AeroCentury
CASE SUMMARY: AeroCentury to Run Sale Process With Drake Asset Management, Managed by Falko Regional Aircraft, as Stalking Horse Through Credit Bid
Tue 03/30/2021 15:02 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
Cash Collateral Motion
Bid Procedures Motion
First Day Hearing Agenda
AeroCentury Corp., a Burlingame, Calif.-based publicly traded aircraft operating lessor and finance company specializing in leasing regional aircraft and engines to regional airlines and commercial users globally, filed for chapter 11 protection on Monday, March 29, in the Bankruptcy Court for the District of Delaware. The debtors seek to continue their sale process through B. Riley that began prepetition, having secured Drake Asset Management Jersey Ltd., a fund managed by aviation asset management company Falko Regional Aircraft Ltd., as stalking horse bidder for a credit bid of secured obligations of approximately $83.5 million that it acquired prepetition. After the sale, the debtors would “restructure their business around their remaining assets, aircraft leasing platform, and tax attributes (to the extent feasible based on the outcome of the proposed marketing process).” For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the AeroCentury chapter 11 filing Request a Trial here.
The first day hearing has been scheduled for tomorrow, Wednesday, March 31, at 10 a.m. ET.
The company reports $121 million in assets and $124.7 million in liabilities as of Sept. 30, 2020. The company’s prepetition capital structure includes:
On May 1, 2020, the debtors and the MUFG lenders executed an amendment to the prepetition revolving credit facility to convert it into a term loan. On Oct. 30, 2020, Drake, through Falko as loan servicer, purchased all of the debt held by the MUFG lenders under the prepetition credit facility, of approximately $87.9 million, as well as the swap termination payments owed with respect to the debt. The company entered into a related amendment with Drake and UMB Bank, the replacement administrative agent, to PIK the cash component of the interest payments due under the loan, beginning with payments due March 2020. The prepetition credit facility matures March 31. The debtors note that the $83.5 million prepetition credit facility “does not take into account capitalized interest for April 2020 which was added to the principal on May 1, 2020.”
The debtors are represented by Morrison & Foerster and Young Conaway as co-counsel, and B. Riley Financial as investment banker. KCC is the claims agent. The case has been assigned to Judge John T. Dorsey (case number 21-10636).
Events Leading to the Bankruptcy
The company attributes its financial struggles to “certain impairment losses and bad debt allowance,” leading to defaults under the prepetition revolver by fall 2019, leading to certain amendments under the credit agreement and forbearance through December 2019, after which the MUFG lenders would provide no further forbearance relief. The debtors’ cash flow issues have been exacerbated by the Covid-19 pandemic, which had “an overwhelming adverse effect on all forms of transportation globally, but most acutely for the airline industry,” the debtors say, adding that the “combined effect of fear of infection during air travel and international and domestic travel restrictions has caused a dramatic decrease in passenger loads in all areas of the world, not just in those countries with active clusters of COVID-19, as well as in airline ticket net bookings (i.e., bookings made less bookings canceled).”
B. Riley ran a prepetition dual-track process looking to raise capital and/or sell assets in December 2019, after the debtors defaulted under the MUFG facility. The debtors negotiated a forbearance, along with three amendments, with the MUFG group. The marketing process resulted in eight indications of interest, including two that would be repaid the outstanding principal and interest under the MUFG facility. However, the marketing process coincided with the start of the Covid-19 pandemic, and all of the parties that submitted indications of interest withdrew. The debtors re-started the sales and marketing process in early April 2020, resulting in four offers by mid-May 2020. The debtors say that Drake’s offer was “far and away” the best submitted.
In December 2020, Drake proposed to acquire three aircraft leased to Republic Airways and owned by ACY E-175 LLC, a special purpose entity owned by the debtors. After “several weeks of negotiations,” the company agreed with Drake on a prepetition sales process for the aircraft, resulting in six offers. Drake was ultimately the winning bidder, and closed on the aircraft in March. As part of the sale, Drake agreed to allow the debtors to retain $2.1 million of sale proceeds to “fund the Debtors’ continued business operations and further sale and restructuring efforts.” Drake also ultimately agreed to serve as stalking horse for the debtors’ remaining aircraft and other assets.
