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FINANCIAL RISK MANAGEMENT
 12 Months Ended
Dec. 31, 2018
Financial Risk Management  
FINANCIAL RISK MANAGEMENT

NOTE 3 - FINANCIAL RISK MANAGEMENT

 

  3.1. Financial risk factors

 

The Company is exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The program overall risk management of the Company aims to minimize the adverse effects of financial risks affecting the company.

 

  (a) Market risk

 

Due to the nature of its operations, the Company is exposed to market factors such as: (i) fuel-price risk, (ii) exchange -rate risk, and (iii) interest -rate risk.

 

The Company has developed policies and procedures for managing market risk, which aim to identify, quantify, monitor and mitigate the adverse effects of changes in market factors mentioned above.

 

For this, the Administration monitors the evolution of price levels, exchange rates and interest rates, and quantifies their risk exposures (Value at Risk), and develops and implements hedging strategies.

 

  (i) Fuel-price risk:

 

Exposition:

 

For the execution of its operations the Company purchases a fuel called Jet Fuel grade 54 USGC, which is subject to the fluctuations of international fuel prices.

 

Mitigation:

 

To cover the risk exposure fuel, the Company operates with derivative instruments (swaps and options) whose underlying assets may be different from Jet Fuel, being possible use West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and greater liquidity.

 

Fuel Hedging Results:

 

During the year ended December 31, 2018, the Company recognized gains of US$ 29.7 million for fuel coverage net of premium. During the same period of 2017, the Company recognized gains of US$ 15.1 million for the same concept.

 

As of December 31, 2018, the market value of fuel positions amounted to US$ 15.8 million (negative). At the end of December 2017, this market value was US$ 10.7 million (positive).

 

The following tables show the level of hedge for different periods:

 

Positions as of  December 31, 2018 (*)   Maturities  
    Q119     Q219     Q319     Q419     Total  
                               
Percentage of coverage over the expected volume of consumption     66 %     58 %     40 %     15 %     45 %

 

(*) The volume shown in the table considers all the hedging instruments (swaps and options).

 

Positions as of  December 31, 2017 (*)   Maturities  
    Q118     Q218     Q318     Total  
                         
Percentage of coverage over the expected volume of consumption     19 %     12 %     5 %     12 %

 

(*) The volume shown in the table considers all the hedging instruments (swaps and options).

 

Sensitivity analysis

 

A drop in fuel price positively affects the Company through a reduction in costs. However, also negatively affects contracted positions as these are acquired to protect the Company against the risk of a rise in price. The policy therefore is to maintain a hedge-free percentage in order to be competitive in the event of a drop in price.

 

The current hedge positions they are booked as cash flow hedge contracts, so a variation in the fuel price has an impact on the Company’s net equity.

 

The following table shows the sensitivity analysis of the financial instruments according to reasonable changes in the fuel price and their effect on equity. The term of the projection was defined until the end of the last current fuel hedge contract, being the last business day of the fourth quarter of 2019.

 

The calculations were made considering a parallel movement of US$ 5 per barrel in the curve of the BRENT and JET crude futures benchmark price at the end of December 2018 and the end of December, 2017.

 

    Positions as of December 31, 2018   Positions as of December 31, 2017
Benchmark price   effect on equity   effect on equity
(US$ per barrel)   (millions of US$)   (millions of US$)
         
 +5    +7.4   +1.8
 -5    - 5.5   -3.3

 

Given the structure of fuel coverage during 2018, considers a hedge-free portion, a vertical drop of 5 dollars in the JET reference price (considered as the monthly average), would have meant an approximate impact US $ 135.2 million of lower fuel costs. For the same period, a vertical rise of $ 5 in the JET reference price (considered as the monthly average) would have meant an impact of approximately US $ 146.5 million of higher fuel costs.

 

  (ii) Foreign exchange rate risk:

 

Exposition:

 

The functional and presentation currency of the Financial Statements of the Parent Company is the US dollar, so that the risk of the Transactional and Conversion exchange rate arises mainly from the Company's business, strategic and accounting operating activities that are expressed in a monetary unit other than the functional currency.

 

The subsidiaries of LATAM are also exposed to foreign exchange risk whose impact affects the Company's Consolidated Income.

 

The largest operational exposure to LATAM's exchange risk comes from the concentration of businesses in Brazil, which are mostly denominated in Brazilian Real (BRL), and are actively managed by the company.

 

At a lower concentration, the Company is also exposed to the fluctuation of other currencies, such as: Euro, Pound sterling, Australian dollar, Colombian peso, Chilean peso, Argentine peso, Paraguayan guarani, Mexican peso, Peruvian nuevo sol and New Zealand dollar.

 

Mitigation:

 

The Company mitigates currency risk exposures by contracting derivative instruments or through natural hedges or execution of internal operations.

