Full credit and responsibility for the content of this article goes to Allan Blake
CHC Group Ltd and 42 affiliated companies petitioned to enter the US Chapter 11 process on 5th May 2016, with outstanding debt obligations of approximately $1.6 billion. The Chapter 11 process has many of the features present in bankruptcy proceedings both in the US and other jurisdictions. However, it also provides additional benefits for debtors with mechanisms that allow the debtor, CHC in this case, to restructure its business. For example, the debtor can acquire financing and loans on favorable terms by giving new lenders first priority on the business’s earnings, cancelling outstanding debt and equity; the court may also permit the debtor to reject and cancel onerous contracts, such as asset backed loans and helicopter and property leases. The debtor is protected from litigation whilst in Chapter 11. This process is critical for the staff employed by the debtor as it provides an opportunity for many of them,79% of CHC staff in this case, to maintain their employment in the continuing business while a new business plan is developed, rather than going straight into liquidation and being made redundant. Exit from Chapter 11 occurs once a reorganisation plan is developed and approved by the US Bankruptcy Court; failing this, the debtor moves into liquidation proceedings.
Six months later, on October 11th 2016, CHC lodged a court Motion seeking approval for a Plan Support Agreement (‘PSA’) that creditors will vote on and which will provide the necessary financial support to eventually exit Chapter 11. The Motion states that CHC has been seeking to
“(1) Negotiate a “cornerstone” lease arrangement with one or more key aircraft lessors that provides for substantially improved economic terms and fleet flexibility; (2) develop a chapter 11 plan that provides for a significantly reduced balance sheet supported by the company’s go forward operations; and (3) attract one or more new capital investors to fund this plan and the reorganized entity’s future operations.” (Case 16-31854-bjh11, Doc 956 filed 11th October 2016)
CHC believe that they have accomplished these goals and have a clear path forward with this PSA to exit Chapter 11. Karl Fessenden, President and CEO stating:
“We are confident that this Plan, together with our strong and competitive operating model, will significantly enhance our financial flexibility and establish a sustainable capital structure that enables CHC to invest in and grow the business over the long-term.” (CHC Press Release, 11thNovember 2016)
Critically, CHC have achieved the broad support of the majority of their creditors and the support of Milestone, a part of the GE Group, who will become their lead lessor of aircraft and provider of asset backed finance. There is also an agreement in principle with Waypoint, CHC’s other main helicopter lessor. The PSA Motion, Backstop Agreement and Milestone agreement was approved to go forward for creditor approval by the US Bankruptcy Court on December 20th. CHC still have processes to go through to finally exit Chapter 11 and the financial agreements are conditional on a Final Confirmation Order from the Bankruptcy Court of no later than March 17th 2017. However, the Court approval of the PSA for submission to creditors to vote on is a major step forward.
CHC Chapter 11 Backstop Parties (** also PSA Sponsor)Commitment (US$)
Alliance Bernstein L.P. **57,231,439
Bain Capital Credit, LP **108,380,404
Carl Marks Management Company **36,124,146
FHIT – Franklin High Income Fund **15,000,000
Marble Ridge Capital LP5,676,614
Solus Alternative Asset Management LP14,323,386
Tennenbaum Capital Partners **19,480,268
Wayzata Investment Partners LLC **43,783,743
The restructuring detailed in the PSA involves cancellation of the CHC debt and equity holdings and an investment of $300 million in the form of a pro rata rights offering to existing security holders and unsecured debtors of a debt called “New Second Lien Convertible Notes”. This investment will be in a new Cayman Islands unlisted parent company that replaces the current US listed company. There will be no costly listings on stock exchanges and the SEC requirements will not apply. Eight investors, called “Backstop Parties” and listed in the Table below, will back CHC’s $300 million issue, underwriting it for a fee of $30.8m of additional Notes. It is anticipated that this injection of fresh funds will provide the necessary liquidity and support for the CHC operations after emergence from Chapter 11.
