AeroCentury Corp. – Further to $83.5mn Sale of Aircraft to Drake Asset Management, Debtors Have “Going Concern” Plan (Albeit with Toggle) Confirmed; Existing Management Look Poised to Rebuild with Backing of Chinese Investors

August 31, 2021 – The Court hearing the AeroCentury cases confirmed the Plan element of the Debtors’ Combined Plan and Disclosure Statement (the “Combined Document”) [Docket No. 296].

On March 29, 2021, AeroCentury Corp. and two affiliated Debtors (NYSE: ACY; “AeroCentury” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 21-10636. At filing, the Debtors, providers of leasing and finance services to regional airlines worldwide noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. In a subsequently filed Schedule A/B, the lead Debtor noted $105.8mn of assets and $83.3mn of liabilities [Docket No. 91].

Plan Summary

After attempting to address prepetition credit facility defaults, an effort that was significantly impacted by the onset and continuance of COVID-19-related restrictions, the Debtors entered Chapter 11 with plans to sell their core assets (which primarily consisted of aircraft) to pay off prepetition loan debt and then restructure around their remaining assets through a Chapter 11 Plan. At filing, the Debtors noted: "AeroCentury intends to remain a public company focusing on the regional aircraft industry. With a clean balance sheet, we will be primed for immediate execution of a recapitalization plan that will allow us to resume and build upon our asset leasing, finance and management business."

Those filing date objectives have remained largely unchanged throughout, with the Court having now approved a $83.5mn sale of substantially all of the Debtors’ assets to credit bidding prepetition lender Drake Asset Management Jersey Limited (see "Asset Sale," below) [Docket No. 172]. The Debtors did ultimately succeed in their search for a Plan sponsor (see just below) and a going concern solution, albeit without their fleet of aicraft (but with an apparent interest in building anew with funding from Chinese investors and largely still under pre-bankruptcy management). Even with the plan sponsor, however, the Plan envisages a "toggle" to "the Stand-Alone Plan, whereby the Debtors’ remaining Assets will vest in the Post-Effective Date Debtors and be monetized by the Plan Administrator." The Debtors had previously noted that they would toggle in the event they did not find a Plan sponsor, so the fact that the toggle remains with a Plan sponsor may suggest some continuing risk as to that selected Plan Sponsor, ie Yucheng Hu, Hao Yang, Jing Li, Yeh Ching and Yu Wang who have together agreed to invest $11.0mn in the Debtors. 

Although "Plan Sponsor" is defined as the four individuals above, the Plan Sponsor Agreement is signed by 9 individuals with Yucheng Hu as the "lead investor" and purchasing more than half of the equity being made available to the group. Seven of the remaining investors are purchasing equity which suggests investments just above the EB-5 visa requirement of $500k although if this is in fact an EB-5 visa-driven investment, there is no specific reference to that fact in the Plan Sponsor Agreement (or term sheet) or the Plan-related documents. 

Immediately following Plan effectiveness, the debtors' board will be comprised of Christopher Tigno, Michael Magnusson and Harold Lyons, each existing members of management. It is estimated that, after giving effect to transactions anticipated by the Plan Sponsor Agreement, 65.0%-74.0% of the emerged common stock will be held by the Investors and 26.0%-35.0% held by legacy shareholders.

The Memorandum provides the following pre-Plan confirmation hearing summary: "The Combined Disclosure Statement and Plan provides for a toggle between the (i) the Sponsored Plan, which pursuant to the terms of the Plan Sponsor Agreement, the Debtors and the Plan Sponsor will agree to a restructuring of the Debtors’ business that will be implemented through the Sponsored Plants and (ii) the Stand-Alone Plan, whereby the Debtors’ remaining Assets will vest in the Post-Effective Date Debtors and be monetized by the Plan Administrator. 

