PHI, Inc.
5.25% Notes Trustee Delaware Trust Says PHI Engaged in ‘Offensive’ Conduct to Benefit Insiders, Warns Blue Torch Loan May Be Subject to Avoidance
Mon 03/18/2019 12:27 PM
Relevant Document:
Limited Objection
Ahead of this afternoon’s first day hearing, Delaware Trust Co., indenture trustee for PHI’s 5.25% senior notes, filed a limited objection this morning to the debtors’ cash management motion, saying that the debtors entered chapter 11 against a “backdrop of prepetition backroom dealing.” The objection argues that the debtors and their advisors are acting in the interests of their controlling shareholder, CEO Al Gonsoulin, “at the expense of their other stakeholders, including unsecured creditors, and are seeking to divert the value of the estate to insiders.” This pattern of behavior preceding the chapter 11 filing will be “central to many disputes in these cases,” says the objection. The trustee calls for immediate court oversight of the debtors’ management of funds and says that an interim cash management order should not be entered unless it is modified to include a weekly reporting requirement of all transfers made through the cash management system.
In arguing that the debtors engaged in “offensive” prepetition conduct, Delaware Trust focuses on PHI’s entry into a $70 million term loan with Blue Torch Capital on March 13, two days before the bankruptcy filing. The objection says the Blue Torch loan is the debtors’ attempt to secure the benefits of DIP financing without the accompanying reporting obligations and court oversight. The indenture trustee says it “reserves all rights to seek avoidance of the Blue Torch Facility and the [$130 million working capital term loan from Gonsoulin-affiliated Thirty Two LLC] as fraudulent transfers and preferential transfers, to seek equitable subordination of the claims on account of each, and to recharacterize each purported loan as an equity contribution” (emphasis added).
Reorg Covenants provided an overview of the key terms and provisions of the Blue Torch loan HERE.
The indenture trustee also says that PHI entered into the Blue Torch loan after an ad hoc committee of 2.25% noteholders provided “at the Debtors’ request ... a non-priming, postpetition financing proposal on competitive terms relative to comparable cases on February 28, 2019” (emphasis added). However, the objection says that the debtors declined to engage on the ad hoc committee’s proposal and “ignored” the ad hoc committee’s admonition that any financing process be “open and transparent.”
Judge Stacey Jernigan will consider PHI’s cash management motion and other first day motions at a hearing scheduled to begin today at 3 p.m. ET. Reorg will provide updates of the first day hearing, which can be accessed through our live blog portal HERE (accessible when logged into Reorg) when the hearing begins.
Delaware Trust says that in the first day motions, the debtors have endeavored to make the chapter 11 cases appear like a routine restructuring, with “an overleveraged company, facing a pending maturity, seeking a balance sheet restructuring.” However, the debtors have in reality taken “extraordinary” actions to “generate leverage to disadvantage third-party creditors in an effort to maintain control for the benefit of their largest shareholder,” says the filing. By entering into the Blue Torch loan March 13, the objection argues, the debtors:
The trustee says that six months ago, the debtors had funded debt issued entirely by third parties, including $500 million in senior unsecured notes, which had a well-publicized maturity of March 15. All stakeholders understood that the upcoming maturity needed to be addressed, the objection asserts, but instead of refinancing the senior notes, the debtors “undertook a series of carefully orchestrated steps to entrench their CEO and largest shareholder.” As a result, the debtors today have $200 million of purported secured debt, the majority of which is controlled by an insider, and have granted liens on substantially all of their assets, including liens on 90 of their aircraft (and nearly all of their most valuable aircraft) granted two days before the commencement of these cases, argues Delaware Trust.
The filing says that historically, the debtors had a $130 million secured revolving credit facility provided by an independent third party, Whitney Bank. However, in September 2018, the debtors refinanced and replaced the Whitney Bank loan with a secured term loan from Thirty Two LLC, controlled by Gonsoulin, who also controls 70.9% of the debtors’ voting equity interests, the objection argues. Delaware Trust says that this loan is secured by a lien on inventory, accounts receivable and spare parts located within the United States related to certain aircraft. There is “no evidence” that any public marketing process for the refinancing of the Whitney loan was conducted or that any non-insider offers were considered, adds the trustee. The objection says that at the same time the Thirty Two loan was executed, PHI put “golden parachute” arrangements in place for Gonsoulin and four other company executives.
