CityJet examinership: Debt to equity conversion
Case study
Transaction timeline
In August 2017, Investec Bank (IBP) provided a fully amortising 6-yr Mezzanine Debt Facility to CityJet (“CJ”), an Irish regional airline into finance leases secured against 22xCRJ-900 aircraft. Senior Debt was provided by Export Development Canada (“EDC”).
On April 17 2020, CJ filed for Examinership in Ireland (akin to US chapter 11 process, but much shorter period) citing Covid- 19 as the main reason.
On July 16 2020 IBP and EDC entered into an MOU agreeing to concessions and converting the finance leases to operating leases.
On August 10th 2020 CityJet exited Examinership and all 14 aircraft remain employed.
Examinership process – Debt to equity conversion
Examinership is a “debtor in possession” process in Ireland that lasts 100 days and constitutes a full business re-organisation, whereby a creditor scheme is also agreed.
The initial proposal put forward by CJ/Irish Examiner was for IBP to receive 1.5% of its loan amount / 98.5% write off as their view was IBPs second ranking position wasn’t recoverable and the Examiner had power to effectively “cram down” IBP’s position and/or EDC could outvote IBP in Examinership process.
Fortunately SAS were keen to commit to continue wet leasing the aircraft, from CJ albeit on significantly revised terms. The SAS contracts are key to CJ’s business as a going concern.
Through the commercial, restructuring, technical and asset experience of the Aviation Finance team, IBP argued that its junior position wasn’t limited to the CJ leases but to the lifetime value of the assets, secured by a second ranking mortgage) and (ii) the potential proceeds available over the life of the aircraft, in an evolving market (including end of lease payments, onward leasing etc.) were sufficient to justify a restructuring of all debt, thus significantly improving our initial subordinated position and reducing our Day 1 impairment. The alternative would have been a collapse of Examinership process and value destructive repo/asset sale.
IBP proposed that the finance leases should be terminated and new operating leases, matched to the SAS contracts be put in place. This meant that EDC/IBP would now take the economic risk/benefit in the aircraft.
The restructuring was approved by the Irish courts and represent significantly better recovery prospects for IBP than originally proposed.
Takeaways and stakeholders
Broad Investec engagement and support
The AF restructuring team brought technical, legal and commercial lease expertise that surpassed EDC’s abilities and allowed IBP even in its minority position to break the deadlock with the Examiner and drive the restructuring dialogue.
Favourable lease terms agreed whilst remaining fair to lessee.
Restructuring expertise
The existing loan agreements & structure allowed IBP to rely on its legal position to leverage its negotiating stance in the restructuring.
The team had a deep understanding of operating leases.
Focus on the bottom line
With AF team members working on this, with other stakeholders within IBP, there was an alignment of interest in protecting IBPs position and preserving value as best as possible to minimize losses and deliver tangible savings.
Team
IBP was able to work collaboratively & quickly with deal team driving the process forward aggressively and able to make decisions.
Existing relationships with Cityjet allowed rapid resolution of issues under negotiation.
