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Why Latam Airlines Shares Gained 11%, Then Lost 14%, on Thursday

By Lou Whiteman – May 28, 2020 at 4:38PM

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Bankruptcy creates volatility.

What happened

Latam Airlines Group (NYSE: LTM) stockholders endured a volatile ride on Thursday, with shares of the Latin American airline rallying 10% and falling 14.5% in a single trading session. Such is life for shares of companies that have filed for bankruptcy, and the turbulence experienced by Latam holders is unlikely to subside anytime soon.

So what

Latam earlier this week became the largest airline so far to declare bankruptcy due to the COVID-19 pandemic, filing for Chapter 11 protection in New York. The airline has more than $10 billion in debt and little revenue coming in because of the pandemic, which has taken a particularly hard toll on South American airlines due to their reliance on cross-border traffic.

A ground worker directs a plane to the terminal.

Image source: Getty Images.

Latam is based in Chile but has affiliates in Brazil, Paraguay, and Argentina. The airline said it has received $900 million in debtor-in-possession financing, funds that allow it to sustain operations while in bankruptcy, from existing shareholders the Cuetos and Amaro families, as well as from Qatar Airways.

Shares of Latam fell 34% on Tuesday after the filing and are currently hovering around $1 per share. The stock is heading for a delisting by the New York Stock Exchange, which will leave it trading over-the-counter (OTC) between brokers. With the share price so low, only a few-cents change in price can lead to a notable swing.

Now what

It is important for investors to understand that in Chapter 11, equityholders are at the back of the line, behind debt holders and other creditors. While it is not unheard of for shareholders to retain some value in a reorganization -- PG&E is one recent example -- it is rare. And for Latam, I see little to no chance that shareholders will get any sort of recovery.

With Latam heading to the OTC markets, expect continued volatility and plenty of traders jumping in and out of positions to take advantage of the swings. But for long-term investors, there seems to be no good reason to consider Latam right now.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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