Wed 03/09/2022 13:07 PM
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Aero Components Restructuring:

Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
Aero Components Plan of Reorganization / Aero Components DS
Fore Debtors Plan of Liquidation / Fore Debtors DS
First Day Hearing Notice




















Summary
Aero Components manufactures aerospace parts for the national defense and aerospace industry and commercial aerospace market
Filed two plans - one to reorganize debtor Aero Components through a balance sheet restructuring, and one to liquidate the remaining debtors, including Fore Machine
Plans are premised on RSA entered into with the debtors’ prepetition secured lenders that are also equityholders
Case would be funded with $2.5 million in DIP financing ($500,000 sought on an interim basis) from its prepetition secured lenders

Aero Components, a Haltom City, Texas-based manufacturer and supplier of aerospace parts for the national defense and aerospace industry and commercial aerospace market, filed for chapter 11 protection on Monday, March 7, in the Bankruptcy Court for the Northern District of Texas, along with several affiliates. The case is premised on an RSA that bifurcates the restructuring into a balance sheet restructuring for the reorganizing debtor, Aero Components LLC, and an orderly liquidation of the remaining debtors - Fore Machine LLC, Fore Aero Holdings LLC and Fore Capital Holding LLC.

The RSA was entered into with (a) sponsor Aero Solutions & Technologies, LLC and (b) Newspring Mezzanine Capital III and Southfield Mezzanine Capital, prepetition secured lenders and proposed DIP lenders that are holders of approximately 14.9% of Aero Holdings’ membership interests. The “cornerstone” of the plan is a new money capital investment of $21 million in the aggregate, in exchange for the sponsor receiving 100% of the new equity. The debtors’ operations would be funded during the chapter 11 cases with a $2.5 million DIP financing facility provided by Newspring and Southfield.

First day declarant Jens Verloop, the debtors’ CFO, says that in the months leading up to the petition date, the debtors attempted to recapitalize their balance sheet through a refinancing or an outright sale of the businesses. “Having been unsuccessful despite their herculean efforts,” Verloop continues, the debtors’ board ultimately concluded that pursuing a reorganization of Aero and a liquidation of the other debtors through chapter 11 is the “most appropriate remaining option and the path that will lead to the greatest recovery for stakeholders.”

The RSA contemplates the following:

  • The sponsor would make a new money capital equity investment of (a) up to $19.5 million to pay the prepetition lenders, up to $4 million of which an amount equal to the DIP obligations owed may be used to repay the DIP obligations and (c) an additional $1.5 million of new money equity investment from the sponsor earmarked for new capital expenditures for the reorganizing debtor, provided that “the amounts set forth herein that are earmarked for payment to the Prepetition Lenders shall be reduced by an amount equal to the Liquidation Proceeds that are paid to the Prepetition Lenders on the Reorganizing Debtor’s Plan Effective Date pursuant to the Liquidating Plan.”

  • Prepetition lenders would receive a pro rata share of $19.5 million in cash less amounts received by the prepetition lenders postpetition through the effective date. The prepetition lenders would also be entitled to payment of fees and expenses and retain their rights to the “Consenting Stakeholder Indemnifications,” and would waive the unsecured portion of their allowed claims.

  • The sponsor would receive 100% of the new equity and existing membership interests would be canceled.


The first day hearing has been scheduled for Thursday, March 10 at 4:30 p.m. ET.

The company’s prepetition capital structure includes:

 

The first lien senior subordinated note was entered into with Southfield and Newspring as lenders and Newspring as agent, designed to finance a portion of the cash purchase price relating to the 2017 acquisition of substantially all of the assets of Aero Components, Inc., Machine Company, Inc. and the capital stock of Fore Capital, a wholly-owned subsidiary of the Machine Company, Inc. The unsecured subordinated promissory note, which bears interest at 8%, was entered into with Aero Components, Inc. in connection with the 2017 acquisition. Pursuant to a subordination agreement that subordinates the Aero Components, Inc. note to the Southfield/Newspring loan, the unsecured note would be separately classified in any plan of reorganization, and Aero Components, Inc. would not be permitted to vote against any plan of reorganization supported by prepetition lenders Southfield and Newspring.

