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SAS AB – Scandinavian Carrier Get Access to $700mn in DIP Financing from Apollo Nothwithstanding Court’s “Significant Reservations” as to Equity-Based Terms

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September 9, 2022 – The Court hearing the SAS AB cases authorized the Debtors to access $700.0mn (approximately SEK 7.0bn) of debtor-in-possession (“DIP”) financing being provided by Apollo Global Management (“Apollo” or the “DIP Lender”). The order has yet to be filed, although a revised proposed order (which attached the execution version of the August 13th DIP credit agreement) is filed at Docket No. 321 (which also includes a "DIP Hearing Demonstrative" relating to the proposed call option and tag right termination fee.

The go ahead to tap the DIP financing came after Judge Michael Wiles expressed "significant reservations" about the DIP's "unusual" terms, but ultimately seemed reluctant to interfere at this point (beyond raising concerns) given a lack of formal objections to the financing as proposed and reassurances received from the Debtors' advsiors (i) that the Debtors were still in position to take a better deal should it arrive and (ii) that the very same equity-based elements (eg conversion to equity upon emergence and participation in an equity offering) that Judge Wiles was struggling to get comfortable with also made this relatively cheap financing. He had also earlier noted as to a now approved $7.0mn break-up fee that “I have never had a case where someone sought transaction protections in connection with a DIP loan.”

In a supplemental declaration in support of the DIP financing [Docket No. 306], investment bankers Seabury note as to the potential for a third party financing source and revisions to terms agreed since the Debtors filed their DIP motion on August 16th: "The Debtors received one indication of interest during this confirmatory marketing process from a consortium of lenders that had submitted an indication of interest in the prior financing round. Unfortunately, the consortium ultimately communicated to the Debtors’ advisors and the Creditors’ Committee’s advisors that they were not able to provide a binding commitment for DIP financing within the necessary timeframe, even if they were granted an extension up to the date of the hearing regarding the DIP Motion.

Since the filing of the DIP Motion, the Debtors and their advisors, in cooperation with the Creditors’ Committee and their advisors, negotiated with the DIP Lenders to achieve improvements to the DIP Facility, including, among other benefits, obtaining a reduction in the Tag Right Termination Fee from 4% down to 3% of the DIP Commitments, a $7 million savings in the event SAS terminates the Tag Right."

In a press release heralding approval of the Apollo-led financing, the Debtors' provide: “On August 14, 2022, SAS announced that it entered into a DIP financing credit agreement for USD 700 million with Apollo, subject to Court approval. The terms of the DIP financing credit agreement approved by the Court today are substantially similar to the terms previously announced by SAS.

…The DIP financing, along with cash generated from the Company’s ongoing operations, enables SAS to continue meeting its obligations throughout the chapter 11 process.”

Anko van der Werff, President and Chief Executive Officer of SAS, added: "With the Court’s approval of our DIP financing, we are making important progress in our chapter 11 process. The DIP financing agreement with Apollo followed an extensive and competitive process that we conducted to achieve the best financing outcome for SAS…"

Background

On July 5, 2022, SAS AB and 13 affiliated Debtors (“SAS” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0bn and $50.0bn; and estimated liabilities between $1.0bn and $10.0bn ($1.35bn of funded debt) [NB: The Debtors add: “On a consolidated basis, as of May 31, 2022, the total value of the Debtors’ assets is approximately $12.43 billion and the total amount of the Debtors’ liabilities is approximately $9.41 billion”].

On August 16th, the Debtors requested Court authority to access $700.0mn (approximately SEK 7.0bn) of debtor-in-possession (“DIP”) financing (with half of that, $350.0mn/@SEK 3.5bn, available upon issuance of an interim DIP order) from Apollo Global Management ("Apollo" or the “DIP Lender”) [Docket No. 226]. In selecting Apollo after a lengthy, 6-month process which began with 30 parties executing NDA's (and during which the Debtors leaned heavily towards financing sources that also "expressed the strongest desire to be the eventual equity investors in the reorganized Company") the Debtors noted: 

"Apollo’s proposal offered a number of favorable economic terms, including the size and certainty of the committed amount (the full $700 million requested by the Debtors), flexibility of the terms, the applicable interest rate on drawn amounts (particularly if the Debtors elect the PIK option for interest payments), and the reasonableness of conditions precedent and applicable financial covenants.