On March 16, the debtors entered into an asset purchase agreement with Falko Regional Aircraft Ltd. Under the APA, Falko acquired AeroCentury’s membership interests in ACY E175, an entity which owned three aircraft that served as collateral for certain nondebtor special purpose entity loans in exchange for purchase consideration of $26.5 million in the form of cash and assumed liabilities, with the cash portion used used to pay down, in part, the prepetition credit facility and fund operations and the chapter 11 cases.
Background
AeroCentury was founded in 1997 to provide leasing and finance services to regional airlines worldwide. The debtors’ aircraft portfolio consists primarily of midlife regional turboprop and jet aircraft and engines, which the debtors lease aircraft to a globally diverse customer base. The debtors also sell aircraft from their operating lease portfolio to third parties, including other leasing companies, financial services companies and airlines. The company’s operating performance is driven by the composition of their aircraft portfolio, the terms of its leases, the interest rate of their debt and asset sales. The debtors currently lease aircraft to six airlines in five countries.
The debtors’ generated $43.6 million in annual revenue for 2019, which reflected a 61% increase from 2018, primarily attributed to increased maintenance reserves revenue and gains on asset sales in 2019 as opposed to a loss on sales of assets in 2018. Operating revenue decreased by 7% in 2019, primarily due to reduced rent income resulting from the early termination of four aircraft leases with one of the debtors’ customers and the sale of an asset in 2019 that had been on lease until the time of sale. These decreases were partially offset by revenue from two aircraft purchased in the second quarter of 2018 and an asset that was on lease in 2019 but off lease in 2018. As of the debtors’ latest SEC filing on Sept. 30, 2020, AeroCentury’s revenue and other income decreased by 85% in the third quarter of 2020 from the prior year, primarily due to effects of the Covid-19 pandemic on the airline industry.
The debtors held the following aircraft subject to operating leases as of the petition date: one Bombardier CRJ900 regional jet, three Bombardier CRJ700 regional jets and two Bombardier Q400 turboprop aircraft. The debtors also hold two Bombardier DHC-8-300 subject to financing leases. The debtors also hold the following aircraft for sale in whole or as parts: three Bombardier CRJ900 aircraft, one Bombardier Q300 aircraft, one Bombardier Q400 aircraft, one SAAB 340B Plus aircraft and one Pratt & Whitney PW150A aircraft.
AeroCentury generally targets used regional aircraft with purchase prices between $10 million and $20 million and lease terms of three to 10 years. The debtors typically lease their aircraft to customers pursuant to “triple net leases,” which are leases under which, in addition to monthly rental payments, the lessee is generally responsible for the taxes, insurance and maintenance and repair of the aircraft arising from the use and operation of the aircraft during the term of the lease.
The debtors’ corporate organizational structure is shown below:
Bid Procedures Motion
As part of a prepetition marketing effort, B. Riley contacted approximately 90 parties, ultimately leading to the E-175 sale to Drake. The debtors seek to continue to market and sell their core assets, “primarily aircraft.” Drake would serve as stalking horse with a credit bid of the prepetition debt it acquired at the end of October, of approximately $83 million.
The debtors propose a “reasonable” initial overbid to be calculated in consultation with certain consultation parties, with subsequent overbids to be announced also in consultation with the consultation parties. There is no proposed breakup fee or expense reimbursement.
The debtors also submitted the declaration of Adam Rosen, managing director at B. Riley, the debtors’ investment banker, in support of the proposed bid procedures.
The debtors propose the following sale timeline:
Cash Collateral Motion
The debtors seek to use the cash collateral of Drake, stating that it is “required to fund day-to-day operating expenses,” which include employee payroll and other benefits” and is otherwise necessary to “sustain the going concern value of the Debtors’ businesses.” Without the use of cash collateral, the debtors believe that they will be unable “to preserve and maximize the value of the Debtors’ assets” and that “the value of the Debtors’ assets will quickly erode.”
The debtors state that all of their cash constitutes cash collateral of the prepetition lender.
The debtors propose replacement liens and allowed superpriority administrative expense claims as adequate protection. The debtors also propose adequate protection payments equal to “all rent, maintenance reserves, power by the hour payments and all other revenue received in respect of the Aircraft under the lease documents proposed to be acquired by Drake pursuant to the stalking horse agreement in respect of any period from (and including) February 1, 2021.”