 

FX Hedging Results:

 

With the objective of reducing exposure to the exchange rate risk in the operational cash flows of 2018, and securing the operating margin, LATAM makes hedges using FX derivatives.

 

As of December 31, 2018, the Company does not maintain hedge derivatives. At the end of December 2017, this market value was US $ 4.4 million (positive).

 

During the period ended December 31, 2018, the Company recognized gains of US$ 18.3 million for FX net premium coverage. During the same period of 2017, the company recognized losses of US$ 9.7 million for this concept.

 

As of December 31, 2018, the Company has not subscribed new FX derivatives. By the end of December 2017, the company had contracted FX derivatives for US$ 180 million for BRL.

 

As of December 31, the company has contracted FX derivatives which have not been recorded under hedge accounting. The market value of these positions amounts to US$ 19.4 million (positive). The premium associated with the contracting of this derivative is accrued linearly during the months elapsed until the expiration of the instrument. The Company registered the derivative as fair value through profits and loss. As of December 31, 2018, the amount recognized in results amounts to US $ 11.7 million (positive) net of premiums.

 

Sensitivity analysis:

 

A depreciation of the R$/US$ exchange rate, negatively affects the Company's operating cash flows, however, also positively affects the value of the positions of derivatives contracted.

 

FX derivatives are recorded as cash flow hedge contracts; therefore, a variation in the exchange rate has an impact on the market value of the derivatives, the changes of which affect the Company's net equity.

 

As of December 31, 2018, the Company does not have FX derivatives in its portfolio. During 2017, the Company contracted derivative currency swaps to hedge debt issued the same year for a notional UF 8.7 million. As of December 31, 2018, the market value of derivative positions of currency swaps amounted to US$ 15.1 million (positive).

 

In the case of TAM S.A, whose functional currency is the Brazilian real, a large part of its liabilities are expressed in US dollars. Therefore, when converting financial assets and liabilities, from dollars to reais, they have an impact on the result of TAM S.A., which is consolidated in the Company's Income Statement.

 

With the objective of reducing the impact on the Company's results caused by appreciations or depreciations of R$/US $, the Company has executed internal operations to reduce the net exposure in US$ for TAM S.A.

 

The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$:

 

Appreciation (depreciation)   Effect at December 31, 2018   Effect at December 31, 2017
of R$/US$(*)   Millions of US$   Millions of US$
         
-10%   +39.8   +80.5
+10%   -39.8    -80.5

 

(*) Appreciation (depreciation) of US$ regard to the covered currencies.

 

Effects of exchange rate derivatives in the Financial Statements

 

The profit or losses caused by changes in the fair value of hedging instruments are segregated between intrinsic value and temporary value. The intrinsic value is the actual percentage of cash flow covered, initially shown in equity and later transferred to income, while the hedge transaction is recorded in income. The temporary value corresponds to the ineffective portion of cash flow hedge which is recognized in the financial results of the Company (Note 19).

 

Due to the functional currency of TAM S.A. and Subsidiaries is the Brazilian real, the Company presents the effects of the exchange rate fluctuations in Other comprehensive income by converting the Statement of financial position and Income statement of TAM S.A. and Subsidiaries from their functional currency to the U.S. dollar, which is the presentation currency of the consolidated financial statement of LATAM Airlines Group S.A. and Subsidiaries. The Goodwill generated in the Business combination is recognized as an asset of TAM S.A. and Subsidiaries in Brazilian real whose conversion to U.S. dollar also produces effects in other comprehensive income.

 

The following table shows the change in Other comprehensive income recognized in Total equity in the case of appreciate or depreciate 10% the exchange rate R$/US$:

 

Appreciation (depreciation)   Effect at December 31, 2018   Effect at December 31, 2017
of R$/US$   Millions of US$   Millions of US$
         
-10%   +384.73   +386.62
+10%   -314.78   -316.33

 

  (iii) Interest -rate risk:

 

Exposition:

 

The Company is exposed to fluctuations in interest rates affecting the markets future cash flows of the assets, and current and future financial liabilities.

 

The Company is exposed in one portion to the variations of London Inter-Bank Offer Rate (“LIBOR”) and other interest rates of less relevance are Brazilian Interbank Deposit Certificate ("ILC").

 

Mitigation:

 

In order to reduce the risk of an eventual rise in interest rates, the Company has signed interest-rate swap and call option contracts. Currently a 60% (63% at December 31, 2017) of the debt is fixed to fluctuations in interest rate.

 

Rate Hedging Results:

 

As of December 31, 2018, the market value of the derivative positions of interest rates amounted to US $ 2.2 million (negative). At the end of December 2017, this market value was US $ 6.6 million (negative).

 

Sensitivity analysis:

 

The following table shows the sensitivity of changes in financial obligations that are not hedged against interest-rate variations. These changes are considered reasonably possible, based on current market conditions each date.