According to the cash management motion, the debtors have approximately $654,000 in cash across three checking accounts.

The debtors are represented by Winston & Strawn in Houston and New York as counsel and Alvarez & Marsal as financial advisor. Stretto is the claims agent. The case has been assigned to Judge Mark X. Mullin (case no. 22-40487).

Events Leading to the Bankruptcy / Prepetition Restructuring Efforts

While Aero Components, the reorganizing debtor under the RSA, has been and remains successful, the debtors’ overall financial health has suffered as a result of complications with debtor Fore Machine that led to the loss of its primary customer, liquidity constraints and the ultimate decision by the debtors board to cease Machine’s operations in November 2021.

According to the first day declaration, in 2020, it “became apparent” that Machine was “habitually” falling behind on its contractual delivery obligations to Bell Helicopter, which represented the “vast majority” of Machine’s revenue. The board examined the existing management’s oversight of operations and discovered numerous issues, including ineffective audit procedures, systemic errors in enterprise resource planning systems, quality control issues, limited substantiation for balance sheet items and “culture issues.”

In fall 2020, the board began the process of replacing Machine’s CEO and CFO with new professionals and began corrective action to improve performance with Bell “with a particular emphasis on improving the culture” at Machine in order to improve safety and ensure the quality of Machine’s products. The debtors say that these actions were “applauded” by Bell’s supply chain managers, who continued to urge further improvement and investment on the part of Machine. Despite a rapid turnaround of performance and quality, Bell assessed contractual liquidated damages totaling approximately $6.6 million with a commitment for 100% forgiveness over three to four months. In July 2021, Bell signed a memorandum of understanding formalizing a forgiveness plan in exchange for on-time performance of scheduled parts.

“Despite Machine’s corrective actions,” in November Bell canceled all outstanding purchase orders with Machine, “effectively ending the relationship.” Without Bell’s revenue, Machine’s business was no longer viable, and the board unanimously voted to cease operations to preserve cash while options were explored. After months of investigation and discussions with their advisors, the board determined that an orderly liquidation of Machine is in the best interest of its creditors and the value of the estate.

While Machine’s business was faltering, Aero Components continued to have “tremendous” success, with EBITDA increasing from $210,000 in 2018 to approximately $3.5 million in 2021, the debtors say, noting that the business continues to grow. Given Machine’s troubles, however, and in order to right-size the debtors’ capital structure, the debtors retained KAL Capital as investment banker, which explored potential strategic alternatives to maximize the debtors’ value, including a potential sale of Aero Components. Though the KAL process was not successful, the debtors say that the board believed that by targeting the appropriate buyers, the process could be expanded for better results. Prior to Machine’s cessation of operations, the board developed a buyer base with eight active bidders offering ranges of value between $16 million to $20 million of enterprise value for Aero Components.

Given Machine’s declining performance and the negative effect this had on the debtors’ out-of-court transaction options, the debtors shifted their focus to an in-court process and retained Alvarez & Marsal and Winston and Strawn. From November 2021 to January 2022, the debtors’ advisors negotiated with Regions Bank, Newspring, and Southfield, which together are the debtors’ largest secured creditors, ultimately culminating in the RSA.

Background

The debtors are manufacturers and suppliers for the national defense and aerospace industry and the commercial aerospace industry in the fixed wing and rotary wing aerospace markets. The companies’ manufacturing facilities encompass over 176,000 square feet in the aggregate and offer a variety of machining, assembly, metal-to-metal bonding, fiberglass layup, organic finish and multiple chemical processing capabilities.

Debtor Aero Components, the reorganizing debtor under the RSA, is a leading provider of military aftermarket parts and spare parts in support of service-life extension efforts for the U.S. Department of Defense and leading OEMs, primarily for fixed-wing aircraft. Headquartered in Fort Worth, Texas, the companies’ facilities span 47,500 square feet with dedicated work centers for fabricated parts, bonded structures, mechanical assemblies, and in-house tooling, all to support “military readiness” and service life extension and modernization programs on legacy aircraft. In 2019 and 2020, the company was approved to work on Lockheed Martin missile processing, Gulfstream Aerospace structural bonding, Boeing paint primer production, in addition to other approvals from Boeing, Northrop Grumman and Lockheed Martin in 2021. Aero Components has 86 employees, of whom 83 are full-time and three are independent contractors. None of these employees are represented by a union.