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carve-out for professional fees is $100,000.
The proposed budget for the use of cash collateral is HERE.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
Cash Collateral Motion
Bid Procedures Motion
First Day Hearing Agenda
| Summary |
| AeroCentury is a publicly traded aircraft operating lessor and finance company |
| Attributes bankruptcy to “certain impairment losses,” “bad debt allowance,” ensuing defaults under prepetition credit agreements and Covid-19’s impact on airline travel |
| Seeks to continue prepetition marketing process with Drake Asset Management Jersey Ltd., a fund managed by Falko Regional Aircraft as stalking horse for a credit bid of approximately $83.5 million of secured obligations acquired by Drake in November 2020 |
AeroCentury Corp., a Burlingame, Calif.-based publicly traded aircraft operating lessor and finance company specializing in leasing regional aircraft and engines to regional airlines and commercial users globally, filed for chapter 11 protection on Monday, March 29, in the Bankruptcy Court for the District of Delaware. The debtors seek to continue their sale process through B. Riley that began prepetition, having secured Drake Asset Management Jersey Ltd., a fund managed by aviation asset management company Falko Regional Aircraft Ltd., as stalking horse bidder for a credit bid of secured obligations of approximately $83.5 million that it acquired prepetition. After the sale, the debtors would “restructure their business around their remaining assets, aircraft leasing platform, and tax attributes (to the extent feasible based on the outcome of the proposed marketing process).” For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the AeroCentury chapter 11 filing Request a Trial here.
The first day hearing has been scheduled for tomorrow, Wednesday, March 31, at 10 a.m. ET.
The company reports $121 million in assets and $124.7 million in liabilities as of Sept. 30, 2020. The company’s prepetition capital structure includes:
- Secured debt:
- Prepetition credit facility: $83.2 million (principal plus accrued interest).
- Norddeutsche Landesbank Girozentrale, New York Branch facility (nondebtor SPE loans): $44.3 million.
- Unsecured debt:
- PPP loans:
- May 2020 loan: $276,353.
- February 2021 loan: $170,002.
- PPP loans:
- Equity: Toni M. Perazzo is the only individual or entity that owns more than 10% of the equity ownership interests in AeroCentury (21.2%). AeroCentury has been continuously listed on the New York Stock Exchange since January 1998. There was “unusual market activity” on AeroCentury stock in December 2020, which according to the first day declaration, the “unusual volume and price action was due to algorithmic trading.”
On May 1, 2020, the debtors and the MUFG lenders executed an amendment to the prepetition revolving credit facility to convert it into a term loan. On Oct. 30, 2020, Drake, through Falko as loan servicer, purchased all of the debt held by the MUFG lenders under the prepetition credit facility, of approximately $87.9 million, as well as the swap termination payments owed with respect to the debt. The company entered into a related amendment with Drake and UMB Bank, the replacement administrative agent, to PIK the cash component of the interest payments due under the loan, beginning with payments due March 2020. The prepetition credit facility matures March 31. The debtors note that the $83.5 million prepetition credit facility “does not take into account capitalized interest for April 2020 which was added to the principal on May 1, 2020.”
The debtors are represented by Morrison & Foerster and Young Conaway as co-counsel, and B. Riley Financial as investment banker. KCC is the claims agent. The case has been assigned to Judge John T. Dorsey (case number 21-10636).
Events Leading to the Bankruptcy
The company attributes its financial struggles to “certain impairment losses and bad debt allowance,” leading to defaults under the prepetition revolver by fall 2019, leading to certain amendments under the credit agreement and forbearance through December 2019, after which the MUFG lenders would provide no further forbearance relief. The debtors’ cash flow issues have been exacerbated by the Covid-19 pandemic, which had “an overwhelming adverse effect on all forms of transportation globally, but most acutely for the airline industry,” the debtors say, adding that the “combined effect of fear of infection during air travel and international and domestic travel restrictions has caused a dramatic decrease in passenger loads in all areas of the world, not just in those countries with active clusters of COVID-19, as well as in airline ticket net bookings (i.e., bookings made less bookings canceled).”
