Relevant Documents:Hearing AgendaPress Release
Judge Michael Wiles
approved today the SAS debtors’
proposed $700 million DIP facility with Apollo Global Management. The judge delivered a bench ruling this afternoon after taking the matter under advisement
earlier today at the conclusion of day two of the DIP hearing. The court held the
first day of the DIP hearing on Wednesday, Sept. 7.
Judge Wiles approved the DIP notwithstanding his “doubts and misgivings” over the two “equity-linked features” of the proposed DIP: a call option and tag right for Apollo. The call option would give Apollo the option to subscribe for equity in the reorganized debtors under a plan based on a $3.2 billion assumed total enterprise value. If the debtors pursue an alternative transaction, Apollo would have the option to convert some or all of the outstanding DIP loans to equity and/or to purchase equity for cash.
The tag right would give Apollo the right to subscribe for up to 30% of a new-money equity raise with a third party on the same terms made available to such a third party. Both options are terminable by the debtors, subject to a $19.5 million call option termination fee and a $21 million tag right termination fee.
The judge initially raised his concerns at the Aug. 18
hearing on DIP
transaction protections for Apollo and continued to probe the debtors and their advisors over the issues throughout the two-day DIP hearing.
In today’s ruling - which Judge Wiles intends to memorialize in a written ruling - the judge expressed worry over “opening the door” to similar equity-linked DIPs in future cases. The judge noted, however, that the lack of objections (the official committee of unsecured creditors
supported the DIP) and the existence of “some precedent” for these types of arrangements (citing the
Aeroméxico DIP approved by Judge Shelley Chapman in 2020) together weighed in favor of its approval.
A summary of today’s bench ruling followed by highlights from the DIP hearing before the ruling are reviewed below.
Ruling
Judge Wiles said his concerns relate both to the “principle” of granting equity rights under a DIP and with whether the deal makes “economic sense” for the estates.
To start, Judge Wiles rejected the debtors’ argument - discussed further below - that, in the court’s words, “the right to participate in a plan process” is a property right that a debtor can sell under Bankruptcy Code section 363 outside the context of a plan process. The judge said he does not believe that section 363 authorizes that.
Judge Wiles also noted that the fact that the call option and tag right are terminable weighed heavily in his analysis, pointing out that he has uniformly rejected DIP proposals that would have guaranteed DIP lenders a specified percentage of reorganized equity. Such provisions “have no business” in DIP loans and should be reserved for the plan process, said the judge.
The court also expressed skepticism over the debtors’ assurances that the equity-linked features were granted in exchange for a reduced interest rate (approximating the size of the $19.5 million call option termination fee, according to the debtors) and are unlikely to impede a competitive plan sponsorship process because they are revocable and because the termination fees are “relatively small” in relation to the equity that would eventually be raised.
Those arguments did little to allay his concerns, said the judge, adding that “if we have learned anything,” it is that “if we open a door in one case,” the “door gets pushed open wider in the next case.”
Judge Wiles then laid out his doubts about whether it can be determined that the call option and tag right, and their associated termination fees, are actually a good business deal for the company. He noted that the potential costs and benefits as well as the value of the options being granted to Apollo are “extremely difficult” to determine, making it hard to discern whether the arrangement makes “business sense” or is actually an “additional way that the process is being chipped away at” to allow “particularly situated creditors” to obtain advantages.
The judge added that he was not persuaded by the debtors’ evidence on the potential costs and benefits of the deal, which consisted primarily of a probability weighted analysis of potential outcomes. As a result, he continued, he is unable to determine the value of the options being granted compared with the benefits to be received, and whether it is a “good deal” “depends entirely” on currently unknown factors, such as the debtors’ actual enterprise value and whether third parties or Apollo itself remain interested in sponsoring a plan when the time comes.
Having laid out his reservations, Judge Wiles said he is not willing to deny the DIP motion based on “abstract principles” in the face of some precedent and the lack of objections. He added that he is hesitant to substitute his “instincts” as to economics in place of the judgments of the parties who have an actual economic interest. The judge observed that he has no evidence that the debtors and UCC are clearly wrong in their judgment, and therefore he would not “disregard their consensus.”
Hearing Summary
SAS counsel Gary Holtzer of Weil Gotshal attempted to assuage the court’s concerns over the source of authority in the Bankruptcy Code to grant Apollo the call option and tag right if the request had been made separate from a DIP. Holtzer argued today that the source of authority would be Bankruptcy Code section 363(b), which authorizes a debtor to use or sell estate property outside the ordinary course of business with court approval.
Holtzer asserted that the equity-linked features of the DIP should be viewed as a use or sale of an “opportunity to invest” and/or a use of cash, both of which he maintained are estate property. As a result, Holtzer argued, the court can approve the transactions under section 363(b) with a finding that they are a reasonable exercise of the debtors’ business judgment.
Holtzer maintained that investment opportunities are estate property pursuant to the U.S. Supreme Court’s 1999
North LaSalle opinion. Judge Wiles questioned whether
LaSalle permits a sale of investment rights outside of a chapter 11 plan process. He further observed that “who gets equity under a plan” is not a matter within the debtors’ business judgment but is instead a plan confirmation issue, which requires a creditor vote. Holtzer responded that if Apollo were to exercise its rights, it would only receive equity pursuant to a confirmed plan that has been put to a creditor vote.
Judge Wiles continued to express concerns over the “implications” of Holtzer’s argument on the applicability of section 363(b), querying whether it would extend to a sale of exclusive equity subscription rights outside of a plan process. Holtzer argued that such a sale could be approved apart from a plan under the same standard as a sale of substantially all assets under section 363.
The court also probed the debtors on how the equity-linked features would apply under certain alternative scenarios, including under a competing third-party plan and a section 363 asset sale separate from a plan. Holtzer answered that a third-party plan that does not honor Apollo’s call option or tag right would trigger the respective termination fees.
He added that nothing in the DIP prevents the debtors from pursuing a sale as opposed to a reorganization, but Apollo would have the right to exercise its call option (but not the tag right) and propose an Apollo-sponsored plan at a $3.2 billion total enterprise value, which the debtors would weigh against any sale bids. If the debtors were to reject Apollo’s plan bid, the $19.5 million call option termination fee would be triggered.
The court heard additional testimony from John Luth of Seabury Securities, the debtors’ co-investment banker and restructuring advisor, who also testified on Wednesday, Sept 7. Judge Wiles questioned Luth on the debtors’ need for the $700 million requested under the DIP. Luth responded that the July
pilots strike caused the debtors to accrue approximately $165 million in costs - primarily related to dishonored passenger tickets and European Union fines - that have yet to become payable. Luth added the fall and winter are typically low-revenue seasons for airlines. He said the debtors have no alternatives if the court were to reject the DIP.
Discussing ongoing engagement with the debtors’ other stakeholders, Luth mentioned that the government of Denmark - a
holder of both debt and equity in SAS - has expressed “strong interest” in being involved in a plan equity raise.
The UCC, which supports the DIP, called to the stand Leon Szlezinger of Jefferies, the UCC’s investment banker, to offer his views. Szlezinger said that although the UCC was initially displeased with the proposed equity-linked features, it came to support the DIP as a result of certain
concessions from Apollo and after concluding that there was a “very real need for financing coming up quite quickly.”
Szlezinger said the UCC analyzed the potential impact of the call option and tag right termination fees - $19.5 million and $21 million, respectively - on unsecured creditor recoveries and ultimately determined they would have a “very small effect.”
He added that the unsecured claim pool “will be large here, certainly in the billions,” and as a result fees in the $20 million range would be insignificant.