Turning to the $70 million Blue Torch loan, the indenture trustee says that it “radically altered” the capital structure two days before the chapter 11 filing. The objection notes that $70 million happens to be the maximum additional indebtedness the debtors were permitted to incur under the 5.25% senior notes indenture. The filing also draws attention to the collateral package for Blue Torch under the new loan:
The objection also takes issue with the PHI debtors’ responses to attempts by an ad hoc committee of 5.25% noteholders to negotiate prior to the bankruptcy. The trustee says that in October 2018, when the debtors announced the termination of their “well-subscribed” cash tender offer to purchase the senior notes, the ad hoc committee continued its efforts to engage in restructuring discussions. The advisors to the ad hoc committee signed nondisclosure agreements with the debtors in January, but these advisors did not receive the financial information necessary to assess appropriate restructuring terms until mid-February, roughly a month before the senior notes’ March 15 maturity date, says Delaware Trust.
Moreover, the ad hoc committee “reasonably” insisted that the members of the group themselves, and not just their advisors, needed to review information relating to PHI’s financial position, and the group members therefore negotiated an NDA with the company, the objection adds. However, Delaware Trust says the company was ultimately unwilling to execute the NDA, precluding meaningful prepetition discussions between the ad hoc committee and the debtors.
The objection also states that the ad hoc committee repeatedly stressed to the debtors the need for any DIP financing process to be open and transparent, delivering a nonpriming DIP proposal to the debtors on Feb. 28. However, the debtors signed a term sheet with Blue Torch for the prepetition term loan and did not give the ad hoc committee an opportunity to match or improve the terms, says the filing. The result, says the objection, is that the prepetition Blue Torch facility lacks court scrutiny and the customary due process protections that would usually accompany a DIP financing.
In the same vein, the objection argues that the Blue Torch facility has many of the features of DIP financing, including “adequate protection,” which is “a concept expressly tied to postpetition protections granted to prepetition lenders.” Delaware Trust also says there is “no evidence” that the debtors attempted to tailor the size of the Blue Torch facility to actual liquidity needs. Instead, it appears that the debtors simply elected to take on the maximum additional debt permitted under the 5.25% senior notes indenture, says the filing.
The objection also suggests that the debtors may have sought to structure the Blue Torch facility as a prepetition, rather than postpetition, loan in order to “manufacture a non-insider prepetition class” that would be impaired and would vote in favor of a plan of reorganization. If true, this “inequitable conduct” could warrant vote designation or disallowance or create grounds for avoidance of the Blue Torch facility, says Delaware Trust. Moreover, with Gonsoulin in control of Thirty Two LLC, the working capital loan may not serve as the debtors’ impaired accepting class for purposes of plan confirmation, the filing adds.
The indenture trustee asserts that the debtors are seeking “carte blanche” to transfer funds through the cash management motion. Through the motion, the debtors seek authorization to continue making “Intercompany Transfers” without defining what these transfers are or between which companies such transfers are to be made. The objection adds that the debtors fail to specify which “Non-Debtor Affiliates” may continue to receive estate funds or for what purposes.
The trustee says that instead of being provided with court approval to continue their “unusual prepetition practices,” the debtors should be required to clarify what so-called ordinary course transfers may be made through the cash management system and to which parties and to provide protections against the depletion of assets of their estates. To promote much-needed transparency, any order entered approving the cash management motion should be modified to include a requirement that the debtors make weekly reports, to the bankruptcy court and to Delaware Trust, of all transfers made through the cash management system, says the objection.