The agreement with Milestone provides CHC with essential cost savings for their leased fleet and flexibility for their remaining leased aircraft. It is also an important agreement for Milestone who maintain a key client as a continuing outlet for their fleet, many of which would otherwise be idle and incurring storage fees. Milestone had 42 helicopters leased to CHC at the start of the Chapter 11 proceedings. The main terms of the Milestone agreement are:
“…an agreement in principle on a proposal for an overall transaction that [CHC] believe will provide them with significant flexibility in their fleet and cost savings, consistent with their overall fleet restructuring goals… With this agreement in principle…[CHC] will have reached a favorable result with both of their largest lessors consistent with the goals set forth in the Debtors’ business plan.” (Revised Proposed Disclosure Statement for the second Amended Joint Chapter 11 Plan of CHC Group, 19th December 2016, p.35)
It looks like Waypoint have eventually reduced their ongoing lease rates for the aircraft that will remain in the CHC fleet, and any new aircraft in the future, as well as taking some aircraft back voluntarily on reduced return terms. CHC gained another major backer for the PSA approval and avoided potentially lengthy litigation with one of its two largest lessors. CHC had 18 different lessors at the start of the Chapter 11 proceedings and has now reached agreement with eight of the main ones, including Lobo .
The court approval to move forward on the basis of the PSA is critical for the future of CHC. It had set expectations with its clients for an an early 2017 exit from Chapter 11 and needed to enhance their confidence to survive. That schedule is now achievable. However, it will still not be easy, even with the financial and leasing support, to maintain the business in the current environment. Although Chapter 11 will deliver the much needed strategy of fleet rationalisation, reduction of the balance sheet and cutting of annual fixed costs from $417m in 2016 to a planned $142m in 2019, the business will also need to look at other strategies post Chapter 11. For example:
Other offshore operators may be fearful. In a relatively small market an effective Chapter 11 exit can provide the affected operator with a significant commercial advantage going forward: in this case a fast and very economic fleet rationalisation, significant balance sheet improvement, and reduced fixed costs including improved aircraft lease terms. However, such fears can be exaggerated as:
The price of oil is recovering but any improvement will not necessarily lead the oil and gas companies to ramp up exploration quickly and could be quickly brought to halt by US shale producers turning the taps back on. They will wait to see whether any revival can be sustained and need to focus on sustainable profitability rather than enhancement of reserves at high extraction costs. The recent BP announcement not to proceed with their high cost exploration in the Great Australian Bight with co-sponsor Statoil, despite having already committed substantial cash and a very high profile political commitment to the project, is an example of continuing caution in the Final Investment Decision process as profits decline. Recent BP deals to take 10% in Abu Dhabi’s onshore Adco concession and a 62% interest in Kosmos Energy’s blocks in Mauritania and Senegal illustrate a cautious focus on low cost developments to replenish reserves. Shell, a large CHC client, is still looking to sell $30 billion of assets, including Norwegian assets, to offset the price it paid for BG. In September 2016 Shell had a significantly increased debt of $86 billion, rising from $52 billion at the end of 2015. The price of oil is not leading to attractive sell off prices for Shell to reduce this high level of debt. Even as exploration recommences in a cautious manner, oil and gas companies will not want to give up the significant cost reductions that they have secured from their helicopter providers and other suppliers as they focus on making profit at $50 per barrel or less.
Against this background, there isn’t much time for the CHC management to catch its breath to embark on the next strategic challenge following the arduous, stressful but ultimately successful Chapter 11 process. With a broad range of committed investors and a key lead lessor to support, advise, and even cajole, CHC have given themselves a good opportunity to continue as a main player in the future offshore helicopter market. The restructuring agreements secured by CHC are great news for the staff who remain at CHC: the humming bird seems set to rise out of the ashes of Chapter 11.
Copyright and full responsibility for the content of this article remains with Allan Blake