 

Increase (decrease)   Positions as of December 31, 2018   Positions as of December 31, 2017
futures curve   effect on profit or loss before tax   effect on profit or loss before tax
in libor 3 months   (millions of US$)   (millions of US$)
         
+100 basis points    -29.62    -29.26
-100 basis points   +29.62   +29.26

 

Much of the current rate derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity.

 

The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve, being both reasonably possible scenarios according to historical market conditions.

 

Increase (decrease)   Positions as of December 31, 2018   Positions as of December 31, 2017
futures curve   effect on equity   effect on equity
in libor 3 months   (millions of US$)   (millions of US$)
         
+100  basis points   +0.70   +1.9
-100   basis points   -0.71   -1.9

 

The assumptions of sensitivity calculation must assume that forward curves of interest rates do not necessarily reflect the real value of the compensation flows. Moreover, the structure of interest rates is dynamic over time.

 

During the periods presented, the Company has no registered amounts by ineffectiveness in consolidated statement of income for this kind of hedging.

 

  (b) Credit risk

 

Credit risk occurs when the counterparty to a financial agreement or instrument fails to discharge an obligation due or financial instrument, leading to a loss in market value of a financial instrument (only financial assets, not liabilities).

 

The Company is exposed to credit risk due to its operative and financial activities, including deposits with banks and financial institutions, investments in other kinds of instruments, exchange-rate transactions and the contracting of derivative instruments or options.

 

To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities in Brazil with travel agents).

 

As a way to mitigate credit risk related to financial activities, the Company requires that the counterparty to the financial activities remain at least investment grade by major Risk Assessment Agencies. Additionally the Company has established maximum limits for investments which are monitored regularly.

 

  (i) Financial activities

 

Cash surpluses that remain after the financing of assets necessary for the operation are invested according to credit limits approved by the Company’s Board, mainly in time deposits with different financial institutions, private investment funds, short-term mutual funds, and easily-liquidated corporate and sovereign bonds with short remaining maturities. These investments are booked as Cash and cash equivalents and other current financial assets.

 

In order to reduce counterparty risk and to ensure that the risk assumed is known and managed by the Company, investments are diversified among different banking institutions (both local and international). The Company evaluates the credit standing of each counterparty and the levels of investment, based on (i) their credit rating, (ii) the equity size of the counterparty, and (iii) investment limits according to the Company’s level of liquidity. According to these three parameters, the Company chooses the most restrictive parameter of the previous three and based on this, establishes limits for operations with each counterparty.

 

The Company has no guarantees to mitigate this exposure.

 

  (ii) Operational activities

 

The Company has four large sales “clusters”: travel agencies, cargo agents, airlines and credit-card administrators. The first three are governed by International Air Transport Association, international (“IATA”) organization comprising most of the airlines that represent over 90% of scheduled commercial traffic and one of its main objectives is to regulate the financial transactions between airlines and travel agents and cargo. When an agency or airline does not pay their debt, they are excluded from operating with IATA’s member airlines. In the case of credit-card administrators, they are fully guaranteed by 100% by the issuing institutions.

 

The exposure consists of the term granted, which fluctuates between 1 and 45 days.

 

One of the tools the Company uses for reducing credit risk is to participate in global entities related to the industry, such as IATA, Business Sales Processing (“BSP”), Cargo Account Settlement Systems (“CASS”), IATA Clearing House (“ICH”) and banks (credit cards). These institutions fulfill the role of collectors and distributors between airlines and travel and cargo agencies. In the case of the Clearing House, it acts as an offsetting entity between airlines for the services provided between them. A reduction in term and implementation of guarantees has been achieved through these entities. Currently the sales invoicing of TAM Linhas Aéreas S.A. related with travel agents and cargo agents for domestic transportation in Brazil is done directly by TAM Linhas Aéreas S.A.

 

Credit quality of financial assets

 

The external credit evaluation system used by the Company is provided by IATA. Internal systems are also used for particular evaluations or specific markets based on trade reports available on the local market. The internal classification system is complementary to the external one, i.e. for agencies or airlines not members of IATA, the internal demands are greater.

 

To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities of TAM Linhas Aéreas S.A. with travel agents).The bad-debt rate in the principal countries where the Company has a presence is insignificant.

 

  (c) Liquidity risk

 

Liquidity risk represents the risk that the Company has no sufficient funds to meet its obligations.

 

Because of the cyclical nature of the business, the operation, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, plus the financing needs, the Company requires liquid funds, defined as cash and cash equivalents plus other short term financial assets, to meet its payment obligations.

 

The liquid funds, the future cash generation and the capacity to obtain additional funding, through bond issuance and banking loans, will allow the Company to obtain sufficient alternatives to face its investment and financing future commitments.

 

At December 31, 2018 is US$ 1,404 million (US$ 1,614 million at December 31, 2017), invested in short term instruments through financial high credit rating levels entities.

