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Air Methods Corporation – Leading Air Medical Service Provider Files Prepackaged Chapter 11 with Over $2.2bn of Funded Debt, Looks to Emerge by Year End Deleveraged by $1.7bn and 98% Owned by First Lien Lenders

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October 24, 2023 – Air Methods Corporation and 15 affiliated debtors (together “Air Methods” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Souther District of Texas, lead case No. 23-90886 (Judge TBA). The Debtors, the "nation’s leading air medical service" and a portfolio company of private equity house American Securities*, are represented by Gabriel A. Morgan of Weil Gotshal & Manges LLP. Further Board authorized appointments include: (i) Alvarez & Marsal as restructuring advisor, (ii) Lazard Frères & Co. LLC as investment banker and (iii) Epiq Corporate Restructuring, LLC as claims agent.

* American Securities acquired the Debtors in March 2017 in a transaction which valued the Debtors at $2.5bn.

Davis Polk & Wardwell LLP is serving as legal advisor and Evercore Group, L.L.C. is serving as financial advisor to the ad hoc group of lenders.

The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($2.243bn of funded debt). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Trust, National Association (as Trustee for $516.7mn of unsecured notes), (ii) Safran Helicopter Engines USA ($4.7mn trade claim) and (iii) Vanderbilt University Medical Center ($2.3mn trade claim). All 30 of the Debtors' top 30 unsecured creditors have claim of $300k or greater.

Petition Date Highlights 

  • Leading Air Medical Service Owned by PE House American Securities Files Prepackaged Chapter 11 (RSA Attached) with Over $2.2bn of Funded Debt
  • With Support from First Lien Lenders and American Securities, Looks to Emerge by Year End Minus $1.7bn of Funded Debt
  • In addition to Unsustainable Capital Structure, Debtors Cite Labor Shortages (ie Pilots), Increased Costs Generally, Payor Reimbursements Mechanics, the "No Surprises Act" and Severe Weather as Precipitating Bankruptcy Filing
  • First Lien Lenders (Owed Almost $1.3bn) in Line for 98% of Emerged Equity (Subject to Dilution), Unsecured Noteholders (Owed $500.0mn of Principal) Just 2%
  • Debtors Have Committments for $80.0mn of New Money DIP Financing ($40.0mn Interim) to be Provided by First Lien Lenders Party to the RSA

In a press release announcing the filing, Air Methods provided that it: “has entered into a Restructuring Support Agreement (“RSA”) with (i) majorities of its first lien lenders and bondholders and (ii) its equity sponsor [ie Private equity firm American Securities] under which such key stakeholders have agreed to support an expedited balance sheet restructuring.Implementing the restructuring contemplated by the RSA will reduce the Company’s total debt by approximately $1.7 billion, increase liquidity and position the business for long-term success by allowing it to focus on its growth and development strategies.

To implement the restructuring contemplated by the RSA, Air Methods and certain of its affiliates initiated today voluntary prepackaged Chapter 11 cases in the U.S. Bankruptcy Court for the Southern District of Texas. The prepackaged Chapter 11 process provides an orderly forum for Air Methods to implement the balance sheet restructuring efficiently and quickly. Additionally, the restructuring contemplated by the RSA provides for vendors and suppliers to be paid in full, and for teammates to continue receiving their pay and benefits without interruption. Pursuant to the RSA, the Company has already obtained the requisite support from its stakeholders to confirm the plan of reorganization and, due to this broad support, Air Methods expects to complete this process on an expedited basis and emerge from Chapter
11 with an optimal capital structure by year end
.

Blue Hawaiian, the largest provider of helicopter tours and charter flights in Hawaii, is not included in the Company’s court-supervised process."

The Debtors’ CEO Jaelynn Williams added: “With increased financial flexibility and access to additional capital, we will be better positioned to continue opening new greenfield bases, accelerate our talent acquisition initiatives, execute on our growth initiatives and equip more emergency personnel with the expertise needed to safely deliver the highest quality air medical care for generations to come….We appreciate the support of our debtholders and equity sponsor in enabling us to achieve this positive outcome.” 

Prepetition Solicitation

On October 24th, the Debtors commenced a prepetition solicitation of acceptances of the prepackaged Chapter 11 Plan from holders of claims and interests that are eligible to vote – ie, Class 3 Prepetition Secured Loan Claims and Class 7 Prepetition Unsecured Note Claims." 