Debtor Fore Machine was a precision manufacturing, metal processing and assembly company based in Haltom City, Texas, primarily for rotorcraft in both commercial and defense industries. After a good relationship “for decades,” Machine’s primary customer, Bell Helicopter, ended its relationship with the debtors in November 2021, threatening Machine’s near-term going concern capacity and leading to the debtors’ board’s ultimate decision to cease all operations to preserve cash. The board and its advisors concluded that, given the proprietary nature of the Machine’s equipment, assemblies and processes, a sale to Bell would maximize the value of Machine’s assets for its stakeholders. With the exception of a relatively small amount of inventory and work-in -progress inventory, Machine’s offer to sell substantially all of its assets was rejected by Bell. In anticipation of its liquidation, Machine laid off the majority of its workforce and as of the petition date has no remaining employees.

Debtor Fore Capital is a wholly owned subsidiary of Machine. It was created in 2017 in connection with the 2017 Fore acquisition. Fore Capital does not have any assets, operations or employees. Debtor Fore Aero Holdings LLC owns all of the equity of Aero Components and Machine and does not have any operations or employees.

The company’s corporate organizational structure chart is below:

The case representatives are as follows:

























































Representatives
Role Name Firm Location
Debtors' Counsel Katherine A. Preston Winston & Strawn Houston
Timothy W. Walsh New York
James T. Bentley
Emma Flemming
Debtors' Financial
Advisor
NA Alvarez & Marsal NA
Debtors' Claims Agent Sheryl Betance Stretto Irvine, Calif.
Co-Counsel to
Newpring and Southfield
Robert Lapowsky Stevens & Lee King of Prussia, Pa.
David W. Giattino
Co-Counsel to
Newpring and Southfield
Joe E. Marshall Marshall Law Dallas

The debtors' largest unsecured creditors are listed below:


 










































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
Fore Inc. Fort Worth, Texas Trade $    5,417,854
AJ Rod Houston Trade 441,819
Sierra Alloys Company Irwindale, Calif. Trade 357,905
Prism Aerospace, Inc. Riverside, Calif. Trade 357,009
Titanium Industries Chicago Trade 264,239
Prospect Mold & Die Company Cuyahoga Falls, Ohio Trade 173,972
RSM US LLP Chicago Trade 157,848
LTTS Machine Fort Worth, Texas Trade 151,326
Mag Capital Partners LLC Fort Worth, Texas Landlord 148,038
Cpp-Port Hueneme Port Hueneme, Calif. Trade 144,460



Below is a chart of the plan’s classes, along with their impairment status and voting rights.

 

Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:

  • Class 1 - Other secured claims: Payment in full in cash, the collateral securing the claim, reinstatement or such other treatment rendering the claim unimpaired.

  • Class 2 - Other priority claims: Payment in full in cash.

  • Class 3 - Prepetition lender claims: Pro rata share of cash of (a) $19.5 million minus (b) amounts received by the lenders postpetition through the effective date except for amounts applied to expenses incurred by the prepetition secured lenders or DIP lenders; plus payment of fees and expenses and the right to the “Consenting Stakeholder Indemnifications”; allowed in the principal amount of $19.5 million plus interest.

  • Class 4 - General unsecured claims (including prepetition lender deficiency claims): Payment in full in cash; prepetition secured lenders to waive distributions on account of their deficiency claims.

  • Class 5 - Aero Components, Inc. unsecured note: Payment of $10,000 in cash, and note to be canceled. According to the plan, pursuant to the subordination agreement, because the prepetition secured lender claims are not being “paid in full,” the Class 5 claim is not entitled to any payment under the plan, and the Class 5 distribution is being provided based on an agreement to allow the distribution notwithstanding the terms of the subordination agreement but only if the plan is confirmed and the effective date occurs.

  • Class 6 - Equity interests of Fore Aero Holdings, LLC: Interests would be canceled with no distribution.


Exit Facility

The plan contemplates an exit facility, the terms of which would be included in a plan supplement.

