First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
Tect Aerospace Group Holdings Inc.
|Tect is a manufacturer of high precision components and assemblies for the aerospace industry
|Attributes financial struggles to Boeing’s suspension of production of the Boeing 737 MAX, Spirit Aerosystem’s termination of a supply contract and the impact of Covid-19 on the aviation industry
|Seeks to pursue a sale process for “all or a portion their assets in the near term”
|Requests $60.2 million of DIP financing ($29.5 million of new money) from Boeing, which purchased the debtors’ prepetition revolving credit facility debt in February
, a Wichita, Kan.-based manufacturer of high precision components and assemblies for the aerospace industry, filed for chapter 11 protection on Monday night in the Bankruptcy Court for the District of Delaware, along with several affiliates. Pinning the bankruptcy filing primarily on the impact of Boeing’s suspension of production of its Boeing 737 MAX airplane, the termination of a supply agreement by Spirit AeroSystems and the collapse of the aviation industry stemming from the Covid-19 pandemic, the debtors filed to pursue a sale process. The debtors have secured commitments for $60.2 million of DIP financing (including $29.5 million of new money) from Boeing, which purchased the debt under Tect’s prepetition revolving credit agreement in February before notifying the debtors that it would not provide further funding absent a chapter 11 filing. 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 TECT bankruptcy filing Request a Trial here.
According to the first day declaration of Winter Harbor co-founder and Managing Partner Shaun Martin, who serves as the debtors’ chief restructuring officer, the debtors are in the process of marketing their assets “and are hopeful that this process will result in an executed asset purchase agreement or agreements that will allow the Debtors to sell all or a portion of their assets in the near term pursuant to section 363 of the Bankruptcy Code.” Martin adds that the DIP financing contemplated in the cases would provide the funding necessary for the debtors to continue their operations through the sale processes and to pay expenses related to these chapter 11 cases.
Milestones contained in the DIP documents envision two distinct sale processes: (i) with respect to the debtors assets in Everett, Wash., the deadline to file a bid procedures motion is April 15, with an auction deadline of May 20 and a sale closing deadline of June 2; and (ii) with respect to the debtors’ assets in Kansas, the bid procedures deadline is June 4, with a sale closing deadline of July 22.
The first day hearing has been scheduled for tomorrow, Wednesday, April 7, at 2 p.m. ET.
The company reports $50 million to $100 million in assets and $100 million to $500 million in liabilities, and its prepetition capital structure includes:
- Secured debt:
- Revolving credit agreement: $41.9 million.
- Chisholm Trail State Bank equipment loan: $1.25 million.
- Unsecured debt:
- Obligations to nondebtor affiliated creditors: $19.7 million.
- Ordinary course trade creditors: $35 million, including $17 million owed to Boeing.
- Equity: The debtors are privately held companies owned by Glass Holdings LLC and related Glass-owned or Glass-controlled entities.
In February, PNC transferred the loan under the prepetition credit agreement to Boeing and, by letter dated Feb 26, Boeing notified the debtors that Boeing was the sole lender under the prepetition credit agreement.
The debtor is represented by Richards Layton & Finger as counsel, Winter Harbor as restructuring advisor and Imperial Capital as investment banker. KCC is the claims agent. The case number is 21-10670. The case has been assigned to Judge Karen B. Owens.
Events Leading to the Bankruptcy Filing / Prepetition Restructuring Efforts
The company attributes its financial struggles to the FAA’s grounding of Boeing 737 MAX airplanes and the “unprecedented economic impact” of the Covid-19 pandemic on the aviation industry.
In 2019, 35% of TECT’s revenue was related to the production and sale of parts for the 737 MAX to both Boeing and Spirit Aerospace, a supplier to Boeing under the 737 MAX program. Boeing announced in April 2019 that it would be reducing production of the 737 MAX and, in December 2019, Boeing announced the suspension of production entirely beginning in January 2020. Following this announcement, the debtors negotiated with Boeing to continue to supply certain assemblies for the 737 MAX at a significantly lower volume. Around the same time, Spirit announced that it would also suspend its production of assemblies used in the production of the 737 MAX. While production of the 737 MAX resumed with respect to Spirit in May 2020, it was at a much lower volume. “As a result, aerospace suppliers, such as TECT, were drastically affected by the production halt of the 737 MAX,” the debtors say, noting that in 2020, Tect’s revenue related to the 737 MAX dropped approximately 83% from compared with 2019.
Having defaulted on their obligations to their affiliated creditors, in March 2020, the debtors, Boeing, the affiliated creditors, PNC and other important customers commenced discussions regarding strategic alternatives for addressing Tect’s financial distress, leading to the parties to explore the option of a sale of Tect’s Kansas assets to nondebtor affiliate NWI Aerostructures. The parties ultimately failed to reach an agreement. The debtors continued their exploration of out-of-court options through December 2020, but these efforts were stymied when Spirit notified the debtors that it was terminating its supply agreement with Tect.
