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Creditors of Varig, the Brazilian flag-carrying airline under creditor protection with debts of about R$8bn ($3.9bn), have agreed to a rescue package under which the company will be sold in about two months’ time.

An agreement would end years of uncertainty over Varig’s future and several months of crisis during which it came close to collapse.

About half of Varig’s former fleet of 120 aircraft have been grounded because of lack of maintenance and leasing companies have demanded the return of aircraft and engines.

Petrobras, the government-controlled oil group that supplies its fuel, and Infraero, the government airports authority, have refused further credit and demanded payment in advance.

Under the agreement, Varig will be sold according to one of two possible models, depending on investor interest.

The first option would create a company flying domestic and international routes, to be sold for a minimum of $860m. A separate company would be created holding Varig’s debts and operations other than air transport, such as airport and commercial operations, including its air miles programme. The second company would continue under creditor protection.

The second option would see Varig split into two airlines, one domestic and one international. The domestic airline would be sold for a minimum of $700m and the international airline, still under creditor protection, would hold Varig’s debts.

Varig said 27 investors had registered interest in taking part in the auction, but that their identity would remain secret. Interest has recently been expressed by, among others, TAP, the Portuguese airline; Ocean Air, a Brazilian airline; and Matlin Patterson, a US distressed equity firm that led investors who bought Varig’s air cargo division in January.

Brazil’s government-owned development bank, the BNDES, will provide a loan of $100m to see Varig through the period from now to the auction, expected to take place in 60 days from the announcement of the agreement on Tuesday.

President Luiz Inácio Lula da Silva recently ruled out using public money to rescue Varig. But the airline’s supporters say the government shares responsibility for its predicament as it owes Varig about R$4.5bn from losses incurred after illegal price freezes.

Copyright The Financial Times Limited 2017. All rights reserved.
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