Two Recent Cases Present Novel Approach to Bankruptcy Financing, Debtors Enter Into Controversial New Loans Immediately Prior to Petition Date

Relevant Documents:
PHI Blue Torch Loan Credit Agreement
Bristow ‘2019 Term Loan’ Credit Agreement

Postpetition DIP loans can be highly controversial to the extent they hand a high degree of case control to lenders or are structured to remedy prepetition collateral holes. A trend in bankruptcy financing emerging over the past two months could prove equally controversial: two new-money loans expressly contemplating bankruptcy and funded to debtors just days prior to the petition date. On March 13, PHI Inc., a Lafayette, La.-based helicopter services company, entered into a term loan with third-party lender Blue Torch Capital 36 hours before filing for chapter 11. Then on May 10, Bristow Group Inc., a Houston-based direct competitor of PHI, entered into a term loan with an ad hoc group of holders of its senior secured notes a day before filing for bankruptcy and further obtained a commitment letter from the ad hoc secured group to fund a traditional DIP loan if needed later in the cases. During Bristow’s first day hearing, the Houlihan Lokey banker advising the debtors in both cases, Matthew Niemann, called the financing an “Out-N-In Burger,” due to the presence of both in-court and out-of-court components.

Both loans took advantage of the presence of unencumbered collateral and the absence of covenants that would prevent the move. The Bristow and PHI prepetition loans are in contrast to another structuring option arising in recent months: prepetition bridge loans that convert into DIP financing, such as the $15 million facility recently unveiled in connection with an anticipated Fusion Connect bankruptcy or the May 2018 $110 million bridge loan converted to a DIP in Westmoreland Coal’s chapter 11 cases in October.

While such bridge financing expressly contemplates approval of a conversion into DIP financing, the PHI and Bristow loans are intended to operate as valid and binding prepetition claims against the bankruptcy estate without any further court action. As discussed below, this has proven controversial and attracted criticism from unsecured creditors and others.

Case control is a prominent theme in the arguments of those taking issue with the prepetition loans, with an ad hoc unsecured group in Bristow questioning whether the debtors’ entry into the restructuring support agreement with the ad hoc secured group was a condition to the loan provided by that group. The Bristow ad hoc unsecured group has said it may seek discovery into whether the debtors and the secured group acted in good faith in connection with the prepetition loan and RSA. In PHI, the indenture trustee for the company’s unsecured notes raised similar concerns about a lack of transparency, characterizing the prepetition loan as an attempt to secure the benefits of DIP financing without the accompanying reporting obligations and court oversight.

In PHI, the unsecured creditors committee has also argued that in entering the Blue Torch loan, the debtors “manufactured” a reason to cross-collateralize a purported “Insider Loan” from Thirty Two LLC, an affiliate of CEO Al Gonsoulin. Unsecured creditors in both cases have also raised the argument that the prepetition loans may be avoidable as fraudulent transfers.

The Loans

The Blue Torch loan is a $70 million term loan priced at L+6% with a LIBOR floor of 1.5% and a four-year maturity. The loan is guaranteed by PHI’s material domestic subsidiaries and is secured by a first lien on 91 aircraft owned by debtor PHI Inc. “registered and located in Antarctica, Australia, Canada, and the United States, (which are currently deployed primarily in PHI’s oil and gas and technical services operations), the related spare parts for such aircraft, and certain other non-working capital assets” as well as a lien on all working capital assets second in priority to the liens granted under the Thirty Two loan. Among other covenants, the loan requires a minimum “total appraisal ratio” of aircraft collateral appraised value to outstanding borrowings of 4:1, measured monthly.

Debtor Bristow Group Inc., or BGI, and nondebtor Cayman Islands affiliate Bristow Holdings Co. Ltd. III, or BHC III, are co-borrowers under the “2019 term loan” issued with 2% OID, an interest rate of L+7% with a floor of 2.5% and a three-year term. The 2019 term loan is secured by a junior lien on certain collateral that secures the secured notes plus new first-priority liens on previously unencumbered assets of the obligors, including certain unspecified aircraft and 35% of the equity interests in certain of BGI’s first-tier foreign subsidiaries (the remaining 65% of the equity interests in such entities has been previously pledged under the secured notes), and by certain other assets, including 100% of the equity of BHC III, Bristow International Panama S. de RL and two newly formed “specified aircraft SPVs” holding six helicopters and four related leases. The 2019 term loan is guaranteed by each of the debtors other than Bristow Equipment Leasing Ltd. and by certain nondebtor subsidiaries.