After initial negotiations between the parties failed, Tect continued evaluating a number of alternative paths forward. In February 2021, Boeing purchased the debt under the prepetition credit agreement and notified the debtors that it would not continue funding under the agreement absent a chapter 11 filing. The forbearances offered by the affiliated creditors ultimately gave the debtors until April 9 to finalize DIP financing arrangements with Boeing and prepare for the chapter 11 filing.
The debtors launched a prepetition marketing process with Imperial Capital in March but have not entered into any agreements with respect to a sale of the debtors’ assets.
Recognizing that a likely bidder for certain of Tect’s Kansas assets may be NWI or another affiliate of the debtors, the board of directors of Tect Aerospace Kansas Holdings LLC and Tect Aerospace Holdings LLC established a special independent committee of each board to review, evaluate, negotiate, approve and execute any transaction involving the debtors, on the one hand, and one or more affiliates of the debtors and any other related party, on the other hand. Jean King is the independent director of the boards and the sole member of the special committee.
Tect and its affiliates manufacture high precision components and assemblies for the aerospace industry, specializing in complex structural and mechanical assemblies and machined components for a variety of aerospace applications. The debtors produce assemblies and parts used in flight controls, fuselage/interior structures, doors, wings, landing gear and cockpits. Established in 2004 and headquartered in Wichita, Kan., the debtors supply “many of the largest aerospace manufacturers in the world,” including Boeing and other customers in the commercial, business, military and general aviation markets. The debtors have about 400 employees.
As is commonplace throughout the aerospace industry, the debtors say, Tect functions under a tiered supply chain structure whereby the debtors manufacture and service specialized aerospace components that are in turn utilized and incorporated by customers into their platforms and planes.
The debtors operate in an “extremely competitive market which has been severely impacted both by the extended grounding of the 737 MAX aircraft and effects of the COVID-19 pandemic on aircraft production rates,” the debtors lament. The company continues to provide high-precision and complex manufacturing and assembling services to meet the “stringent demands of their customers”; however, the debtors note that the abrupt decline in this market has created “severe financial challenges.”
The chart below summarizes Tect’s corporate organizational structure:
The debtors' largest unsecured creditors are listed below:
|10 Largest Unsecured Creditors
|The Boeing Co.
||Trade / Material
|Spirit Aerosystems Inc.
||Trade / Material
|All Metal Services Ltd.
|WM F Hurst Co. LLC
|Universal Alloy Corp.
|Kiser Manufacturing Co.
|Spirit Aerosystems Processing
|Global Machine Works Inc.
|Hytek Finishes Co.
The case representatives are as follows:
||Daniel J. DeFranceschi
|Paul N. Heath
|Zachary I. Shapiro
Advisor and CRO
|David E. Burns
|Co-Counsel to Boeing
||Alan D. Smith
|Co-Counsel to Boeing
||Kenneth J. Enos
Stargatt & Taylor
DIP Financing Motion
The debtors request $60.2 million in DIP financing, consisting of (i) $29.5 million of new-money revolving loans, and (ii) a creeping rollup of $30.7 million of prepetition secured debt. The DIP motion seeks $22 million in total DIP financing on an interim basis.
Pursuant to the terms of the DIP facility, the debtors’ receipts would be swept daily to repay the prepetition obligations “such that the Debtors’ operations and other costs incurred to administer the Debtors’ chapter 11 cases will be funded entirely from the proceeds of the DIP Facility.” The debtors say that the interim borrowings “will exceed the debtors’ receipts by approximately $12.9 million, and the maximum commitment under the DIP facility would exceed the debtors’ receipts by approximately $16.6 million. “As a result, on the expected date when the DIP Facility will be fully drawn, it is anticipated that the DIP Facility will consist of approximately $29.5 million in new money post-petition financing in excess of the Debtors’ receipts,” the debtors say.
The DIP financing bears interest at the 30-day L+10% (plus an additional 5% for the default interest rate) and matures on the earliest of (i) Aug. 6 (120 days from the petition date), (ii) the date of acceleration of obligations, (iii) the effective date of sale of all or substantially all of the debtors’ assets and (iv) the effective date of a chapter 11 plan that provides for payment in full of all obligations or is otherwise acceptable to the DIP agent. The debtors would use the proceeds of the DIP facility for working capital and other general purposes, including paying professional fees in these chapter 11 cases, to pay the reasonable fees and expenses of the DIP secured parties, to pay certain interest and fees that are payable in connection with the DIP facility and to pay claims in respect of certain prepetition creditors.
To secure the DIP financing, the debtors propose to grant first priority, senior priming liens on all DIP collateral, including the DIP collateral that is subject to the prepetition liens under the prepetition credit agreement, and superpriority claims. The DIP liens would attach to, and the superpriority claims would have recourse to, the proceeds of avoidance actions upon entry of the final order.
