Waypoint Leasing Holdings – Sumitomo Objects to Retention of Houlihan Lokey, $7mn (plus) of Sales-Related Fees in a Non-Sale

January 10, 2019  – Sumitomo Mitsui Banking Corporation, Brussels Branch, in its capacity as the administrative agent (“Sumitomo” or ths“WAC12 Administrative Agent”) under the WAC12 Credit Facility dated as of August 2, 2017, filed an objection [Docket No. 239] to the Debtors’ retention of Houlihan Lokey Capital, Inc. (“Houlihan”) as the Debtors’ investment banker, arguing in effect that Houlihan was in line to be paid millions in sales-related fees (the Houlihan engagement letter sets a floor of $7mn, although that stands to be significantly higher in the event of any sale valued over $575mn) in a transaction that does not actually involve a sale and in respect of which Houlihan has failed to attract a single third-party bidder.

Sumitomo argues that the intention of lenders (including Sumitomo) to credit bid in respect of the Debtors’ assets (which are collateral securing loans made by Sumitomo and other lenders) has been made abundantly clear throughout the section 363 sales process, and certainly was known to the Debtors prior to the retention of Houlihan. It further notes that the credit bidding of lenders is likely in aggregate to surpass the $650mn bid of stalking horse Macquarie, a bid which lenders believe to be unreasonably low.  Macquarie, Sumitomu argues, is not only a stalking horse but a straw man, the presence of which in a purported auction process should not obscure the fact that what is actually going on here is the foreclosure of lenders on its collateral, something which it always had a right to do pursuant to loan agreements…and most certainly not a sale.

Adding insult to injury, the inflated fees will ultimately come out of the pocket of whomever buys the Debtors’ assets, including possibly the pocket of the Sumitomo itself.

[NB: Sumitomo does not address the possibility of result of an auction result where Macquarie (or any other non-credit bidding bidder) ends up the winning bidder.]

In a related objection [Docket No. 254, which we cover separately] filed by the U.S. Trustee assigned to the Waypoint Leasing Holdings case also questions Houlihan’s fee in the context of credit bidding. That objection states, “For example, [it] is unclear why Houlihan should earn a Sale Transaction Fee in the event of a credit bid. In such instance what, if any, benefit is there to the Debtors’ estates?“

 

The Objection states, “The WAC12 Administrative Agent is the administrative agent under the WAC12 Credit Facility in respect of Waypoint Asset Co 12 Limited (‘WAC12’) and its subsidiaries (collectively, the ‘WAC12 Debtors’). The WAC12 Debtors own 17 helicopters of desirable types and configurations, all of which currently are on lease to third-party operators and which collectively produce lease income sufficient to pay the WAC12 Debtors’ operating costs and required debt service under the WAC12 Credit Facility.

 

Prior to the Petition Date, the WAC12 Administrative Agent understands the Debtors to have engaged in marketing process to solicit bids for substantially all of the assets of the WACs on an aggregated basis. This marketing process culminated in the Debtors’ election to pursue approval of a stalking horse bid from Macquarie Rotorcraft Leasing Holdings Limited (‘Macquarie’) to purchase on an aggregate basis substantially all of the assets of the Debtors’ various estates for a total purchase price of $650 million, subject to certain adjustments. The lenders under the WAC12 Credit Facility (the ‘WAC12 Lenders’) believe that the Macquarie bid, and any other bid being discussed by the Debtors prior to that time, significantly undervalues the assets of the WAC12 Debtors’ estates. 

 

Both prior to and at various points since the Petition Date, the WAC12 Lenders have informed the advisors to the Debtors and the Steering Committee that the WAC12 Lenders are prepared to instruct the WAC12 Administrative Agent to bid for the WAC12 Debtors’ assets. The WAC12 Administrative Agent currently intends to submit a Credit Bid for such assets by the Credit Bid Deadline (as defined in the Bidding Procedures Order). 

 

The WAC12 Administrative Agent objects to the Houlihan Retention Application insofar as it seeks approval of the retention of Houlihan Lokey Capital, Inc. (‘Houlihan Lokey’) as the investment banker to the WAC12 Debtors on the terms set forth in the Engagement Letter. Notwithstanding the fact that the WAC12 Administrative Agent consistently has conveyed its intention to credit bid for the WAC12 Lenders’ collateral, the terms of Houlihan Lokey’s retention seek to obligate the WAC12 Debtors for the payment of millions of dollars of professional fees, including a multimillion-dollar ‘Sale Transaction Fee’ upon the consummation by the WAC12 Administrative Agent of a Credit Bid that, in essence, is a foreclosure by the WAC12 Administrative Agent on the collateral securing the WAC12 Credit Facility. 

 

There is no reasonable business justification for the WAC12 Debtors to seek approval of the retention of Houlihan Lokey on the terms as set forth in the Engagement Letter. Given the facts as they exist with respect to the WAC12 Debtors’ estates, the Houlihan Retention Application therefore is not reasonable and should not be approved. Since the time Houlihan Lokey initially was engaged by the Debtors in May 2018, it has become clear that the prepetition sale process failed to produce any third-party bids that did not significantly undervalue the WAC12 Debtors’ assets, and accordingly there was to be no “Sale Transaction” in respect of the WAC12 Debtors’ estates. 

 

Rather, the WAC12 Debtors’ chapter 11 cases will serve as little more than a forum for the WAC12 Lenders to acquire, through a Credit Bid, the WAC12 Debtors’ assets. This is similar to what the WAC12 Lenders would have been able to do in a foreclosure outside of bankruptcy by exercising their rights under the WAC12 Credit Agreement. In light of this, it would be unreasonable for the WAC12 Debtors to obligate themselves for millions of dollars of professional fees for Houlihan Lokey to provide investment banking services to the WAC12 Debtors’ estates on the terms set forth in the Engagement Agreement to the detriment of the creditors of the WAC12 Debtors’ estates. The Debtors have failed to produce any evidence in respect of the WAC12 Debtors and their estates that would support, let alone prove beyond mere conclusion, that the terms of the Houlihan Lokey retention are reasonable in respect of the WAC12 Debtors or their estates. Accordingly, under the circumstances present in the WAC12 Debtors’ cases and insofar as the Houlihan Retention Application seeks approval of the Houlihan Lokey retention by WAC12 Debtors, it should be denied.”