B. Riley ran a prepetition dual-track process looking to raise capital and/or sell assets in December 2019, after the debtors defaulted under the MUFG facility. The debtors negotiated a forbearance, along with three amendments, with the MUFG group. The marketing process resulted in eight indications of interest, including two that would be repaid the outstanding principal and interest under the MUFG facility. However, the marketing process coincided with the start of the Covid-19 pandemic, and all of the parties that submitted indications of interest withdrew. The debtors re-started the sales and marketing process in early April 2020, resulting in four offers by mid-May 2020. The debtors say that Drake’s offer was “far and away” the best submitted.
In December 2020, Drake proposed to acquire three aircraft leased to Republic Airways and owned by ACY E-175 LLC, a special purpose entity owned by the debtors. After “several weeks of negotiations,” the company agreed with Drake on a prepetition sales process for the aircraft, resulting in six offers. Drake was ultimately the winning bidder, and closed on the aircraft in March. As part of the sale, Drake agreed to allow the debtors to retain $2.1 million of sale proceeds to “fund the Debtors’ continued business operations and further sale and restructuring efforts.” Drake also ultimately agreed to serve as stalking horse for the debtors’ remaining aircraft and other assets.
On March 16, the debtors entered into an asset purchase agreement with Falko Regional Aircraft Ltd. Under the APA, Falko acquired AeroCentury’s membership interests in ACY E175, an entity which owned three aircraft that served as collateral for certain nondebtor special purpose entity loans in exchange for purchase consideration of $26.5 million in the form of cash and assumed liabilities, with the cash portion used used to pay down, in part, the prepetition credit facility and fund operations and the chapter 11 cases.
Background
AeroCentury was founded in 1997 to provide leasing and finance services to regional airlines worldwide. The debtors’ aircraft portfolio consists primarily of midlife regional turboprop and jet aircraft and engines, which the debtors lease aircraft to a globally diverse customer base. The debtors also sell aircraft from their operating lease portfolio to third parties, including other leasing companies, financial services companies and airlines. The company’s operating performance is driven by the composition of their aircraft portfolio, the terms of its leases, the interest rate of their debt and asset sales. The debtors currently lease aircraft to six airlines in five countries.
The debtors’ generated $43.6 million in annual revenue for 2019, which reflected a 61% increase from 2018, primarily attributed to increased maintenance reserves revenue and gains on asset sales in 2019 as opposed to a loss on sales of assets in 2018. Operating revenue decreased by 7% in 2019, primarily due to reduced rent income resulting from the early termination of four aircraft leases with one of the debtors’ customers and the sale of an asset in 2019 that had been on lease until the time of sale. These decreases were partially offset by revenue from two aircraft purchased in the second quarter of 2018 and an asset that was on lease in 2019 but off lease in 2018. As of the debtors’ latest SEC filing on Sept. 30, 2020, AeroCentury’s revenue and other income decreased by 85% in the third quarter of 2020 from the prior year, primarily due to effects of the Covid-19 pandemic on the airline industry.
The debtors held the following aircraft subject to operating leases as of the petition date: one Bombardier CRJ900 regional jet, three Bombardier CRJ700 regional jets and two Bombardier Q400 turboprop aircraft. The debtors also hold two Bombardier DHC-8-300 subject to financing leases. The debtors also hold the following aircraft for sale in whole or as parts: three Bombardier CRJ900 aircraft, one Bombardier Q300 aircraft, one Bombardier Q400 aircraft, one SAAB 340B Plus aircraft and one Pratt & Whitney PW150A aircraft.
AeroCentury generally targets used regional aircraft with purchase prices between $10 million and $20 million and lease terms of three to 10 years. The debtors typically lease their aircraft to customers pursuant to “triple net leases,” which are leases under which, in addition to monthly rental payments, the lessee is generally responsible for the taxes, insurance and maintenance and repair of the aircraft arising from the use and operation of the aircraft during the term of the lease.