On August 9, 2021, the Debtors’ filed the Notice of Selection of Plan Sponsor [D.I. 254] which included as Exhibit A an Investment Term Sheet between AeroCentury and the Plan Sponsor setting for the principal terms of an investment by the Plan Sponsor into AeroCentury to be implemented pursuant to the Plan. On August 16, 2021, the Debtors’ filed a supplement to the Plan (the 'Plan Supplement') which contained the Plan Sponsor Agreement. A summary of the financial terms of the Plan Sponsor Agreement are as follows:

1. On the Effective Date of the Combined Disclosure Statement and Plan, each Interest in AeroCentury Corp. shall be reinstated, subject to dilution. The Debtors will issue new shares of AeroCentuy Corp. common stock to the Plan Sponsor such that the pro forma ownership percentages of the AeroCentury Corp. common stock will be: (a) 65.0% held by the Plan Sponsor, and (b) 35.0% held by existing shareholders of AeroCentury Corp. on the Effective Date (the “Legacy Shareholders”). 
2. As soon as practicable following the Effective Date, AeroCentury Corp. will make a cash dividend distribution to the Legacy Shareholders in the aggregate amount of $1,000,000. 
3. On the Effective Date, a trust will be established for the benefit of the Legacy Shareholders. At the same time, all Interests of AeroCentury Corp. in JetFleet Holding Corp. will be canceled. JetFleet Holding Corp. will then issue a Series B Preferred Stock to the trust. The Series B Preferred Stock will have a liquidation preference of $1, non-convertible, non-transferable, non-voting, will not pay a dividend, and will contain a mandatory, redeemable provision. The Series B Preferred Stock is redeemable for an aggregate amount equal to (i) $1,000,000, if the Series B Preferred Stock is redeemed after following the first fiscal year for which JetFleet Holding Corp. reports positive EBITDA for the preceding 12 month period, or (ii) $0.001 per share, if the Series B Preferred Stock is redeemed prior the first fiscal year for which JetFleet Holding Corp. reports positive EBITDA for
    the preceding 12-month period."

The Combined Document [Docket No. 216] states, “The combined Disclosure Statement and Plan consists of a toggle between (i) the Sponsored Plan, which, pursuant to the terms of the Plan Sponsor Agreement, the Debtors and the Plan Sponsor will agree to a restructuring of the Debtors’ businesses that will be implemented through the Sponsored Plan, and (ii) the Stand-Alone Plan, whereby the Debtors’ remaining Assets will vest in the Post-Effective Date Debtors and be monetized by the Plan Administrator. The Debtors will file a document detailing the treatment to be accorded to Holders of Interests in Class 7 no later than 14 days before the Voting Deadline. If the definitive Plan Sponsor Agreement is executed on or before 7 days prior to the Voting Deadline, the Plan Sponsor Agreement will be included within the Plan Supplement. If a Plan Sponsor Agreement is not executed before 7 days prior to the Voting Deadline, the Debtors will file a notice that they will seek confirmation of the Stand-Alone Plan. Thus, this Plan contains both provisions applicable to a reorganization pursuant to the terms of the Plan Sponsor Agreement, as well as provisions only applicable under the Stand-Alone Plan (as defined below). For the ease of convenience, the provisions applicable to a reorganization pursuant to the Plan Sponsor Agreement will be referred to herein as the ‘Sponsored Plan;’ whereas, the provisions applicable only to a standalone wind-down will be referred to as the ‘Stand-Alone Plan.’ References to ‘this Plan or the Plan’ refer to both the Sponsored Plan and the Stand-Alone Plan.”

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as in the Plan and/or Disclosure Statement; see also the Liquidation Analysis below):