 

In addition to the balance of liquid funds, the Company has access to short-term credit lines. As of December 31, 2018, LATAM has credit lines for working capital that are not committed to several banks and additionally has an unused committed line of US $ 600 million (US $ 450 million as of December 31, 2017) subject to availability of collateral.

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2018

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Loans to exporters                                                                                    
97.032.000-8   BBVA   Chile   US$     38,625       76,275       -       -       -       114,900       113,000     At Expiration     3.36       3.36  
97.032.000-8   BBVA   Chile   UF     -       52,490       -       -       -       52,490       50,785     At Expiration     3.31       3.31  
97.036.000-K   SANTANDER   Chile   US$     23,070       -       -       -       -       23,070       23,000     At Expiration     3.90       3.90  
97.003.000-K   BANCO DO BRASIL   Chile   US$     201,884       -       -       -       -       201,884       200,000     At Expiration     3.64       3.64  
97.951.000-4   HSBC   Chile   US$     12,094       -       -       -       -       12,094       12,000     At Expiration     3.14       3.14  
                                                                                         
Bank loans                                                                                        
97.023.000-9   CORPBANCA   Chile   UF     5,778       17,086       16,662       -       -       39,526       38,231     Quarterly     3.35       3.35  
0-E   BLADEX   U.S.A.   US$     -       15,766       -       -       -       15,766       15,000     Semiannual     6.74       6.74  
97.036.000-K   SANTANDER   Chile   US$     1,347       587       102,521       -       -       104,455       102,521     Quarterly     5.60       5.60  
76.362.099-9   BTG   Chile   UF     510       1,531       69,435       -       -       71,476       65,862     At Expiration     3.10       3.10  
                                                                                         
Obligations with the public                                                                                    
0-E   BANK OF NEW YORK   U.S.A.   US$     -       84,375       614,375       96,250       724,063       1,519,063       1,200,000     At Expiration     7.44       7.03  
97.030.000-7   ESTADO   Chile   UF     -       18,985       37,970       196,970       213,114       467,039       345,182     At Expiration     5.50       5.50  
                                                                                         
Guaranteed obligations                                                                                    
0-E   CREDIT AGRICOLE   France   US$     743       2,201       5,718       2,086       -       10,748       10,080     Quarterly     3.23       3.23  
0-E   BNP PARIBAS   U.S.A.   US$     14,741       61,973       152,826       145,252       250,387       625,179       511,698     Quarterly     4.55       4.55  
0-E   WILMINGTON TRUST COMPANY   U.S.A.   US$     31,336       96,304       248,720       289,251       509,168       1,174,779       952,758     Quarterly     4.47       4.47  
0-E   CITIBANK   U.S.A.   US$     12,757       38,398       102,062       77,710       65,232       296,159       269,365     Quarterly     3.82       2.94  
0-E   US BANK   U.S.A.   US$     18,406       55,112       146,045       144,670       86,076       450,309       411,684     Quarterly     4.00       2.82  
0-E   NATIXIS   France   US$     14,027       42,132       111,528       92,228       124,910       384,825       324,524     Quarterly     4.69       4.69  
0-E   PK AirFinance   U.S.A.   US$     2,490       7,663       25,610       3,153       -       38,916       37,615     Monthly     4.15       4.15  
0-E   INVESTEC   England   US$     2,004       11,579       26,874       24,367       -       64,824       54,014     Semiannual     7.17       7.17  
                                                                                         
Otras obligaciones garantizadas                                                                                    
0-E   CREDIT AGRICOLE   France   US$     2,576       8,380       273,122       -       -       284,078       253,692     At Expiration     4.11       4.11  
0-E   DVB BANK SE   Germany   US$     28,087       83,260       213,177       122,674       20,274       467,472       422,065     Quarterly     4.42       4.42  
                                                                                         
Other guaranteed obligations                                                                                    
0-E   ING   U.S.A.   US$     4,025       12,075       12,134       -       -       28,234       26,831     Quarterly     5.70       5.01  
0-E   CREDIT AGRICOLE   France   US$     7,618       21,994       27,811       1,684       -       59,107       56,403     Quarterly     3.66       3.31  
0-E   CITIBANK   U.S.A.   US$     14,870       44,570       83,389       42,178       -       185,007       172,158     Quarterly     4.40       3.80  
0-E   PEFCO   U.S.A.   US$     5,771       13,541       3,899       -       -       23,211       22,407     Quarterly     5.64       5.02  
0-E   BNP PARIBAS   U.S.A.   US$     8,467       25,214       26,933       1,641       -       62,255       59,567     Quarterly     3.90       3.58  
0-E   WELLS FARGO   U.S.A.   US$     35,458       106,397       282,923       239,168       99,232       763,178       719,338     Quarterly     2.77       2.09  
97.036.000-K   SANTANDER   Chile   US$     6,340       19,025       49,945       26,779       -       102,089       95,022     Quarterly     3.68       3.14  
0-E   RRPF ENGINE   England   US$     1,167       3,480       9,103       8,826       4,870       27,446       23,012     Monthly     4.01       4.01  
0-E   APPLE BANK   U.S.A.   US$     1,711       5,175       13,640       13,394       760       34,680       31,544     Quarterly     3.93       3.33  
0-E   BTMU   U.S.A.   US$     3,489       10,485       27,605       27,062       775       69,416       63,189     Quarterly     4.06       3.46  
0-E   NATIXIS   France   US$     4,242       9,870       9,815       563       -       24,490       23,161     Quarterly     4.28       4.12  
0-E   KFW IPEX-BANK   Germany   US$     1,764       5,328       5,378       -       -       12,470       12,215     Quarterly     4.20       4.19  
0-E   AIRBUS FINANCIAL   U.S.A.   US$     2,074       6,197       7,840       -       -       16,111       15,417     Monthly     4.19       4.19  
                                                                                         