Apollo’s proposal also offered the most promising prospects for a successful restructuring in these chapter 11 cases. Throughout the process, it became clear to the Debtors that, following extensive diligence and discussions with the Debtors and advisors, Apollo had tailored its proposal to the Debtors’ specific business and financial needs. The DIP Facility also offers the Debtors the opportunity to work collaboratively with a single lender, which can reduce the administrative burden associated with obtaining consensus amongst a group of lenders for any matters requiring lender consent."

According to a press release announcing the DIP funding: "The DIP financing, along with cash generated from the Company’s ongoing operations, enables SAS to continue meeting its obligations throughout the chapter 11 process. The DIP financing is subject to approval by the U.S. Bankruptcy Court for the Southern District of New York (the 'Court').

The DIP financing is structured as a delayed draw term loan with a nine-month maturity from the Closing Date. The maturity date can be extended incrementally up to an 18-month term (see further below). SAS selected Apollo’s DIP financing proposal following a competitive process and considers the terms of the DIP financing to be on market terms."

SAS chairman of the board Carsten Dilling further commented: “With this financing, we will have a strong financial position to continue supporting our on-going operations throughout our voluntary restructuring process in the U.S. Apollo Global Management has a long track record of helping build stronger, more competitive businesses and extensive experience in the aviation sector. With their substantial financing commitment, we can now focus entirely on accelerating the implementation our SAS FORWARD plan, and to continue our more than 75-year legacy of being the leading airline in Scandinavia.”

Apollo partner Antoine Munfakh stated: "SAS is one of Europe’s leading airlines and we are pleased to support the business operations as they implement their restructuring plans to emerge a stronger company. At Apollo we have a wealth of experience in commercial aviation and fully support the comprehensive SAS FORWARD plan as well as the goals of recapitalizing the Company upon its emergence from the chapter 11 process.”

SAS said it expects to receive Court approval for its DIP financing by mid-September 2022, and SAS expects to complete its court-supervised process in the United States in 9 to 12 months from the July 2022 Petition Date.

Key Terms of the DIP Financing

  • Commitment: The DIP financing will be provided by Apollo under a term loan agreement (the 'DIP Term Loan Agreement') by way of non-amortizing senior secured super-priority debtor-in-possession delayed-draw term loan facility in an aggregate principal amount of $700.0mn (the "Total Aggregate Commitment"), of which $350.0mn will be available following the Court’s approval of the DIP Term Loan Agreement, which is expected to take place in mid-September, and satisfaction of certain conditions precedent under the DIP Term Loan Agreement (the 'Closing Date'). The remaining $350.0mn will be available upon the satisfaction of certain other conditions precedent under the DIP Term Loan Agreement.
  • Interest Rate: Loans under the DIP Facility will bear interest at a rate per annum equal to adjusted term SOFR (Secured Overnight Financing Rate) plus 9.0 percent, payable in cash or in kind at the borrower’s election.
  • Default Interest: The interest rate may be increased by 2.0 percent per annum during the continuance of any event of default under the DIP Term Loan Agreement.
  • Fees: The DIP Term Loan Agreement requires the payment of certain fees to Apollo on the Closing Date;
    • an upfront fee of 1.0 percent of the Total Aggregate Commitment
    • an advisor fee of 1.0 percent of the Total Aggregate Commitment
    • an unused commitment fee of 2.0 percent of the unused amount of the Total Aggregate Commitment per annum
    • an initial work fee of USD 1 million.
    • Certain fees are payable upon the occurrence of specific events, including a break-up fee of 1.0 percent of the Total Aggregate Commitment, and an exit fee of 4.0 percent of the Total Aggregate Commitment.
    • In the event Apollo elects, but is not provided the opportunity, to subscribe for equity interests of the Company on the effective date of the chapter 11 plan of reorganization, with the amount of such equity interests calculated assuming a total enterprise value of the Company of $3.2bn, SAS shall pay Apollo a fee equal to (a) if such fee event occurs within 12 months of the Closing Date, $19.5mn; or (b) if such fee event occurs after the 12-month anniversary of the Closing Date, an amount such that Apollo receives an all-in internal rate of return of 23.2% on the DIP financing.
    • In addition, the DIP Term Loan Agreement requires the payment of a 4.0% fee of the Total Aggregate Commitment in the event Apollo elects, but is not provided the opportunity, to provide up to 30.0% of any new money equity or equity-like financing for the Company that is provided by any third party on the Effective Date, on the same terms and conditions made available to any such third parties.
  • New Money: $700.0mn
  • Roll-Up: N/A
  • Maturity/Termination: The DIP Facility matures nine months after the Closing Date, but may be extended for an additional three-month period, at the election of the Company, up to three times, subject to the Company paying an escalating extension fee equal to 0.75 percent (first extension), 1.25 percent (second extension) and 1.50 percent (third extension), respectively, of the Total Aggregate Commitment, together with any accrued and unpaid interest or expenses….
    • If, pursuant to the equity capital raise process, the Company determines that allowing Apollo to subscribe for shares as described above is in the best interests of the Company and its creditors, Apollo would be permitted to convert its DIP loans into new equity of the Company on the Effective Date, subject to required approvals (including from regulatory authorities, the Court and the Company’s shareholders). In such case, Apollo has agreed to negotiate with the Danish State terms and conditions under which the Danish State would acquire up to USD 250 million of equity interests of the Company associated with Apollo’s conversion of its DIP loans into new equity of the Company.
    • Because any conversion of the DIP financing commitments may be insufficient to fully meet the objectives of the equity capital raise, the Company may seek to raise the additional equity capital required to meet that level. Furthermore, the Company is the sole party that may negotiate and propose its plan of reorganization during the exclusivity period under the applicable provisions of the U.S. Bankruptcy Code, subject to required approvals (including from regulatory authorities, the Court and the Company’s shareholders). Given the Danish State’s expressed interest in possibly participating in the Company’s equity capital raise, the Company intends to work closely with the Danish State towards accommodating such an investment interest in the context of the equity capital raise process.
  • Milestones:
    • Breakup fee approval deadline: within five (5) Business Days after the date on which the Breakup Fee Motion is filed
    • DIP Order deadline: within 30 days of delivery of the agreement
    • Plan filing deadline: eight months after DIP closing date
    • Plan confirmation deadline: no later than five days before the Maturity Date
    • Plan Effective Date deadline: no later than the Maturity Date.

