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MD Helicopters, Inc. – Zohar Portfolio Company Seeks Approval of Bidding Procedures and Stalking Horse Arrangements with Credit Bidding ($210mn Bid) First Lien Lenders

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March 30, 2022 – The Debtors filed a motion requesting each of a bidding procedures order and a sale order [Docket No. 28]. The bidding procedures order would approve (i) bidding procedures in relation to the sale of the Debtors’ assets (the “Sale”), including bidder protections for credit bidding stalking horse bidder MDH Holdco LLC (the “Stalking Horse Bidder”*) and (ii) a proposed auction/sale timetable culminating in an auction on June 9th and a sale hearing on June 17th. The sale order would authorize the Sale. NB: The Stalking Horse Bidder's APA is attached to the motion at Exhibit A.

*The Stalking Horse Bidder is an affiliate of the Zohar Funds, which own approximately 49.7% of the Debtors' equity and hold approximately 93% of the Debtors' Prepetition First Lien Credit Agreement debt (they hold $332.0mn of the $357.0mn under the agreement). The Zohar Funds are bidding in conjunction with their creditors, who will be the ultimate beneficial economic owners of the Stalking Horse Bidder.

On March 30th,  MD Helicopters, Inc. and one affiliated Debtor ("MD Helicopters" or the "Debtors") filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtors," a leading rotorcraft manufacturer of American Made commercial, military, law enforcement and air-rescue helicopters," cited the U.S. military’s withdrawal from Afghanistan (resulting in the losss of $160.0mn in gross revenue) as compounding what was already a difficult period (see "Events" below for more on credit agreement default and litigation).

The Debtors and investment banker Moelis value the stalking horse bid at (up to) $210.0mn comprised of (a) a $150.0mn credit bid of "Prepetition First Lien Obligations" and (b) assumption of up to $60.0mnn of the Debtors' new money debtor-in-possession ("DIP") financing; provided that the credit bid amount shall be increased by the difference between $60.0mn and actual amounts borrowed under the DIP, up to a maximum increase of $30.0mn.

The selection of the Stalking Horse comes after a lengthy prepetition marketing process (see further below) which will continue post-petition, with the Stalking Horse eschewing bidder protections ("The Stalking Horse Bid does not provide for a break-up fee, expense reimbursement, or any other bid protections") and the quantum of the credit bid (ie the hurdle/barrier of entry for any prospective third party bidder) well below the Stalking Horse's $332.0mn position in the Debtors' first lien credit facility.

The motion [Docket No.28] states, “‘[t]he Debtors have determined, in consultation with their advisors and certain of their constituents, that a sale of substantially all of their Assets (as defined below) is the best available path to maximize the value of their estates and in the best interest of the Debtors and their stakeholders (including their customers, employees, and suppliers). The Debtors undertook several actions prior to commencing these Chapter 11 Cases to ensure that the sale process yields a value-maximizing transaction. Specifically, the Debtors have conducted an extensive prepetition marketing process that culminated in entry into the Stalking Horse Agreement, subject to the Debtors’ receipt of higher or better offers at the Auction. The Stalking Horse Agreement offers the Debtors and their stakeholders certainty by establishing a minimum purchase price for the Assets and signaling to other potential bidders the prevailing market value of the Assets, while also affording the Debtors an opportunity to seek higher or otherwise better offers.  

As described in further detail herein, it is imperative that the Debtors stabilize their business and provide certainty to their vendors, suppliers, customers, and workforce regarding the path forward for the business from the outset of these Chapter 11 Cases. Establishing a process for the swift and orderly transition of the Debtors’ business to the Successful Bidder will signal to the Debtors’ stakeholders that the situation in which the Debtors find themselves is temporary only and the Debtors will emerge from the chapter 11 process with new owners and a clean slate. It is therefore imperative that the Debtors consummate a value-maximizing sale as expeditiously as possible.”