Those two classes are set to receive the following treatment:

Class 3: Prepetition Secured Loan Claims. Each holder of an Allowed Prepetition Secured Loan Claim (@$1.175bn principal of term loans and $115.8mn principal and interest of  revolving loans) shall receive from Reorganized AMC, in full and final satisfaction, settlement, release, and discharge of such Prepetition Secured Loan Claim, subject to the DOT Procedures, its Pro Rata share, calculated as of the Petition Date, of: (i) the Prepetition Secured Loan Claims Equity Distribution; (ii) the DRO Subscription Rights; and (iii) the ERO Subscription Rights; provided that each holder of an Allowed Prepetition Secured Loan Claim shall have the option to elect to exercise the Equity Cash-Out Option in lieu of (A) receiving its Pro Rata share of the Prepetition Secured Loan Claims Equity Distribution and (B) subscribing for the ERO, in accordance with this Plan.

Class 7: Prepetition Unsecured Note Claims. Each holder of an Allowed Prepetition Unsecured Note Claim (@$500.0mn) shall receive from Reorganized AMC, in full and final satisfaction, settlement, release, and discharge of such Allowed Prepetition Unsecured Note Claim, subject to the DOT Procedures, its Pro Rata share of: (i) the Prepetition Unsecured Note Claims Recovery Pool; (ii) the New Tranche 1 Warrants; and (iii) the New Tranche 2 Warrants; provided that each holder of an Allowed Prepetition Unsecured Note Claim shall have the option to elect to exercise the Equity Cash-Out Option, in accordance with this Plan.

Where:

"Prepetition Secured Loan Claims Equity Distribution" means 100% of the New Interests, subject to the DOT Procedures and dilution by: (i) DRO Equity Interests; (ii) DRO Backstop Commitment Premium Shares; (iii) ERO Equity Interests; (iv) ERO Backstop Commitment Premium Shares; (v) Private Placement Commitment Shares; (vi) Private Placement Premium Shares; (vii) the Prepetition Unsecured Note Claims Recovery Pool; (viii) New Common Stock issued upon the exercise of the New Warrants; and (ix) New Common Stock issued on account of the Management Incentive Plan.

"Prepetition Unsecured Note Claims Recovery Pool" means 2.0% of the New Interests, subject to the DOT Procedures and dilution by: (i) the ERO Equity Interests; (ii) New Common Stock issued upon the exercise of the New Warrants; and (iii) New Common Stock issued on account of the Management Incentive Plan.

Plan and RSA Overview [Docket No. 5]

The Kahn Declaration (defined below) provides: "

  • The DIP Lenders (as defined in the Plan) have committed, pursuant to the terms set forth in the Restructuring Support Agreement, to provide a senior secured, superpriority, and priming debtor-in-possession term loan credit facility in the aggregate principal amount of up to $155,000,000, consisting of (i) new money term loans in an aggregate principal amount of $80,000,000, of which $40,000,000 will be available immediately upon entry of an interim order and (ii) subject to entry of a final order, a roll-up of up to $75,000,000 in aggregate principal amount of the outstanding Term Loans (as defined in the Prepetition Credit Agreement, the “Prepetition Term Loans”) held by the DIP Lenders, which will convert, on a dollar-for-dollar basis, to Exit Term Loans (as defined in the Plan) upon emergence from these chapter 11 cases;
  • pursuant to the Plan, certain creditors will be provided with the opportunity to participate in a debt rights offering, equity rights offering, and equity cash-out option (in each case pursuant to the terms and conditions set forth in the Plan), the proceeds of which will be used to fund distributions and provide the Debtors with a minimum of $135,000,000 of post-emergence liquidity on the Debtors’ go-forward balance sheet, which offerings will be backstopped by certain creditors, in each case in accordance with the terms of the Purchase Commitment and Backstop Agreement (as defined in the Plan); and
  • other than Prepetition Secured Parties, Prepetition Unsecured Noteholders, and holders of existing equity interests, all creditors—including counterparties to the Debtors aircraft leases and financing arrangements, vendors and suppliers and other general unsecured creditors—will be unimpaired under the Plan."

Proposed Timeline

DIP Financing

As noted above he Debtors have lined up a $155.0mn debtor-in-possession financing package which includes $80.0mn of new money ($40.0mn interim) to be provided by first lien lenders party to the RSA and also includes a $75.0mn roll-up of prepeition term loans.

Prepetition Indebtedness

 As of the Petition date, the Debtors’ prepetition capital structure includes approximately $2.2bn in funded debt as summarized below:

Events Leading to the Chapter 11 Filings

In a declaration in support of first day filings (the "Kahn Declaration"), Jason Kahn, the Debtors' interim CFO provides: "Although the Debtors’ business is
operationally sound, the Debtors have substantial long-term funded debt that must be restructured prior to upcoming maturities. Simply put, the Debtors require deleveraging and additional capital, as they no longer can support their existing capital structure. Through these chapter 11 cases, the Debtors will address such indebtedness while raising additional debt and equity capital to fund their go-forward operations and position the Company for long-term growth and success.

[In 2019, the Debtors] began to experience additional external challenges related to unforeseen macroeconomic and legislative changes that significantly impacted the Debtors’ business and the air medical industry as a whole. 