Limited Objection
Ahead of this afternoon’s first day hearing, Delaware Trust Co., indenture trustee for PHI’s 5.25% senior notes, filed a limited objection this morning to the debtors’ cash management motion, saying that the debtors entered chapter 11 against a “backdrop of prepetition backroom dealing.” The objection argues that the debtors and their advisors are acting in the interests of their controlling shareholder, CEO Al Gonsoulin, “at the expense of their other stakeholders, including unsecured creditors, and are seeking to divert the value of the estate to insiders.” This pattern of behavior preceding the chapter 11 filing will be “central to many disputes in these cases,” says the objection. The trustee calls for immediate court oversight of the debtors’ management of funds and says that an interim cash management order should not be entered unless it is modified to include a weekly reporting requirement of all transfers made through the cash management system.
In arguing that the debtors engaged in “offensive” prepetition conduct, Delaware Trust focuses on PHI’s entry into a $70 million term loan with Blue Torch Capital on March 13, two days before the bankruptcy filing. The objection says the Blue Torch loan is the debtors’ attempt to secure the benefits of DIP financing without the accompanying reporting obligations and court oversight. The indenture trustee says it “reserves all rights to seek avoidance of the Blue Torch Facility and the [$130 million working capital term loan from Gonsoulin-affiliated Thirty Two LLC] as fraudulent transfers and preferential transfers, to seek equitable subordination of the claims on account of each, and to recharacterize each purported loan as an equity contribution” (emphasis added).
Reorg Covenants provided an overview of the key terms and provisions of the Blue Torch loan HERE.
The indenture trustee also says that PHI entered into the Blue Torch loan after an ad hoc committee of 2.25% noteholders provided “at the Debtors’ request ... a non-priming, postpetition financing proposal on competitive terms relative to comparable cases on February 28, 2019” (emphasis added). However, the objection says that the debtors declined to engage on the ad hoc committee’s proposal and “ignored” the ad hoc committee’s admonition that any financing process be “open and transparent.”
Judge Stacey Jernigan will consider PHI’s cash management motion and other first day motions at a hearing scheduled to begin today at 3 p.m. ET. Reorg will provide updates of the first day hearing, which can be accessed through our live blog portal HERE (accessible when logged into Reorg) when the hearing begins.
Delaware Trust says that in the first day motions, the debtors have endeavored to make the chapter 11 cases appear like a routine restructuring, with “an overleveraged company, facing a pending maturity, seeking a balance sheet restructuring.” However, the debtors have in reality taken “extraordinary” actions to “generate leverage to disadvantage third-party creditors in an effort to maintain control for the benefit of their largest shareholder,” says the filing. By entering into the Blue Torch loan March 13, the objection argues, the debtors:
- “Encumbered hundreds of millions of dollars of previously unencumbered collateral to support the new debt, including 90 aircraft that were not previously subject to any liens.
- Granted a new second lien in the Debtors’ aircraft for the benefit of their CEO and controlling shareholder to support the Insider Loan.
- Manufactured a prepetition class of debt that, aside from unsecured creditors, is now the only non-insider prepetition class capable of serving as an impaired accepting class necessary to confirm a plan of reorganization over the objection of unsecured creditors, including the holders of the Senior Notes.
- Circumvented the Bankruptcy Court’s ability to ensure that any financing of the Debtors’ bankruptcy postpetition is on the best available terms.”
The trustee says that six months ago, the debtors had funded debt issued entirely by third parties, including $500 million in senior unsecured notes, which had a well-publicized maturity of March 15. All stakeholders understood that the upcoming maturity needed to be addressed, the objection asserts, but instead of refinancing the senior notes, the debtors “undertook a series of carefully orchestrated steps to entrench their CEO and largest shareholder.” As a result, the debtors today have $200 million of purported secured debt, the majority of which is controlled by an insider, and have granted liens on substantially all of their assets, including liens on 90 of their aircraft (and nearly all of their most valuable aircraft) granted two days before the commencement of these cases, argues Delaware Trust.