Marketing

In a declaration in support of the DIP motion [Docket No. 228], Investment banker Seabury notes: "Commencing in February 2022, Seabury and Skandinaviska Enskilda Banken AB (“SEB”), the Debtors’ co-investment bankers, conducted a broad, yet targeted, marketing process to raise equity capital as part of the Company’s objective to implement its SAS Forward Plan on an out-of-court basis. However, given the uncertainties associated with successfully effectuating such an equity capital raise, such as the significant potential for the commencement of a strike by certain pilots’ unions of indeterminate duration, Seabury and SEB were authorized to communicate to potential investors that DIP financing may be required as part of the process to raise equity financing and implement the SAS Forward Plan.

The Debtors’ primary strategic consideration when marketing the financing opportunity was the identification of an economical and reliable source of financing that could (i) support the Debtors’ need for a sizeable loan to provide for general working capital, (ii) provide the Debtors with financing for the duration of their chapter 11 cases that affords them adequate time and flexibility to implement the cost-savings initiatives in the SAS Forward Plan, and (iii) facilitate achieving the Debtors’ ultimate financial goal of raising equity capital as part of their exit from these chapter 11 cases.

Thirty parties signed non-disclosure agreements with the Debtors to obtain access to the Company’s data room….The Company, with the advice of its advisors, determined that $700 million in financing was necessary to provide sufficient liquidity for the Company to mitigate financial constraints of a potential pilots’ unions labor strike. Thus, Seabury’s and SEB’s solicitation process focused on achieving $700 million in DIP financing.

The initial solicitation process resulted in submission of indications of interest in the Company’s DIP financing by 11 bidding groups (involving 13 parties) by the first round deadline of May 13, 2022, demonstrating strong interest. Investors submitted bids for various amounts (up to the total ask), but, notably, not a single party was willing to provide financing on an unsecured basis, either at that time or at any point in the process.

The submissions from this initial round were categorized by the Company, Seabury, and SEB into various tiers based on the respective strengths of each proposal. Tier I prospects submitted proposals for the entire amount of the requested DIP financing and expressed willingness to convert their DIP facility into equity. Tier II prospects submitted proposals for the full amount of the requested DIP financing with a suggestion that they might be willing to convert a DIP facility into equity. Tier III prospects were pure credit proposals, looking to the strength of the collateral package with an expectation of full repayment in cash upon exit from chapter 11. 6 Tier IV prospects were partial amount submissions. Among this group of first-round bidders, four bidders indicated interest in a DIP facility with an equity-conversion feature.