Other Plan Provisions

The plan provides for releases of the debtor, the reorganized debtor, Newspring, Southfield, the exit lenders, Fore Aero Holdings, Fore Machine, Fore Capital, Fore Aero Holdings’ interest holders and the sponsor (defined as P4G Capital Management, LLC or its affiliates including P4G Capital Partners I, P4G Capital Partners I-A, P4G Capital Partners I-B, P4G Capital Partners I Co-Invest and their affiliate partners “representing new sources of capital and capital from existing Debtor affiliates of the Sponsor, any of their designees”). In addition, the plan includes an exculpation provision in favor of the debtor, the reorganized debtor, any official committee and its members, and Newspring and Southfield.

Fore Debtors Plan of Liquidation / Fore Debtors DS

The only class entitled to vote on the plan is Class 3 - prepetition secured lender claims. Classes not entitled to vote on the plan are as follows:

Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:

  • Class 1 - Other secured claims: Payment in full in cash, collateral securing the claim or such other treatment rendering the claim unimpaired.

  • Class 2A, 2B and 2C - Other priority non-tax claims: Payment in cash in full.

  • Class 3 - Prepetition secured lender claims: Payment of all “Available Cash” and retain the right to the “Consenting Stakeholder Indemnifications;” allowed in the aggregate principal amount of the lesser of (a) $19.5 million plus accrued and unpaid fees and expenses and (b) “Available Cash” on the effective date.

  • Class 4A, 4B and 4C - General unsecured claims: No distribution.

  • Class 5 - Intercompany claims: Canceled, no distribution.

  • Class 6A, 6B and 6C - Equity interests: Canceled, no distribution.


Other Plan Provisions

The plan contemplates a plan administrator. Liquidation proceeds include proceeds from an auction of substantially all of the assets of Fore Machine.

The plan provides for releases of the liquidating debtors, Newspring, Southfield, the exit lenders, Aero Components, Aero Holdings, Fore Machine, Fore Capital Holding, holders of Fore Aero Holdings’ interests, the sponsor Aero Solutions & Technologies and P4G Capital Management, LLC. In addition, the plan includes an exculpation provision in favor of the debtor, the reorganized debtor, any official committee and its members and Newspring and Southfield.

Releases

Releasing parties in each of the plans include (a) holders of claims or interests that vote to accept the plan, (b) holders of claims or interests that abstain from voting on the plan and who do not opt out of the releases and (c) holders of claims or interests that vote to reject the plan and who do not opt out of the releases.

The DS for each of the plans provides as one of the risk factors that any party in interest, including the U.S. Trustee, could object to the plan on the grounds that the third-party release “is not given consensually or in a permissible non-consensual manner.”

DIP Financing Motion

The debtors request $2.5 million in DIP financing ($500,000 on an interim basis) in the form of a non-revolving line of credit from prepetition secured creditors Newspring and Southfield to meet ongoing liquidity needs and facilitate the ongoing wind-down of the liquidating debtors. “Without such financing, the Reorganizing Debtor will not be able to reorganize and the Liquidating Debtors will not be able to liquidate in a manner that maximizes recoveries for creditors,” the debtors say, cautioning that the reorganizing debtor’s ability to pay its employees and the debtors’ ability to finance the wind-down of the liquidating debtors are dependent on the DIP funding.

The DIP financing bears interest at 6% and matures nine months after the petition date. There is no proposed rollup under the DIP documents filed thus far, and there are no proposed fees.

To secure the DIP financing, the debtors propose to grant priming liens on substantially all of the debtors’ real and personal property, excluding any avoidance actions or their proceeds, and superpriority claims, which would not be payable from avoidance actions or their proceeds.

As adequate protection for the prepetition secured parties, the company proposes replacement liens and superpriority claims.

In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c).

The carveout for professional fees is $50,000.

The proposed budget for the use of the DIP facility is HERE.

The DIP financing is conditioned upon entry of the final DIP order and approval of the RSA within 60 days of the petition date.

The lien challenge deadline for any appointed committee is 60 days from the date of entry of the final DIP order. The UCC lien investigation budget is $15,000.

Other Motions

The debtors also filed various standard first day motions, including the following:


 
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