The filing says that historically, the debtors had a $130 million secured revolving credit facility provided by an independent third party, Whitney Bank. However, in September 2018, the debtors refinanced and replaced the Whitney Bank loan with a secured term loan from Thirty Two LLC, controlled by Gonsoulin, who also controls 70.9% of the debtors’ voting equity interests, the objection argues. Delaware Trust says that this loan is secured by a lien on inventory, accounts receivable and spare parts located within the United States related to certain aircraft. There is “no evidence” that any public marketing process for the refinancing of the Whitney loan was conducted or that any non-insider offers were considered, adds the trustee. The objection says that at the same time the Thirty Two loan was executed, PHI put “golden parachute” arrangements in place for Gonsoulin and four other company executives.
Turning to the $70 million Blue Torch loan, the indenture trustee says that it “radically altered” the capital structure two days before the chapter 11 filing. The objection notes that $70 million happens to be the maximum additional indebtedness the debtors were permitted to incur under the 5.25% senior notes indenture. The filing also draws attention to the collateral package for Blue Torch under the new loan:
The objection also takes issue with the PHI debtors’ responses to attempts by an ad hoc committee of 5.25% noteholders to negotiate prior to the bankruptcy. The trustee says that in October 2018, when the debtors announced the termination of their “well-subscribed” cash tender offer to purchase the senior notes, the ad hoc committee continued its efforts to engage in restructuring discussions. The advisors to the ad hoc committee signed nondisclosure agreements with the debtors in January, but these advisors did not receive the financial information necessary to assess appropriate restructuring terms until mid-February, roughly a month before the senior notes’ March 15 maturity date, says Delaware Trust.
Moreover, the ad hoc committee “reasonably” insisted that the members of the group themselves, and not just their advisors, needed to review information relating to PHI’s financial position, and the group members therefore negotiated an NDA with the company, the objection adds. However, Delaware Trust says the company was ultimately unwilling to execute the NDA, precluding meaningful prepetition discussions between the ad hoc committee and the debtors.
The objection also states that the ad hoc committee repeatedly stressed to the debtors the need for any DIP financing process to be open and transparent, delivering a nonpriming DIP proposal to the debtors on Feb. 28. However, the debtors signed a term sheet with Blue Torch for the prepetition term loan and did not give the ad hoc committee an opportunity to match or improve the terms, says the filing. The result, says the objection, is that the prepetition Blue Torch facility lacks court scrutiny and the customary due process protections that would usually accompany a DIP financing.
In the same vein, the objection argues that the Blue Torch facility has many of the features of DIP financing, including “adequate protection,” which is “a concept expressly tied to postpetition protections granted to prepetition lenders.” Delaware Trust also says there is “no evidence” that the debtors attempted to tailor the size of the Blue Torch facility to actual liquidity needs. Instead, it appears that the debtors simply elected to take on the maximum additional debt permitted under the 5.25% senior notes indenture, says the filing.
The objection also suggests that the debtors may have sought to structure the Blue Torch facility as a prepetition, rather than postpetition, loan in order to “manufacture a non-insider prepetition class” that would be impaired and would vote in favor of a plan of reorganization. If true, this “inequitable conduct” could warrant vote designation or disallowance or create grounds for avoidance of the Blue Torch facility, says Delaware Trust. Moreover, with Gonsoulin in control of Thirty Two LLC, the working capital loan may not serve as the debtors’ impaired accepting class for purposes of plan confirmation, the filing adds.
The indenture trustee asserts that the debtors are seeking “carte blanche” to transfer funds through the cash management motion. Through the motion, the debtors seek authorization to continue making “Intercompany Transfers” without defining what these transfers are or between which companies such transfers are to be made. The objection adds that the debtors fail to specify which “Non-Debtor Affiliates” may continue to receive estate funds or for what purposes.
The trustee says that instead of being provided with court approval to continue their “unusual prepetition practices,” the debtors should be required to clarify what so-called ordinary course transfers may be made through the cash management system and to which parties and to provide protections against the depletion of assets of their estates. To promote much-needed transparency, any order entered approving the cash management motion should be modified to include a requirement that the debtors make weekly reports, to the bankruptcy court and to Delaware Trust, of all transfers made through the cash management system, says the objection.
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