• Class 1 (“Priority NonTax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is for AeroCentury: $0.00, AeroCentury: $0.00 and JetFleet Management: $0.00 and the estimated recovery is 100%. 
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is for AeroCentury: $0.00, AeroCentury: $0.00 and JetFleet Management: $0.00 and the estimated recovery is 100%. 
• Class 3 (“Prepetition Loan Claims’) is impaired and entitled to vote on the Plan per treatment agreed to in the Falko aale order. The aggregate amount of claims is for AeroCentury: $83,164,109, JetFleet Holding: $83,164,109 and JetFleet Management: $83,164,109 and the estimated recovery is 100%. Under both the Stand-Alone Plan and the Sponsored Plan, as of the Confirmation Date, the Prepetition Lender’s sole and exclusive recourse on account of the Prepetition Loan Claims shall be limited to the Assets subject to any Asset Sales to the Prepetition Lender under the Falko Sale Order and no other assets of the Debtors, and the Prepetition Lender unconditionally and irrevocably waives any other rights to assert any Claims or Encumbrances against the Debtors, their Affiliates or subsidiaries, or the Estates.
• Class 4 (“PPP Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is for AeroCentury: $0.00, AeroCentury: $0.00 and JetFleet Management: $0 – $170,216 and the estimated recovery is 100%. 
• Class 5 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is for AeroCentury: $84,227.15, JetFleet Holding: $0.00 and JetFleet Management: $82,362.00 and the estimated recovery is 100%. 
• Class 6 (“Intercompany Claims”) is unimpaired/impaired, presumed to accept or reject and not entitled to vote on the Plan. The aggregate amount of claims is for AeroCentury: $342,030.00, JetFleet Holding: $0.00 and JetFleet Management: $0.00 and expected recovery is 0% or 100%.
• Class 7 (“Interests”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is for AeroCentury: Unknown, JetFleet Holding: $0.00 and JetFleet Management: $0.00 and the estimated recovery is Pro rata share of the PostEffective Date Debtor Assets. Under the Stand-Alone Plan, on the Effective Date, Holders of Allowed Interests shall receive their pro rata share of Distributions from the Post-Effective Date Debtor Assets until no further Post-Effective Date Assets remain, provided, however, that no Distributions shall be made until all Unclassified Claims and Claims in Classes 1 through 6 have been Paid in Full or otherwise satisfied in accordance with this Plan. Under the Sponsored Plan, all Holders of Allowed Interests shall receive either (A) Cash, (B) Reinstatement of such Allowed Interests, (C) Reinstatement of such Allowed Interests subject to dilution, or (D) a combination of (A) though (C), as set forth in the Plan Sponsor Agreement.

Asset Sale

On May 28th, the Court hearing the AeroCentury Corp case issued an order approving the $83.5mn sale of substantially all of the Debtors’ assets to Drake Asset Management Jersey Limited (“Drake” or the “Stalking Horse Bidder”) [Docket No. 172]. An executed version of the Drake APA was attached to the order.

Consideration for the purchase is comprised of approximately $83.5mn of credit bid senior debt (“the amount of outstanding Secured Obligations pursuant to the Mortgage and Loan Agreement” as at the sale closing date).

Drake is an affiliate of (“Falko”) one of the world’s largest aircraft asset management companies (275 regional jet and turboprop aircraft worth over $2.0bn acquired since 2011 and over $1.0bn in 2019)

On October 30, 2020, Drake purchased all of the indebtedness (approximately $87.9mn, of which $83.2mn is principal) held by the Debtors’ then prepetition senior lenders (the “MUFG Lenders”) as well as the swap termination payments owed with respect to such indebtedness. In December 2020, Drake purchased three aircraft from ACY E-175, LLC (“E-175”), a special purpose entity owned by the Debtors, and leased to Republic Airways. Drake now intends to credit bid the totality of the acquired senior debt for the Debtors’ 12 remaining aircraft, 10 (all Bombardier) of which serve as collateral in respect of that debt.

Voting Results
On August 26, 2021, the Debtors' claims agent notified the Court of Plan voting results [Docket No. 281] which were as follows:

• Class 7 (“Interests”) 353,623 shares, representing 99.14% in number, were voted in favor of accepting the Plan. 3,083 shares,  representing 0.86% in number, were voted to reject the Plan.

Plan Supplement

The Debtors' Second Plan Supplement [Docket No. 288] added three exhibits (K, L & M) to those filed with the initial Plan Supplement [Docket No. 266] which together attach the following:

• Exhibit A: Amended and Restated Articles of Incorporation of JetFleet Holding Corp. [Docket No. 266]
• Exhibit B Amended and Restated Bylaws of JetFleet Holding Corp. [Docket No. 266]
• Exhibit C: JetFleet Holding Corp. Series A Preferred Stock Purchase Agreement [Docket No. 266]
• Exhibit D: JetFleet Holding Corp. Series B Preferred Stock Purchase Agreement [Docket No. 266]
• Exhibit E: JetFleet Holding Corp. Common Stock Purchase Agreement [Docket No. 266]
• Exhibit F: Second Amended and Restated Certificate of Incorporation of AeroCentury Corp. [Docket No. 266]
• Exhibit G: Second Amended and Restated Bylaws of AeroCentury Corp. [Docket No. 266]
• Exhibit H: AeroCentury Corp. Securities Purchase Agreement [Docket No. 266]
• Exhibit I: Plan Sponsor Agreement [Docket No. 266]
• Exhibit J: Proposed List of Executory Contracts and Unexpired Leases to Be Assumed and Assigned Pursuant to the Combined Disclosure Statement and Plan [Docket No. 266]
• Exhibit K: Revised Liquidation Analysis for Sponsored Plan [Docket No. 288]
• Exhibit L: JetFleet Holding Corp. Forecast [Docket No. 288]
• Exhibit M: JetFleet Holding Corp. Board of Directors [Docket No. 288]

Prepetition Indebtedness

The Debtors' prepetition capital structure consists of the following:

• The Prepetition Credit Facility: The Debtors’ primary source of debt financing has been the Prepetition Credit Facility. On October 30, 2020, Drake Asset Management Jersey Limited (an affiliate of Falko), through Falko as their loan servicer, purchased all of the indebtedness held by the MUFG Lenders under the Prepetition Credit Facility, totaling approximately $87.9 million, as well as the swap termination payments owed with respect to such indebtedness. The Prepetition Term Loan is in the amount of $83,514,823.64 and has a maturity date of March 31, 2021. As of the Petition Date, the Debtors owed approximately $83,164,109.00 million in principal amount and accrued interest under the Prepetition Credit Facility.
• The Nord Facility 29: On February 8, 2019, the SPEs entered into an agreement with Nord for the Non-Debtor SPE Loans, which provides for six separate term loans with an aggregate principal amount of $44.3 million.
• The PPP Loans:
  • On May 20, 2020, Debtor JetFleet Management Corp. ("JMC") was granted a loan (the “Initial PPP Loan”) from American Express National Bank in the aggregate amount of $276,353 pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act. The Initial PPP Loan is in the form of a note dated May 18, 2020, matures on April 22, 2022, and bears interest at a rate of 1.00% annually. Debtor JMC has exhausted the funds from the Initial PPP Loan and has commenced the loan-forgiveness process with the Small Business Administration, and expects that all or a significant portion of the PPP Loan will be forgiven.
  • In February 2020, Debtor JMC was approved for and received a second tranche Paycheck Protection Program loan in the amount of $170,002, which the Debtors intend to also use for qualifying expenses in order to qualify for maximum loan forgiveness under the CARES Act. The Second PPP Loan bears interest at a rate of 1.00% annually, and matures on February 11, 2026.
• Debtor Swaps related to the Debtors’ Prepetition Credit Facility  had notional amounts totaling $50 million and were to extend through the maturity of the Prepetition Credit Facility in February 2023

Significant Prepetition Shareholders

Debtor AeroCentury Corp. is a publicly traded company. Toni M. Perazzo is the only individual or entity that owns more than 10% of the equity ownership interests in AeroCentury, owning 21.2% of AeroCentury’s outstanding common stock.

Revised Liquidation Analysis for Sponsored Plan (see Exhibit K of Docket No. 288)

About the Debtors

According to the Debtors: “The Debtors are engaged in the business of investing in used regional aircraft and leasing the aircraft to foreign and domestic regional air carriers. The Debtors’ principal business objective is to acquire aircraft assets and manage those assets in order to provide a return on investment through lease revenue and, eventually, sale proceeds. The Debtors strive to achieve this objective by reinvesting cash flow from operations and using short-term and long-term debt and/or equity financing. The Debtors believe their ability to achieve this objective depends in large part on their success in three areas: (i) asset selection and acquisition, (ii) lessee selection and (iii) obtaining financing to acquire aircraft and engines.

The Debtors hold aircraft for lease or for sale, depending on the arrangement with each particular customer. As of the Petition Date, the Debtors’ aircraft portfolio consists of six aircraft held under operating leases, two aircraft held under financing leases and five aircraft held for sale in whole or as parts. Most of the Debtors’ aircraft are mid-life regional aircraft, and their globally diverse customer base consists of six airlines operating in five countries: the United States, Canada, Croatia, Norway and Kenya."

Prepetition Corporate Structure Chart

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