The debtors’ corporate organizational structure is shown below:
The debtors' largest unsecured creditors are listed below:
| Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| American Express
National Bank |
Salt Lake
City |
PPP Loan | $ 278,715 |
| Customers Bank | West Reading, Pa. | PPP Loan | 170,165 |
| American Express | New York | Office
Expenses |
6,980 |
| AT&T | Dallas | Telephone | 5,879 |
| The IR Group | Sammamish, Wash. | Press Release /
Investor Relations |
1,050 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | Lorenzo Marinuzzi | Morrison
& Foerster |
New York |
| Erica J. Richards | |||
| Debtors' Co-Counsel | Joseph M. Barry | Young Conaway
Stargatt & Taylor |
Wilmington, Del. |
| Ryan M. Bartley | |||
| Joseph M. Mulvihill | |||
| S. Alexander Faris | |||
| Debtors' Investment
Banker |
Adam Rosen | B. Riley
Financial |
New York |
| Counsel to the
Prepetition Lender |
Neil Poland | Vedder Price | Chicago |
| David L. Kane | |||
| Counsel to the Federal
Aviation Administration |
N/A | McAfee & Taft | N/A |
| Debtors' Claims
Agent |
Evan Gershbein | Kurtzman
Carson Consultants |
El Segundo, Calif. |
| United States Trustee | Linda Casey | Office of the
U.S. Trustee |
Wilmington, Del. |
Bid Procedures Motion
As part of a prepetition marketing effort, B. Riley contacted approximately 90 parties, ultimately leading to the E-175 sale to Drake. The debtors seek to continue to market and sell their core assets, “primarily aircraft.” Drake would serve as stalking horse with a credit bid of the prepetition debt it acquired at the end of October, of approximately $83 million.
The debtors propose a “reasonable” initial overbid to be calculated in consultation with certain consultation parties, with subsequent overbids to be announced also in consultation with the consultation parties. There is no proposed breakup fee or expense reimbursement.
The debtors also submitted the declaration of Adam Rosen, managing director at B. Riley, the debtors’ investment banker, in support of the proposed bid procedures.
The debtors propose the following sale timeline:
Cash Collateral Motion
The debtors seek to use the cash collateral of Drake, stating that it is “required to fund day-to-day operating expenses,” which include employee payroll and other benefits” and is otherwise necessary to “sustain the going concern value of the Debtors’ businesses.” Without the use of cash collateral, the debtors believe that they will be unable “to preserve and maximize the value of the Debtors’ assets” and that “the value of the Debtors’ assets will quickly erode.”
The debtors state that all of their cash constitutes cash collateral of the prepetition lender.
The debtors propose replacement liens and allowed superpriority administrative expense claims as adequate protection. The debtors also propose adequate protection payments equal to “all rent, maintenance reserves, power by the hour payments and all other revenue received in respect of the Aircraft under the lease documents proposed to be acquired by Drake pursuant to the stalking horse agreement in respect of any period from (and including) February 1, 2021.”
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carve-out for professional fees is $100,000.
The proposed budget for the use of cash collateral is HERE.
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for joint administration
- The cases will be jointly administered under case No. 21-10636.
- Motion to establish trading procedures
- AeroCentury seeks to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses. As of Dec. 31, 2019, the debtors say they believe that they have about $22 million of federal NOLs and $418,000 of state NOLs.
- Motion to pay employee wages and benefits
- The debtors seek to pay up to $200,000 in employee obligations, including obligations owed to AviaConsult International, which services the debtors’ aircraft located in Europe.
- Motion to use cash management system
- The company has bank accounts with California Bank & Trust, Union Bank, MUFG Bank and Bank of Montreal.
- Motion to maintain insurance programs
- Motion to pay taxes and fees
- The debtor requests approval to pay up to $45,000 on account of taxes on an interim basis and up to $60,000 in tax obligations on a final basis.
- Motion to reject Typhoon Investment executory contact
- The debtors seek to reject a contract entered into on March 6, 2020, with Typhoon Investments Ltd. for the sale of one Dash 8-300 MSN 238 aircraft. The sale originally contemplated that delivery of the aircraft occur on May 20, 2020, but due to the Covid-19 pandemic, the contract parties mutually agreed to extend the closing and delivery dates to Oct. 1, 2020. According to the debtors, Typhoon failed to accept delivery in accordance with the terms of the contract, and consequently, prior to the petition date, the debtors sent a notice to Typhoon stating that the contract had automatically terminated by its terms. “Despite that the Rejected Contract has terminated, Debtors nonetheless seek authority to reject the Rejected Contract out of an abundance of caution,” the debtors say.
- Application to appoint KCC as claims agent
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