Other loans                                                                                        
0-E   CITIBANK (*)   U.S.A.   US$     25,705       77,703       103,341       -       -       206,749       196,211     Quarterly     6.00       6.00  
0-E   Boeing   U.S.A.   US$     559       1,425       55,728       -       -       57,712       55,727     At Expiration     4.01       4.01  
                                                                                         
Hedge derivative                                                                                    
-   OTHERS   -   US$     1,224       2,484       681       -       -       4,389       4,021     -     0.00       0.00  
     Total             534,959       1,039,060       2,866,810       1,555,906       2,098,861       8,095,596       6,989,299                      

 

(*) Bonus securitized with the future flows of credit card sales in the United States and Canada.

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2018

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
Bank loans                                                                                    
0-E   NEDERLANDSCHE                                                                                    
    NCM   Holland   US$     175       499       1,332       55       -       2,061       1,851     Monthly     6.01       6.01  
                                                                                         
Financial leases                                                                                    
0-E   NATIXIS   France   US$     4,195       7,935       46,780       41,872       -       100,782       95,789     Quarterly / Semiannual     6.87       6.87  
0-E   WACAPOU LEASING S.A.   Luxembourg   US$     839       2,433       6,542       -       -       9,814       9,226     Quarterly     4.81       4.81  
0-E   SOCIÉTÉ GÉNÉRALE  MILAN BRANCH   Italy   US$     11,536       32,312       161,778       -       -       205,626       208,224     Quarterly     5.88       5.82  
0-E   GA Telesis LLC   U.S.A.   US$     680       1,753       4,675       4,675       11,318       23,101       13,202     Monthly     15.62       15.62  
    Total             17,425       44,932       221,107       46,602       11,318       341,384       328,292                      

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2018

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
Trade and other accounts payables                                                                                    
-   OTHERS   OTHERS   US$     356,342       11,773       -       -       -       368,115       368,115     -     0.00       0.00  
            CLP     137,296       359       -       -       -       137,655       137,655     -     0.00       0.00  
            BRL     250,915       925       -       -       -       251,840       251,840     -     0.00       0.00  
            Other currencies     518,448       3,918       -       -       -       522,366       522,366     -     0.00       0.00  
                                                                                         
Accounts payable to related parties currents                                                                                    
Foreing   Inversora Aeronáutica Argentina S.A.   Argentina   ARS     15       -       -       -       -       15       15     -     0.00       0.00  
78.591.370-1   Bethia S.A. y Filiales   Chile   CLP     365       -       -       -       -       365       365     -     0.00       0.00  
Extranjera   TAM Aviação Executiva e Taxi Aéreo S.A.   Brazil   BRL     2       -       -       -       -       2       2     -     0.00       0.00  
     Total             1,263,383       16,975       -       -       -       1,280,358       1,280,358                      
     Total  consolidated             1,815,767       1,100,967       3,087,917       1,602,508       2,110,179       9,717,338       8,597,949                      

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2017

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Loans to exporters                                                                                    
97.032.000-8   BBVA   Chile   US$     75,863       -       -       -       -       75,863       75,000     At Expiration     2.30       2.30  
97.032.000-8   BBVA   Chile   UF     -       57,363       -       -       -       57,363       55,801     At Expiration     3.57       2.77  
97.036.000-K   SANTANDER   Chile   US$     30,131       -       -       -       -       30,131       30,000     At Expiration     2.49       2.49  
97.030.000-7   ESTADO   Chile   US$     40,257       -       -       -       -       40,257       40,000     At Expiration     2.57       2.57  
97.003.000-K   BANCO DO BRASIL   Chile   US$     100,935       -       -       -       -       100,935       100,000     At Expiration     2.40       2.40  
97.951.000-4   HSBC   Chile   US$     12,061       -       -       -       -       12,061       12,000     At Expiration     2.03       2.03  
                                                                                         
