favor of cooperation with the Brazilian Court. Accordingly, Judge Drain directs that all persons subject to the jurisdiction of the U.S. Court are enjoined and restrained from commencing or continuing any action to collect a prepetition debt without obtaining relief from the Court. Judge Drain will convene a hearing on June 20, 2005, at 2:30 p.m., to consider whether to continue the terms of the Preliminary Injunction beyond that date. ----------------------------------------------------------------- [00007] FOREIGN REPRESENTATIVE'S MOTION FOR JOINT ADMINISTRATION ----------------------------------------------------------------- At the request of Vicente Cervo, the Foreign Representative, Judge Drain directs joint administration of the ancillary cases of VARIG, S.A., Rio-Sul Linhas Aereas S.A., and Nordeste Linhas Aereas, S.A. filed pursuant to Section 304 of the U.S. Bankruptcy Code. The Ancillary Cases pending before the U.S. Bankruptcy Court will be administered jointly in accordance with the provisions of Section 105(a) of the Bankruptcy Code and Rule 1015 of the Federal Rules of Bankruptcy Procedure. All original pleadings filed in the Ancillary Cases will be captioned: UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK _________________________________ ) In re ) An Ancillary Case Under ) Section 304 of the Bankruptcy Code ) PETITION OF VICENTE CERVO, AS ) Case Nos. 05-14400 (RDD) FOREIGN REPRESENTATIVE OF ) VARIG, S.A., et al., ) through 05-14402 (RDD) ) Debtors in Foreign Proceedings. ) Jointly Administered _________________________________) Section 105(a) provides that the court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Bankruptcy Rule 1015 authorizes the Court to order the joint administration of two or more pending cases involving affiliated debtors. Rick B. Antonoff, Esq., at Pillsbury Winthrop Shaw Pittman LLP, in New York, relates that it would be far more practical and expedient to jointly administer the three Ancillary Cases. The Foreign Representative expects that many of the motions, hearings and other matters involved in the Ancillary Cases will affect all of the Debtors. Consequently, joint administration will reduce costs and facilitate a more efficient administrative process, unencumbered by the procedural problems otherwise attendant to the administration of separate proceedings. Mr. Antonoff assures the Court that no party-in-interest will be prejudiced by Joint Administration because the Ancillary Cases will only be procedurally -- not substantively -- consolidated. No party's substantive rights are affected. Mr. Cervo is the representative appointed in the Debtors' reorganization proceedings pending in the Commercial Bankruptcy and Reorganization Court in Rio de Janeiro, Brazil. *** End of Issue No. 1 ***