COVID-crisis forces lessor NAC to file for Chapter 11

Danish regional aircraft lessor Nordic Aviation Capital Designated Activity Company, NAC, has filed for voluntary Chapter 11 restructuring with the Richmond (Virginia) Eastern District Bankruptcy Court. The lessor confirmed this on December 20. The filing, which was done on December 17 and 19, includes NAC holding and 112 affiliated companies. COVID-crisis forces lessor NAC to file for Chapter 11. NAC says it has entered a Restructuring Support Agreement with equity holders and lenders that covers 73 percent of its $6.3 billion debt, or $4.6 billion. The lessor has total liabilities of $8.0 billion. The very complex capital structure with sixty aircraft owing entities, twelve service and fifteen leasing entities plus one joint-venture has made an agreement with all creditors complicated. Once the restructuring has been completed, NAC will be majority-owned by its creditors who will convert $4.0 billion of its debt into equity. The shareholders will infuse $537 million in new capital, of which $337 million in new equity rights and $200 million as a revolving credit facility. To help it through the Chapter 11 phase, creditors have also supplied $170 million in Debtor in Possession (DIP) funding that will allow NAC to meet its obligations to its 75 customers, suppliers, and 172 employees. This includes maintenance obligations by customers or third parties. NAC upholds fleet expansion plans With the new capital, NAC will be able to improve its liquidity position and pursue its plans for the purchase of new aircraft. NAC is the largest lessor of regional aircraft, with a managed and owned fleet of 469 aircraft. They include 163 ATR 72s and 37 ATR 42s, 28 Embraer E170/E175s, 146 Embraer E190-E195s, 85 De Havilland Canada Dash 8s, and 16 Mitsubishi CRJs. It has 64 aircraft on order, including 19 ATR 42s and 25 ATR 72s plus 20 Airbus A220s (both the -100 and -300). This brings the current and future aircraft to 544. The Dublin-based lessor is the first major one known to file for restructuring. Documents filed with the Virginia court state that due to operational disruptions caused by the ongoing COVID-19 pandemic, 65 percent of its customers defaulted on their monthly lease payments. “In the fiscal year 2020-2021, NAC entered into agreements for short-term rental deferrals with 25 customers on more than 100 leases. Consequently, total billings and future cash flows were significantly reduced. In April 2020, NAC collected on less than a quarter of its invoices.” The lessor has been loss-making since 2019/2020 when it posted a $639.1 million net loss and recorded a $2.4 billion loss for 2020/2021. Graphic showing how Nordic Aviation Capital turned from being profitable to loss-making in the past two years. (NAC court document) In a written statement to the court, NAC Vice Chairman and Chairman of the Restructuring Committee Justin Bickle, says that the travel ban announced for Southern Africa in late November after the outbreak of Omicron affected the market from where NAC receives 25 percent of its lease rental income. In October, so before Omicron, the cash collection rate was just forty percent. “NAC’s customers are facing severe liquidity issues, and, simply put, NAC cannot collect cash that its customers do not have. To date, NAC has restructured the lease obligations of thirteen customers on ninety-five aircraft leases. NAC is currently involved in negotiations with fourteen additional customers to restructure the obligations on another 105 leases.” The book value of its fleet dropped in one year from $7 to $4.8 billion. Restructuring process started back in January In response to these problems, NAC reduced costs and cut its workforce, tried the maximize lease collection from customers that were defaulting, and made arrangements to defer its own payments to lenders, while its shareholders supplied $60 million in new equity. The process to restructure and file for Chapter 11 was started back in January but almost partly collapsed when a German bank exited the process in August. The court filing continues: “To preserve Customer relationships and promote continued cash inflows, the Debtors entered into various Lease restructurings with their Customers. Absent such transactions, the Debtors risked Customer attrition and the attendant Lease revenue needed during such a difficult operating environment. These renegotiations resulted in certain Lease modifications, such as reduced rent payments, deferred payment options, and “power by hour” arrangements.” NAC estimates to hold approximately $145 million in cash security deposits on account of active leases. The document adds: “In connection with the negotiation of the Restructuring Support Agreement, the Debtors reached a commercial agreement with certain lenders under various of their secured financing arrangements around the terms and conditions of lease amendments related to the aircraft that serve as collateral under those financing arrangements.” The Restructuring Support Agreements include creditors like DB Nightjar KfW, SMBC, Export Development Canada, and PFA Asset Management. NAC is owned by founder Martin Moller, EQT, KIRKBI, and GIC. Thanks to the investment of $2.0 billion in 2019, the company was able to place an order for a combined 125 Airbus A220s and ATR 72s at the Paris Airshow. NAC’s aircraft are financed through a number of banks, including Credit Agricole, Citi Bank, Deutsche Bank, KfW Ipex Bank, EPC, NAC's customer list shows some 75 airlines across the world. (NAC court document) First-day motions at the Richmond court are scheduled for December 21. NAC hopes to complete the restructuring, which is supported by Kirkland & Ellis, Ernst & Young, Rothschild Bank, Clifford Chance, and William Fry, in some 150 days or by mid-2022. In a media statement, Bickle says: “NAC is taking this proactive step in the U.S. because we believe it is the most efficient and effective way to implement a consensual and comprehensive financial restructuring. With the strong support we’ve received from our lenders to date, we are pleased to be entering the Chapter 11 process with a restructuring support agreement in place to implement the financial restructuring of the Group that will position NAC for future growth and success as industry conditions continue to improve.” His court statement adds that with the restructuring, “NAC has positioned itself to thrive once that return materializes and build a leading narrow-body business for larger commercial aircraft as well.” Martin Moller will step back as Chairman of NAC, the company he founded in 1990. Here he is seen with Airbus CCO Christian Scherer at the 2019 Paris Airshow. (Airbus) As the COVID-crisis forces NAC to file for Chapter 11, founder and Chairman Martin Moller says: “As my 30-year chapter with NAC comes to a close, I am comforted to see the significant support demonstrated by the lenders and their confidence in NAC’s business model. I have the utmost confidence in the Company’s resilience and ability to continue to serve customers in a sustainable manner throughout this process and beyond.”

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