The Bristow loan has an “equity conversion option,” which is structured to give the borrower the option to convert the loan into reorganized equity under certain conditions. Those conditions give the lenders a significant amount of control regarding whether the option is actually exercised. The equity must be issued pursuant to a plan “satisfactory to the lenders.” Further, the loan would convert into an “agreed upon” percentage of reorganized equity “at an agreed upon” discount to plan equity value, which such percentage and equity value shall be “acceptable to” the lenders.

Debtors’ Justifications

PHI’s credit agreement with Blue Torch expressly contemplated that PHI would file for chapter 11 “promptly following” the date of the agreement and that the proceeds of the loan would be used to fund working capital, liquidity requirements and other needs during PHI’s bankruptcy. At the PHI first day hearing, the debtors’ financial advisor, Niemann of Houlihan Lokey, testified that PHI was not soliciting DIP proposals prepetition but that the company did solicit out-of-court proposals, and the one from Blue Torch was the most attractive. Niemann stated that the debtors decided to pursue the Blue Torch financing out of court “because we could” and it was permitted under the indenture for the company’s 5.25% senior unsecured notes. He acknowledged that it was an unusual facility but stated that there was no “nefarious purpose” to the financing and added that “it is pretty cool that we could structure this.”

PHI’s latest disclosure statement responded to a question from the UCC regarding why the debtors opted for the Blue Torch loan instead of “traditional DIP financing.” Among other reasons, the Blue Torch facility was preferable, the debtors argued, because it provided higher net cash to the debtors “than the proposal from another large hedge fund and the Noteholders’ DIP financing would have provided, especially considering the professional fees that would have been incurred by negotiating and complying with the DIP’s terms.” The DS also asserted that the Blue Torch loan allowed the debtors to “avoid[] the administrative burden of seeking court approval to use the DIP financing, which would have interfered with daily operations of the Debtors.”

In addition, the DS stated that after undertaking a comprehensive investigation, the PHI debtors have concluded that the facts do not support avoiding any of the payments, transfers or authorizations made in connection with the Blue Torch facility under theories of fraudulent conveyance (either actual or constructive) or preferential transfer.

Niemann figured prominently at the Bristow first day hearing as well, saying that he suggested the pre- and postpetition financing proposal structure to the company because it was highly important to have cash in hand as soon as possible, especially with a heavy equipment operator such as Bristow. Neimann noted that even if a loan has to be done “on the last day” before a filing, it can be advantageous to raise capital prepetition with unencumbered assets in order to obtain “certainty of capital.”

The Bristow debtors’ first day declaration justifies entry into the term loan due to its status as “part of a comprehensive financing package.” The debtors say they received four financing proposals prepetition - separate groups of unsecured and secured notes provided in- and out-of-court financing proposals and the company also received two other DIP proposals. According to the first day declaration, the debtors chose the ad hoc secured group’s proposal because “both in respect of the pre-petition term loan and post-petition DIP financing,” it “offered the best economic terms.” “Moreover,” the debtors say, “entering into the 2019 Term Loan and RSA with the Secured Noteholders allowed the Debtors to go in to chapter 11 with an agreement for the use of cash collateral, and avoid the prospect of a first-day valuation dispute.” Finally, the debtors say that “only an RSA with the secured noteholders gives the debtors the option of a consensual equitization of their senior secured debt, which otherwise could not be accomplished under section 1129(b) while also substantially deleveraging the Company’s balance sheet.”

Challenges

These loans have received scrutiny from unsecured noteholders and other parties in interest, including the official committee of unsecured creditors in PHI. The PHI debtors and key case parties, including the UCC, are now in a partial litigation standstill ahead of the court-ordered mediation scheduled to begin on May 31. No UCC has been appointed yet in Bristow’s chapter 11, but an ad hoc group of unsecured noteholders represented by Kramer Levin and Ducera Partners critiqued the prepetition loan at the first day hearing and in a statement before the hearing.

Prior to the PHI first day hearing, Delaware Trust Co., indenture trustee for the company’s 5.25% senior unsecured notes, filed a limited objection to the debtors’ cash management motion and posited that PHI’s entry into the term loan with Blue Torch on March 13 was the debtors’ attempt to secure the benefits of DIP financing without the accompanying reporting obligations and court oversight. The limited objection was resolved after the debtors agreed to provide Delaware Trust with weekly reporting as requested in the objection. However, counsel for the PHI debtors and for the indenture trustee spent most of the hearing engaged in a war of words over the trustee’s arguments.

Andrew Leblanc of Milbank, counsel to Delaware Trust, stated that rescue financing for a distressed borrower on the brink of bankruptcy is ordinarily undertaken through a DIP process with “the transparency, the openness, the opportunity for higher and better bids” inherent to that process. Leblanc questioned the debtors’ advisors on the debtors’ decisions to reject a DIP financing proposal from an ad hoc group of 5.25% noteholders. Leblanc also asked whether one of the motivations for closing the Blue Torch facility prepetition was to create an impaired voting class for plan confirmation purposes.