Bank loans                                                                                        
97.023.000-9   CORPBANCA   Chile   UF     22,082       22,782       43,430       -       -       88,294       84,664     Quarterly     3.68       3.68  
0-E   BLADEX   U.S.A.   US$     -       16,465       15,628       -       -       32,093       30,000     Semiannual     5.51       5.51  
97.036.000-K   SANTANDER   Chile   US$     2,040       3,368       202,284       -       -       207,692       202,284     Quarterly     4.41       4.41  
                                                                                         
Obligations with the public                                                                                    
0-E   BANK OF NEW YORK   U.S.A.   US$     -       84,375       650,625       96,250       772,188       1,603,438       1,200,000     At Expiration     7.44       7.03  
97.030.000-7   ESTADO   Chile   UF     -       20,860       41,720       226,379       245,067       534,026       379,274     At Expiration     5.50       5.50  
                                                                                         
Guaranteed obligations                                                                                    
0-E   CREDIT AGRICOLE   France   US$     8,368       25,415       56,305       12,751       -       102,839       98,091     Quarterly     2.66       2.22  
0-E   BNP PARIBAS   U.S.A.   US$     14,498       59,863       148,469       145,315       313,452       681,597       575,221     Quarterly     3.41       3.40  
0-E   WELLS FARGO   U.S.A.   US$     30,764       92,309       246,285       246,479       245,564       861,401       808,987     Quarterly     2.46       1.75  
0-E   WILMINGTON TRUST COMPANY   U.S.A.   US$     32,026       95,042       253,469       244,836       676,474       1,301,847       1,034,853     Quarterly     4.48       4.48  
0-E   CITIBANK   U.S.A.   US$     14,166       42,815       114,612       112,435       102,045       386,073       351,217     Quarterly     3.31       2.47  
0-E   BTMU   U.S.A.   US$     3,292       9,997       26,677       26,704       14,133       80,803       74,734     Quarterly     2.87       2.27  
0-E   APPLE BANK   U.S.A.   US$     1,611       4,928       13,163       13,196       7,369       40,267       37,223     Quarterly     2.78       2.18  
0-E   US BANK   U.S.A.   US$     18,485       55,354       146,709       145,364       158,236       524,148       472,833     Quarterly     4.00       2.82  
0-E   DEUTSCHE BANK   U.S.A.   US$     4,043       12,340       32,775       32,613       32,440       114,211       96,906     Quarterly     4.39       4.39  
0-E   NATIXIS   France   US$     18,192       54,952       129,026       105,990       166,011       474,171       413,011     Quarterly     3.42       3.40  
0-E   PK AirFinance   U.S.A.   US$     2,375       7,308       20,812       18,104       -       48,599       46,500     Monthly     3.18       3.18  
0-E   KFW IPEX-BANK   Germany   US$     2,570       7,111       16,709       1,669       -       28,059       26,888     Quarterly     3.31       3.31  
0-E   AIRBUS FINANCIAL   U.S.A.   US$     2,033       6,107       15,931       -       -       24,071       22,925     Monthly     3.19       3.19  
0-E   INVESTEC   England   US$     1,930       11,092       26,103       26,045       11,055       76,225       63,378     Semiannual     6.04       6.04  
                                                                                         
Other guaranteed obligations                                                                                    
0-E   CREDIT AGRICOLE   France   US$     1,757       5,843       246,926       -       -       254,526       241,287     At Expiration     3.38       3.38  
                                                                                         
Financial leases                                                                                    
0-E   ING   U.S.A.   US$     5,890       12,076       28,234       -       -       46,200       42,957     Quarterly     5.67       5.00  
0-E   CITIBANK   U.S.A.   US$     12,699       38,248       91,821       51,222       2,880       196,870       184,274     Quarterly     3.78       3.17  
0-E   PEFCO   U.S.A.   US$     13,354       34,430       23,211       -       -       70,995       67,783     Quarterly     5.46       4.85  
0-E   BNP PARIBAS   U.S.A.   US$     13,955       35,567       50,433       2,312       -       102,267       98,105     Quarterly     3.66       3.25  
0-E   WELLS FARGO   U.S.A.   US$     12,117       38,076       98,424       66,849       21,253       236,719       221,113     Quarterly     3.17       2.67  
97.036.000-K   SANTANDER   Chile   US$     6,049       18,344       48,829       47,785       3,156       124,163       117,023     Quarterly     2.51       1.96  
0-E   RRPF ENGINE   England   US$     370       3,325       8,798       8,692       9,499       30,684       25,983     Monthly     4.01       4.01  
                                                                                         
Other loans                                                                                        
0-E   CITIBANK (*)   U.S.A.   US$     25,783       77,810       206,749       -       -       310,342       285,891     Quarterly     6.00       6.00  
                                                                                         
Hedge derivative                                                                                    
-   Others   -   US$     5,656       6,719       6,228       -       -       18,603       17,407     -     0.00       0.00  
     Total             535,352       960,284       3,010,385       1,630,990       2,780,822       8,917,833       7,633,613                      

 

(*) Bonus securitized with the future flows of credit card sales in the United States and Canada.