The facility includes various fees, including a 1.5% commitment fee with respect to the aggregate revolving commitments, earned and payable upon entry of the interim order, and a 1% funding fee with respect to the aggregate principal amount of each advance provided under the DIP facility, payable in cash immediately following the funding of the advance or, if agreed by the lender, netted out of the proceeds of the advance.
In support of the proposed DIP financing, the debtors attached to the motion the declaration of David Burns, a senior vice president in Imperial Capital’s restructuring group, who states that, “absent funds available from the DIP Facility, the Debtors could face an immediate, value-destructive interruption to their businesses and lose support from important stakeholders on whom the Debtors’ businesses depend, which, in turn, would hinder the Debtors’ ability to maximize the value of their estates through any proposed asset sale or otherwise.”
The company proposes the following adequate protection to its prepetition secured lenders: (i) replacement liens, subordinate only to the DIP liens and the carve-out, (ii) superpriority claims, (iii) the gradual application of the debtors’ receipts to satisfy the prepetition obligations, (iv) payment of fees and expenses, (v) financial reporting and (vi) credit-bid rights.
In addition, 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), in each instance subject to the final order.
The carveout for professional fees is $250,000. Upon the consummation of a sale of the debtors’ assets located in Everett, Wash., and in Kansas, in each case, consented to by the required DIP lenders, the debtors would be authorized and directed (without the requirement to have received a carveout trigger notice) to transfer from the proceeds of such sale(s) $500,000 for Everett and $500,000 for Kansas for the amount of wind-down expenses expected to be incurred to wind down each location after consummation of such sale. The wind-down funds are not intended to be part of the carve-out and would only be required to be funded out of the proceeds of a sale approved by the DIP secured parties.
The proposed budget for the use of the DIP facility is HERE
The DIP financing is subject to the following milestones:
- April 10: Outside date for entry of interim DIP order;
- April 15: Deadline to file bid procedures motion and sale motion with respect to the sale of the debtors’ Everett, Wash., assets;
- May 10: Outside date for court to enter (i) final DIP order, (ii) Everett bid procedures order and (iii) orders with respect to cash the management motion and the retention applications of Winter Harbor and Imperial Capital;
- May 20: Everett auction deadline;
- May 27: Entry of Everett sale order;
- June 2: Outside date for Everett sale closing;
- June 4: Deadline to file (i) bid procedures motion and (ii) sale motion with respect to the sale of the debtors’ Kansas assets;
- July 19: Outside date for (i) entry of the Kansas assets sale order and (ii) debtors to file a chapter 11 plan and disclosure statement;
- July 22: Outside date for Kansas assets sale closing;
- Sept. 2: Outside date for court to enter order approving the disclosure statement;
- Oct. 17: Outside date for court to enter order confirming the chapter 11 plan; and
- Nov. 16: Plan effective date.
The debtors lso filed various standard first day motions, including the following:
- Motion to use cash management system
- The company has bank accounts with PNC Bank. Prior to the petition date, Boeing purchased PNC’s position under the prepetition credit agreement and revolver. The debtors maintained their accounts with PNC, but, consistent with the transfer of the facility to Boeing, the debtors entered into deposit account control agreements in favor of Boeing, as lender. The debtors' proposed DIP facility seeks authorization to continue the lending relationship with Boeing, in a similar structure as under the prepetition revolver with the addition of new-money financing.
- Motion to pay critical vendors
- Tect seeks authority to pay up $2.5 million in critical vendor claims on an interim basis ($4.7 million on a final basis), $10,000 on account of foreign vendors on an interim basis ($103,000 on a final basis) and $2.4 million with respect to 503(b)(9) claims on an interim basis ($6.1 on a final basis).
- Motion to pay shippers and other claimants
- The debtors request approval to pay up to $55,000 in lien claims on an interim basis.
- Motion to maintain insurance programs
- Motion to maintain shared services agreement
- A nondebtor affiliate, Office Support Services LLC, provides essential services to the debtors and other nondebtor affiliates, including enterprise-level information technology, employee benefits management and other human resources functions and traditional treasury and risk management. Absent access to these services, the debtors would need to develop such services internally or arrange for the services from a third-party provider, each of which would have adverse financial and operational effects on the debtors’ business, the motion says. Accordingly, the debtors request that the shared services agreement “remain undisturbed” during the course of the chapter 11 cases.
- Motion to pay taxes and fees
- The debtors seek to pay up to $31,500 in taxes and fees on an interim basis and up to $225,500 on an final basis.
- Motion to provide utilities with adequate assurance
- Application to appoint Kurtzman Carson Consultants as claims agent
Editor’s note: an earlier version of this story incorrectly reported the total DIP facility size was $62 million. This story has been updated to reflect the correct DIP facility size of $60.2 million.