Subsequently, the PHI UCC took aim at the Blue Torch loan and the debtors’ prepetition conduct in a motion to adjourn the disclosure statement hearing. The UCC criticized the PHI debtors for justifying the loan rather than a DIP facility as providing more flexibility, claiming that “the Debtors did not intend to avail themselves of this flexibility” for which “they paid extra.”

In addition, PHI’s official committee of equity security holders objected to the debtors’ motion to use $30 million of cash collateral, saying that the provision of adequate protection to Blue Torch and Thirty Two including replacement liens, superpriority claims, releases and current payment of nondefault interest to Blue Torch was inappropriate. Judge Harlin Hale ultimately overruled the objection and approved the cash collateral motion on an interim basis at a hearing on May 13, where debtors’ counsel defended the adequate protection as “minimal.”

Most recently, on Friday, May 17, the PHI UCC moved to enforce the automatic stay against Blue Torch, arguing that its efforts to perfect prepetition aircraft security interests violated the stay. According to the motion, Blue Torch attempted to perfect its security interest in 91 of the debtors’ previously unencumbered aircraft by filing an aircraft security agreement with the U.S. Department of Transportation Federal Aviation Administration, or FAA. However, the UCC says that on May 16, it obtained copies of “rejection letters” from the FAA sent to Blue Torch on May 15 that “indicate that the pre-petition filings of the Security Agreements with the FAA by Blue Torch [was] not recordable when filed because of certain deficiencies.” Under section 544(a)(1) of the Bankruptcy Code, unperfected liens can be avoided and effectively treated as unsecured.

On May 16, the UCC recounts, Blue Torch filed a revised version of its security agreement that includes hand-written notations indicating that corrections were made to address the deficiencies identified in the FAA’s letter. The UCC seeks entry of an order to enforce the automatic stay and prohibit Blue Torch from taking any actions to cure defects in the perfection of its security interests in any of the debtors’ assets, including the aircraft. The motion is scheduled for hearing on June 18 at 10 a.m. ET.

Although the Bristow first day hearing was not as long or contested as PHI’s and no one cross-examined Neimann, unsecured creditors in that case have been just as focused on the prepetition term loan. In a statement filed prior to the first day hearing, the ad hoc group of Bristow’s unsecured noteholders filed a statement blasting the debtors’ decision not to engage on the noteholders’ alternative plan construct and warning of potential challenges to the debtors’ prepetition transaction. In a footnote, the ad hoc unsecured group reserved the right “to seek discovery into whether (i) entry into the RSA was made a condition to the $75 million financing (the ‘Prepetition DIP’) provided by the Secured Noteholders the day before the bankruptcy filing, (ii) the Debtors and the Secured Noteholders acted in good faith in connection with the Prepetition DIP and RSA, and (iii) certain claims and liens under the Prepetition DIP granted to the Secured Noteholders are subject to fraudulent transfer or otherwise avoidable.”

At the first day hearing, the debtors sought approval of a cash collateral motion that proposed to provide the term loan lenders with adequate protection in the form of superpriority claims, replacement liens, current payment of interest, payment of fees and expenses, current reporting under the applicable prepetition debt documents and adherence to certain adequate protection milestones beginning with an Aug. 1 deadline to file a plan and DS. Negotiation of the proposed form of interim order continued throughout the first day hearing, and Judge David Jones ultimately entered a revised form of interim order under which the ad hoc unsecured group (i) was added to a nonexclusive list of parties whose rights may not be prejudiced with respect to a challenge of the prepetition liens and (ii) received financial reporting rights.

Potential Issues

The swift and ongoing challenges to these two loans highlight a number of potential issues for lenders to consider.

Adequate protection. In the limited context of the PHI and Bristow cases, lenders have been able to use cash collateral orders as a vehicle to obtain adequate protection packages similar to what DIP lenders would negotiate in a DIP order.

Lien perfection. As highlighted by the allegations in the PHI UCC’s recent motion to enforce the automatic stay against Blue Torch, a short period between loan closing and the petition date may expose a lender to the risk of improperly perfected security interests that could be avoided. This issue could be heightened depending on the type and location of collateral and filing requirements in different jurisdictions. By contrast, a prepetition bridge loan rolled into a DIP or a classic postpetition DIP loan benefit from the bankruptcy court’s authority to order perfection in the DIP order.

Fraudulent conveyance risk. A final issue to consider is whether a prepetition loan funded shortly before the petition date may be subject to challenge as a fraudulent conveyance. The period leading up to the petition date is always heavily scrutinized by creditors committees, and such committees may pursue both actual and constructive fraud theories against a loan and/or liens and collateral backing the loan.