Marketing Process

In July 2020, the Debtors engaged Moelis & Company LLC (“Moelis”) to serve as their financial advisor and investment banker in connection with developing, and advising the Debtors with respect to, various strategic alternatives, including a potential sale and chapter 11 sale process. In October 2021, Moelis, at the direction of and under the supervision of the Director, commenced a process to market the Assets

The Debtors’ marketing efforts included targeted mailings and calls to both potential strategic and financial entities that the Debtors and their advisors believed might be interested in discussing a potential purchase of the Assets. During this process, the Debtors and/or Moelis contacted and sent form non-disclosure agreements to over 170 potential buyers, including 26 strategic buyers. The potential buyers included 19 of the 24 parties that were contacted as part of the process commenced in 2018. The Debtors invited these potential buyers to execute non disclosure agreements and submit an initial indication of interest with respect to a sale of the Assets. In response to the initial outreach, the Debtors executed confidentiality agreements (collectively, the “NDAs”) with 83 prospective buyers of the Assets, each of which received the same package of marketing materials, and received 21 initial indications of interests.

The Debtors, in consultation with their advisors, selected 12 potential buyers with the most competitive indications of interest to move to the next phase of the sale process. The Debtors then engaged in further discussions regarding a sale transaction for the Assets with those potential buyers over the following weeks. 

On or before December 26, 2021, the Debtors received 9 further indications of interest and selected the 2 potential buyers with the highest and best offers to move to the next phase of the sale process. The Debtors engaged in advanced discussions regarding a sale transaction for the Assets with each of those potential buyers over the following 12 weeks leading up to the Petition Date, including engaging in extensive negotiations with each regarding the form of a stalking horse asset purchase agreement

The culmination of the prepetition marketing process was the execution of the Stalking Horse Agreement, which represents the highest or otherwise best offer the Debtors have received to date. The Stalking Horse Agreement was the product of arms’ length, good faith negotiations among the Debtors and the Stalking Horse Bidder. The negotiation of the Stalking Horse Agreement on behalf of the Debtors was led by the Debtors’ management and advisors under the oversight of the Director. On March 29, 2022, the Director adopted resolutions authorizing the Debtors to enter into the Stalking Horse Agreement.

The Stalking Horse Bidder is an affiliate of the Zohar Funds, which own approximately 49.7% of MDHI’s equity and hold approximately 93% of the Obligations under the Prepetition First Lien Credit Agreement and are therefore affiliates of the Debtors. The Zohar Funds are bidding in conjunction with their creditors, which will be the ultimate beneficial economic owners of the Stalking Horse Bidder. As demonstrated by the fact that the Stalking Horse Bid does not provide for a break-up fee, expense reimbursement, or any other bid protections, the Zohar Funds’ and their creditors’ interests are aligned with the Debtors in ensuring that the Debtors are able to run a fulsome, competitive process that maximizes the value of the Assets. In furtherance of the process, certain creditors of the Zohar Funds have offered the Debtors’ debtor-in-possession (“DIP”) financing, as an integral component of the Stalking Horse Bid, that will ensure the Debtors have liquidity required to run the process contemplated in the Bid Procedures and close a value-maximizing transaction.

…the Debtors, with the assistance of Moelis, have continued, and will continue, to market the Assets to potential buyers through the Bid Deadline."

Key Terms of the Stalking Horse Agreement:

  • Seller: MD Helicopters, Inc
  • Buyer: MDH Holdco LLC
  • Assets: Substantially all of the Debtors’ assets
  • Bidder Protections: "The Stalking Horse Bid does not provide for a break-up fee, expense reimbursement, or any other bid protections" although it does have approving an overbid amount of $1.0mn.
  • Purchase Price: $210.0mn comprised of (i) a $150.0mn credit bid of "Prepetition First Lien Obligations" and (ii) assumption of up to $60.0mnn of the Debtors' new money debtor-in-possession ("DIP") financing; provided that the credit bid amount shall be increased by the difference between $60.0mn and actual amounts borrowed under the DIP, up to a maximum increase of $30.0mn. 

Proposed Key Dates:

  • Sale Objection Deadline: May 11, 2022
  • Intention to Submit Qualified Bid Deadline: May 20, 2022
  • Bid Deadline: June 3, 2022
  • Auction: June 9, 2022
  • Post-Auction Objection Deadline: June 13, 2022
  • Sale Hearing: (i) if the Debtors receive one or more Intention(s) to Submit Qualified Bid, the Sale Hearing shall commence on or before June 17, 2022 and (ii) if the Debtors do not receive any Intention to Submit Qualified Bid by the Intention to Submit Qualified Bid Deadline, the Sale Hearing shall commence on or before May 27, 2022.