In June 2022, leading up to the second-round bid submission deadline, the Company faced the high likelihood of a pilots’ unions labor strike that could have a material adverse impact on its business if it extended in duration and determined that it would need to pursue a chapter 11 filing to protect its business and going-concern value. To that end, prior to soliciting second-round bids, I, along with the Seabury and SEB teams, conveyed to all remaining parties that they would need to submit full-sized DIP commitments to be competitive in the Company’s DIP financing process.

On June 24, 2022, the second-round bid deadline, the Company received five submissions for DIP financing (involving 10 parties). Upon receipt of such submissions, Seabury and SEB worked quickly to analyze the competitiveness of the bids. From a cost-of-debt perspective, there were no clear outliers—all bids were within a range of approximately 200–250 basis points.

Therefore, in evaluating these submissions, the Company and its advisors focused on certain factors, such as (i) execution risk and potential timeline to closing an agreement, (ii) likelihood of the lender(s) participating as an equity plan sponsor in a future competitive exit financing process, (iii) economics of the proposed financing, (iv) proposed structure and terms of the agreement, and (v) experience and reputations of the lender(s) in the aviation industry.

The Board selected the two parties with the most favorable terms for the Debtors and with the lowest execution risk, notwithstanding that the Apollo proposal was the superior proposal, even at that point. These bidders also demonstrated the most interest in the investment opportunity, incurring significant expenses in hiring legal and financial advisors to help them fast-track expensive diligence efforts and structure an attractive DIP package from the outset of the Company’s financing process.

Perhaps most importantly, given the Company’s need to raise exit equity upon emergence from chapter 11, the Board’s decision-making process considered that both finalists had expressed the strongest desire to be the eventual equity investors in the reorganized Company. 

Ultimately, the solicitation process yielded a fully-committed $700 million DIP Facility from Apollo Management Holdings, L.P. ('Apollo' and, on behalf of one or more affiliates and/or funds or separate accounts managed by it and its affiliates, the 'DIP Lenders'), which will fully fund the Debtors’ operations and administration of these chapter 11 cases.

Apollo’s proposal offered a number of favorable economic terms, including the size and certainty of the committed amount (the full $700 million requested by the Debtors), flexibility of the terms, the applicable interest rate on drawn amounts (particularly if the Debtors elect the PIK option for interest payments), and the reasonableness of conditions precedent and applicable financial covenants.

Apollo’s proposal also offered the most promising prospects for a successful restructuring in these chapter 11 cases. Throughout the process, it became clear to the Debtors that, following extensive diligence and discussions with the Debtors and advisors, Apollo had tailored its proposal to the Debtors’ specific business and financial needs. The DIP Facility also offers the Debtors the opportunity to work collaboratively with a single lender, which can reduce the administrative burden associated with obtaining consensus amongst a group of lenders for any matters requiring lender consent."

Fee Payment Motion

The motion [Docket No. 223] provides, "Since commencing these chapter 11 cases, the Debtors have made significant progress advancing the key elements of their restructuring. Having resolved the strike formally instituted by approximately 900 pilots on July 4, 2022, which accelerated the Debtors need to file these chapter 11 cases, and having advanced negotiations with aircraft lessors, the Debtors are pleased to report that they have now secured $700 million in debtor-in-possession financing from Apollo, the full financing amount sought by the Debtors, following a robust marketing process run by the Debtors’ proposed co-investment bankers.

This Motion is the first of two motions that the Debtors are filing to seek approval of their proposed debtor-in-possession financing package, first seeking approval of certain Transaction Protections as a predicate to seeking approval of the financing facility, which will take place on regular notice at a hearing scheduled for September 7, 2022."

Specifically, the motion seeks Court approval to pay a fee in the amount of $7 million, representing 1% of the DIP Lenders’ total commitments under the DIP Facility (the “Breakup Fee”), to be due and payable to the DIP Lenders in cash upon the termination of the DIP Commitments, in whole or in part, at any time prior to the entry of the DIP Order, including if the Debtors consummate any alternative debtor-in-possession financing with another counterparty, as well as a $1 million expense deposit to be applied to the payment of the DIP Lenders’ out-of-pocket expenses incurred prior to or after the entry of the Proposed Order.

DIP Budget [Docket Nos. 226 and 321]

 

 

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