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2017

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Bank loans                                                                                    
0-E   NEDERLANDSCHE                                                                                    
    CREDIETVERZEKERING MAATSCHAPPIJ   Holland   US$     176       497       1,332       722       -       2,727       2,382     Monthly     6.01       6.01  
                                                                                         
Financial leases                                                                                    
0-E   NATIXIS   France   US$     4,248       7,903       23,141       71,323       -       106,615       99,036     Quarterly / Semiannual     5.59       5.59  
0-E   WACAPOU LEASING S.A.   Luxembourg   US$     837       2,411       6,509       3,277       -       13,034       12,047     Quarterly     3.69       3.69  
0-E   SOCIÉTÉ GÉNÉRALE  MILAN BRANCH   Italy   US$     11,735       32,230       204,836       -       -       248,801       244,513     Quarterly     4.87       4.81  
0-E   BANCO IBM S.A   Brazil   BRL     34       -       -       -       -       34       21     Monthly     6.89       6.89  
0-E   SOCIÉTÉ GÉNÉRALE   France   BRL     161       12       -       -       -       173       109     Monthly     6.89       6.89  
     Total             17,191       43,053       235,818       75,322       -       371,384       358,108                      

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2017

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Trade and other accounts payables                                                                                    
-   OTHERS   OTHERS   ThUS$     566,838       -       -       -       -       566,838       566,838     -     0.00       0.00  
            CLP     165,299       -       -       -       -       165,299       165,299     -     0.00       0.00  
            BRL     315,605       -       -       -       -       315,605       315,605     -     0.00       0.00  
            Other currencies     290,244       11,215       -       -       -       301,459       301,459     -     0.00       0.00  
                                                                                         
Accounts payable to related parties currents                                                                                    
78.997.060-2   Viajes Falabella Ltda.   Chile   CLP     534       -       -       -       -       534       534     -     0.00       0.00  
0-E   Inversora Aeronáutica Argentina   Argentina   ThUS$     4       -       -       -       -       4       4     -     0.00       0.00  
0-E   Consultoría Administrativa Profesional S.A. de C.V.   Mexico   MXN     210       -       -       -       -       210       210     -     0.00       0.00  
78.591.370-1   Bethia S.A. y Filiales   Chile   CLP     12       -       -       -       -       12       12     -     0.00       0.00  
     Total             1,338,746       11,215       -       -       -       1,349,961       1,349,961                      
     Total  consolidated             1,891,289       1,014,552       3,246,203       1,706,312       2,780,822       10,639,178       9,341,682                      

 

The Company has fuel, interest rate and exchange rate hedging strategies involving derivatives contracts with different financial institutions. The Company has margin facilities with each financial institution in order to regulate the mutual exposure produced by changes in the market valuation of the derivatives.

 

At the end of 2017, the Company had delivered US$ 16.4 million in guarantees for derivative margins, corresponding to cash and standby letters of credit. As of December 31, 2018, US$ 5.0 million were delivered in guarantees corresponding to cash and standby letters of credit. The decrease was due to: i) the expiration of hedge contracts, ii) acquisition of new fuel contracts, and iii) changes in fuel prices, changes in exchange rates and interest rates.

 

  3.2. Capital risk management

 

The Company’s objectives, with respect to the management of capital, are (i) to comply with the restrictions of minimum equity and (ii) to maintain an optimal capital structure.

 

The Company monitors its contractual obligations and the regulatory limitations in the different countries where the entities of the group are domiciled to assure they meet the limit of minimum net equity, where the most restrictive limitation is to maintain a positive net equity.

 

Additionally, the Company periodically monitors the short and long term cash flow projections to assure the Company has adequate sources of funding to generate the cash requirement to face its investment and funding future commitments.

 

The Company international credit rating is the consequence of the Company capacity to face its long terms financing commitments. As of December 31, 2018 the Company has an international long term credit rating of BB- with stable outlook by Standard & Poor’s, a B+ rating with positive outlook by Fitch Ratings and a Ba3 rating with stable outlook by Moody’s.

 

  3.3. Estimates of fair value.

 

At December 31, 2018, the Company maintained financial instruments that should be recorded at fair value. These are grouped into two categories:

 

  1. Hedge Instruments:

 

This category includes the following instruments:

 

  - Interest rate derivative contracts,
  - Fuel derivative contracts,
  - Currency derivative contracts.

 

  2. Financial Investments:

 

This category includes the following instruments:

 

  - Investments in short-term Mutual Funds (cash equivalent)
  - Private investment funds.