Background

Prepetition Indebtedness

As of the Petition date, not less than $357.0mn in respect of loans made under a Prepetition First Lien Facility remain outstanding, of the Prepetition First Lien Obligations, the Zohar Lenders hold approximately $332.0mn, or approximately 93%, and the Patriarch Lenders hold approximately $25.0mn, or approximately 7%. The indebtedness under the Prepetition First Lien Facility matured in April 2019 and is currently in default.

As of the Petition date, an aggregate amount of not less than $59.8mn was outstanding under Prepetition Note Documents. Not less than $30.6mn of the Prepetition Note Obligations is held by Zohar Noteholders, in the aggregate, with the balance held by the Patriarch Noteholders.

The Company was also party to an Amended and Restated Loan and Security Agreement dated as of October 18, 2006, under which (a) ARK II was most recently the sole lender providing a revolving line of credit in the amount of $35.0mn and (b) PPAS served as the administrative agent. The ABL Credit Facility was terminated on May 21, 2020 and, as of that time, there were no loans outstanding thereunder.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Sullivan Declaration”), Barry Sullivan, the Debtors’ chief financial officer, detailed the events leading to MD Helicopters' Chapter 11 filing. The Sullivan Declaration provides: “A number of factors have negatively affected the Debtors’ financial condition, destabilized the Debtors’ business, and threaten to further deteriorate the value of the Debtors’ assets.

To begin, the Prepetition First Lien Obligations matured in June 2019, and the Debtors were unable to repay or refinance such indebtedness. Since that time, the Debtors have been in default under the Prepetition First Lien Credit Agreement, which has negatively affected the Debtors’ ability to access financing and, in turn, has hampered their ability to compete for certain capital-intensive contracts. Specifically, the Debtors have been unable to obtain bonding due to the default under the Prepetition First Lien Credit Agreement and, as a result, have been unable to compete for contracts that include bonding requirements.

As set forth above, the Debtors’ liquidity became further restricted after the termination of the ABL Credit Facility. As set forth above, the Debtors have also been named as defendants in several lawsuits and have expended significant resources defending those lawsuits. Two of those lawsuits have had significant adverse impact on the Debtors, as described above: (i) the State of the Netherlands obtained an approximately $15 million judgment against the Debtors in May 2012, which was registered in Arizona and New York in November 2018 and September 2020, respectively, and (ii) a jury returned a verdict against the Debtors in the Qui Tam Action awarding damages in the amount of approximately $36.8 million in September 2021.

Compounding these issues, the Debtors’ business has also faced headwinds from the U.S. military’s withdrawal from Afghanistan and attendant wind-down of the Debtors’ contracts to supply helicopters and provide related services to the Afghanistan military, which had represented a material portion of the Debtors’ revenues. The materiality of this wind-down cannot be overstated; it caused an approximately a 40% reduction in the Company’s gross revenue and the loss of orders to supply approximately 20 helicopters that would have generated $160 million in gross revenue.

Additionally, the Debtors have experienced supply chain disruptions caused by the COVID-19 pandemic, which have resulted in delays in certain sales. As a result of these factors, among other financial and operating difficulties, the Debtors have been operating under a cloud of uncertainty that has strained the Debtors’ cash flows and negatively affected liquidity."

About the Debtors

According to the Debtors: “MD Helicopters, Inc. (MDHI), is a leading rotorcraft manufacturer of American Made commercial, military, law enforcement and air-rescue helicopters. The MDHI family of rotorcraft is world renowned for its value, versatility, and performance. Commercial offerings include the MD 500E, MD 530F, MD 520N, MD 600N and twin-engine MD 902 Explorer. The MD 530F Cayuse Warrior and MD 530G Attack Helicopter comprise the company’s high-performance military offerings. A key feature of the MD 902, MD 600N, and MD 520N is the innovative NOTAR® system for anti-torque control with no tail rotor – exclusively by MDHI to provide safer, quieter performance and confined-area access capability.”

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The post MD Helicopters, Inc. – Zohar Portfolio Company Seeks Approval of Bidding Procedures and Stalking Horse Arrangements with Credit Bidding ($210mn Bid) First Lien Lenders appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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