The list below enumerates some of the key challenges that the company has faced since its 2019 operational reset:

Labor Shortages. The COVID-19 pandemic and subsequent increased demand for pilots across all aviation sectors led to significant industry-wide labor shortages in 2021 and 2022. This tightening of the labor market resulted in higher labor costs for much of the Debtors’ direct workforce. To attract and retain the highly skilled workforce necessary for the Debtors’ operations, the Debtors significantly increased compensation for front-line employees, such as pilots, medics, clinicians, and mechanics. These increases included one-time bonuses and material increases to base compensation.

Increased Costs. Cost inflation also put upward pressure on the Debtors’ other operating expenses, such as direct maintenance costs, freight costs, and fuel costs. In response, the Debtors have been continually engaged to drive savings across all of its cost elements by operating more efficiently and focusing on effective supply chain management.

Payor Reimbursement Dynamics. Air Methods is reimbursed for transports by patients, private insurance payors with in-network agreements, private insurance payors without network agreements, and government payors (like Medicaid and Medicare). When the Debtors provide a transport to a patient and generate a bill for such amounts, that bill usually is passed to one of these third-party payors, which pays all or a substantial portion of outstanding amounts.

Regulatory changes have impacted both private and public reimbursement rates. First, the No Surprises Act (the “NSA”) went into effect in January 2022, with the ostensible purposes of addressing transparency issues with the American healthcare system and protecting against large out-of-network bills. But the NSA introduced additional 'red tape' and complexity in the Debtors’ ability to collect on their receivables. The NSA introduced a new method of resolving disputed claims—through the NSA’s Independent Resolution Process (“IDR”)….Although Air Methods has been highly successful in winning disputes during the IDR process, the amount of time required to resolve a claim through IDR materially delays the Debtors’ cash collection associated with that claim….

This delay is exacerbated by the shortage of arbiters and the significant back-log of disputes submitted by medical providers across industries (not just air medical
providers). As a result, the Debtors can face unpredictable cash flows, which complicate the Debtors’ ability to service debt obligations and forecast their expected cash flows. To mitigate the issue and reduce the number of claims submitted to IDR, the Debtors continue to negotiate contracts with payors to avoid disputes altogether, but the interim effects of the NSA dealt a blow to the Debtors’ balance sheet.

In addition to regulatory changes with private payors, new legislation and regulation have reduced (or will soon reduce) reimbursement rates for public payors. In fact, at current rates, Medicaid and Medicare reimbursement rates cover less than half the costs for providing a transport. VA-covered transports currently pay above Medicaid and Medicare. In late 2020, however, the VA announced a new rule that would reduce VA reimbursement rates to match the rates reimbursed by Medicare. Despite strong opposition from medical providers—including other providers of air medical transports and general healthcare services—the VA remains steadfast in implementing the rule, as early as February 2024. Although the Debtors continue to consider ways to mitigate the effect of the contemplated rule change, the decrease in reimbursement rate would be pronounced and would put further downward pressure on the Debtors’ ability to generate positive cash flows.

Severe Weather. Due to the nature of the business, severe weather has a direct impact on the Debtors’ ability to complete transports and thus a direct impact on the Debtors’ ability to generate revenue. Over the past year, the Debtors have faced higher than normal weather related cancellations, as global weather patterns continue to fluctuate dramatically. This unpredictable and uncontrollable volatility hinders the Debtors’ ability to spread fixed operational costs across flights (thus negatively impacting profits and cash). To put the issue in perspective, a 1% variance in weather cancellation rate can decrease EBITDA by as much as $11,000,000 as well as place additional pressure on liquidity.

Tightening Debt Markets. In addition to the above, the Debtors feel the strain caused by tightening financial markets, as interest rates continue to rise and unfavorable debt market conditions persist. Rising interest rates, coupled with earnings pressure from the challenges above, have dramatically reduced the Debtors’ free cash flow. These factors, combined with those listed above and others, coalesced at time when the Debtors face near-term maturities for the majority of their funded debt obligations.

Key Prepetition Shareholders

American Securities affilate ASP AMC Holdings, Inc. is the ultimate parent company of each of the Debtors and, directly or indirectly, owns a 100% equity interest in each of the Debtors.

About the Debtors

According to the Debtors: “Air Methods is the nation’s leading air medical service, delivering lifesaving care to more than 100,000 people every year. With more than 40 years of air medical experience, Air Methods is the preferred partner for hospitals and one of the nation’s largest community-based providers of air medical services. United Rotorcraft is the Company’s products division specializing in the design and manufacture of aeromedical and aerospace technology. Air Methods’ fleet of owned, leased and maintained aircraft includes approximately 390 helicopters and fixed-wing aircraft.”

Corporate Structure Chart

 

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