 

The Company has classified the fair value measurement using a hierarchy that reflects the level of information used in the assessment. This hierarchy consists of 3 levels (I) fair value based on quoted prices in active markets for identical assets or liabilities, (II) fair value calculated through valuation methods based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) and (III) fair value based on inputs for the asset or liability that are not based on observable market data.

 

The fair value of financial instruments traded in active markets, such as investments acquired for trading, is based on quoted market prices at the close of the period using the current price of the buyer. The fair value of financial assets not traded in active markets (derivative contracts) is determined using valuation techniques that maximize use of available market information. Valuation techniques generally used by the Company are quoted market prices of similar instruments and / or estimating the present value of future cash flows using forward price curves of the market at period end.

 

The following table shows the classification of financial instruments at fair value, depending on the level of information used in the assessment:

 

    As of December 31, 2018     As of December 31, 2017  
          Fair value measurements using values           Fair value measurements using values  
          considered as           considered as  
    Fair value     Level I     Level II     Level III     Fair value     Level I     Level II     Level III  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
Assets                                                                
Cash and cash equivalents     43,653       43,653       -       -       29,658       29,658       -       -  
Short-term mutual funds     43,653       43,653       -       -       29,658       29,658       -       -  
                                                                 
Other financial assets, current     366,573       343,218       23,355       -       536,001       473,653       62,348       -  
Fair value interest rate derivatives     19,460       -       19,460       -       3,113       -       3,113       -  
Fair value of fuel derivatives     -       -       -       -       10,711       -       10,711       -  
Fair value of foreign currency derivative     3,895       -       3,895       -       48,322       -       48,322       -  
Accrued interest since the last payment date Swap of currencies     -       -       -       -       202       -       202       -  
Derivative not recognized as a hedge     19,396       19,396       -       -       -       -       -       -  
Private investment funds     322,428       322,428       -       -       472,232       472,232       -       -  
Domestic and foreign bonds     1,394       1,394       -       -       1,421       1,421       -       -  
                                                                 
Other financial assets, not current     -       -       -       -       519       -       519       -  
Fair value derived from foreign currency     -       -       -       -       519       -       519       -  
                                                                 
Liabilities                                                                
Other financial liabilities, current     33,633       7,712       25,921       -       12,200       -       12,200       -  
Fair value of interest rate derivatives     335       -       335       -       8,919       -       8,919       -  
Fair value of fuel derivatives     15,678       -       15,678       -       -       -       -       -  
Fair value of foreign currency derivatives     7,587       -       7,587       -       2,092       -       2,092       -  
Interest accrued since the last payment date of Currency Swap     2,321       -       2,321       -       1,189       -       1,189       -  
Derivative not recognized as a hedge     7,712       7,712       -       -       -       -       -       -  
Other financial liabilities, non current     340       -       340       -       2,617       -       2,617       -  
Fair value of interest rate derivatives     -       -       -       -       2,617       -       2,617       -  
Interest accrued since the last date of Swap interest rates     340       -       340       -       -       -       -       -  

 

Additionally, at December 31, 2018, the Company has financial instruments which are not recorded at fair value. In order to meet the disclosure requirements of fair values, the Company has valued these instruments as shown in the table below:

 

    As of December 31, 2018     As of December 31, 2017  
    Book     Fair     Book     Fair  
    value     value     value     value  
    ThUS$     ThUS$     ThUS$     ThUS$  
                         
Cash and cash equivalents     1,037,989       1,037,989       1,112,346       1,112,346  
Cash on hand     8,974       8,974       8,562       8,562  
Bank balance     331,218       331,218       330,430       330,430  
Overnight     282,164       282,164       239,292       239,292  
Time deposits     415,633       415,633       534,062       534,062  
Other financial assets, current     17,411       17,411       23,918       23,918  
Other financial assets     17,411       17,411       23,918       23,918  
Trade debtors, other accounts receivable and Current accounts receivable     1,162,582       1,162,582       1,214,050       1,214,050  
Accounts receivable from entities related, current     2,931       2,931       2,582       2,582  
Other financial assets, not current     58,700       58,700       87,571       87,571  
Accounts receivable, non-current     5,381       5,381       6,891       6,891  
                                 
Other current financial liabilities     1,397,156       1,578,835       1,288,749       1,499,495  
Accounts payable for trade and other accounts payable, current     1,674,303       1,674,303       1,695,202       1,695,202  
Accounts payable to entities related, current     382       382       760       760  
Other financial liabilities, not current     5,864,570       5,893,387       6,602,891       6,738,872  
Accounts payable, not current     483,656       483,656       498,832       498,832  

 

The book values of accounts receivable and payable are assumed to approximate their fair values, due to their short-term nature. In the case of cash on hand, bank balances, overnight, time deposits and accounts payable, non-current, fair value approximates their carrying values.

 

The fair value of other financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments (Level II). In the case of Other financial assets, the valuation was performed according to market prices at period end.