April 22, 2021 – The Court hearing the AeroCentury cases issued an order (i) approving bidding procedures, including bidder protections, in respect of the Debtors’ proposed sale of substantially all of their assets, (ii) authorizing the Debtors to enter into a stalking horse asset purchase agreement (the “APA”) with Drake Asset Management Jersey Limited (“Drake” or the “Stalking Horse Bidder”) and (iii) approving a proposed timetable culminating in an auction on May 20th and a sale hearing on May 25th [Docket No. 87].

Consideration for the purchase is comprised of senior debt ("the amount of outstanding Secured Obligations pursuant to the Mortgage and Loan Agreement" as at the sale closing date) that is to be credit bid, with this amount at $83.5mn as at the Petition date.

Background

Drake is an affiliate of UK-based Falko Regional Aircraft Ltd ("Falko") one of the world's largest aircraft asset management companies (275 regional jet and turboprop aircraft worth over $2.0bn acquired since 2011 and over $1.0bn in 2019)

On October 30, 2020, Drake purchased all of the indebtedness (approximately $87.9mn, of which $83.2mn is principal) held by the Debtors' then prepetition senior lenders (the "MUFG Lenders")  as well as the swap termination payments owed with respect to such indebtedness. In December 2020, Drake purchased three aircraft from ACY E-175, LLC ("E-175"), a special purpose entity owned by the Debtors, and leased to Republic Airways. Drake now intends to credit bid the totality of the acquired senior debt for the Debtors' 12 remaining aircraft, 10 (all Bombardier) of which serve as collateral in respect of that debt.

The Debtors note that they have reached out to 86 potentially interested parties and bidders can bid for "individual assets and for sub-groups of assets" and the Debtors are permitted to join bids. Notwithstanding the lack of bidder protections, Drake's stalking horse bid will represent a formidable benchmark for those trying to coordinate their bids during a relatively short timeframe (the Debtors are requesting bids within 21 days of a bidding procedures order which is likley to be issued within days).

Key Terms of the Stalking Horse Term Sheet and Proposed Bidding Procedures

• Seller: AeroCentury Corp.
• Buyer: Drake Asset Management Jersey Limited, a Falco affiliate
• Purchase Price: The aggregate consideration for the purchase of the Equipment and the related Lease Documents shall be an amount equal to the amount of the then-outstanding Secured Obligations as of the Closing Date, with the recitals noting that "the amount of outstanding Secured Obligations pursuant to the Mortgage and Loan Agreement as of the date of this Agreement is approximately $83,164,109." As at the Petition date, this was up to $83,514,823.64.
• Bidder Protections: No break-up fee or expense reimbursement (for stalking horse or any other potential bidder)
• Joint Bidding: At any time prior to the conclusion of the Auction, the Debtors may negotiate with any two or more Potential Bidders or Qualified Bidders to join them into a joint bid for purposes of submitting a joint or combined bid, including joining Qualified Bids at the Auction.

Key Dates

• Bid Deadline: May 17, 2021
• Sale Objection Deadline: May 18, 2021
• Auction: May 20, 2021
• Sale Hearing: May 25, 2021

Marketing Efforts

The motion reads: “The Debtors retained B. Riley Securities, Inc. (‘B. Riley’) in October 2019 to assist in analyzing options to address their capital structure, including strategic and financing alternatives to restructure their indebtedness and other contractual obligations, including on the Debtors’ default under a credit facility (the ‘MUFG Credit Facility’) for which MUFG Union Bank, N.A. (‘MUFG’) acted as agent….In December 2019, the Debtors embarked on a dual-track process to raise capital and/or sell some or all of the Debtors’ assets. In connection with this dual-track process, the B. Riley team, contacted approximately 90 parties. All prospective parties were encouraged and permitted to submit proposals for a variety of potential transactions, including debt financings, equity investments, or to acquire any of the Debtors’ assets, including any combination thereof. 

To that end, the Debtors set up a robust electronic data room to facilitate information sharing on a confidential basis with prospective parties…The Debtors ultimately received eight (8) indications of interests (‘IOIs’), including two (2) that would have repaid the outstanding principal and accrued interest owed on the MUFG Credit Facility. Unfortunately, this marketing process and the Initial IOI Deadline coincided with the onset of the COVID-19 pandemic….

As a result, each party who initially submitted an IOI ultimately informed the Debtors that they were no longer interested in proceeding on the terms set forth in their original IOIs due to the uncertainty caused by the COVID-19 pandemic. The Debtors remained in default, however, and continued to negotiate with the MUFG Lending Group to determine a viable path forward despite the impact of the COVID-19 pandemic. Following extensive negotiations, as a condition for continuing to allow the Debtors to operate while still in default under the MUFG Credit Facility, the MUFG Lending Group required the Debtors to restart the sales and marketing process beginning in early April of 2020 to solicit highest and best offers. Again, prospective parties were able to submit proposals for a variety of potential transactions, including debt financings, equity investments, or the acquisition of any of the Debtors’ assets, including any combination of assets. Interested parties had approximately six weeks to refresh their diligence and submit a revised IOI. By mid-May 2020, the Debtors received four offers from potentially interested parties.

In December 2020, Drake made a proposal to acquire the three aircraft owned by ACY E-175, LLC (‘E-175’), a special purpose entity owned by the Debtors, and leased to Republic Airways (the ‘Republic Aircraft’). Following several weeks of negotiations, the Debtors and Drake agreed to a process by which the Debtors would conduct a prepetition sales process for the three Republic Aircraft…The Debtors, with the assistance of B. Riley, determined that Drake’s bid for the Membership Interests in E-175 was the highest and best offer received. Drake’s bid provided the highest economic consideration to the Debtors and provided both the fastest and the most certain closing. Most importantly, Drake proposed a closing date at least a month sooner than any other bidder. Further, as part of the sale of the E-175 aircraft, Drake agreed to allow the Debtors to retain $2.1 million of sale proceeds, which would be used to fund the Debtors’ continued business operations and further sale and restructuring efforts. After discussion by the Debtors’ Board of Directors, the Debtors selected Drake as the winning bidder. The sale of the Membership Interests in E-175 to Drake closed on March 16, 2021. As noted above, Drake agreed to allow the Debtors to retain $2.1 million of cash from the sale of the E-175 membership interests to continue their business operations. 

The Debtors determined that a sale of their remaining aircraft and other assets under section 363 could provide the most-value, and the Debtors voluntarily commenced these cases to pursue such a sale….The Stalking Horse Bid is a credit bid in the amount of the Stalking Horse Bidder’s Secured Obligations (as defined in the Stalking Horse Agreement), which are approximately $83,164,109 as of the Petition Date. Importantly, the credit bid does not include any break-up fee or expense reimbursement. The Debtors’ ultimate consummation of the Stalking Horse Agreement is subject to higher or otherwise better offers (in whole or through a combination of bids) that the Debtors may receive for the Assets pursuant to the Bidding Procedures. Accordingly, there is a strong business justification for the Debtors’ entry into the Stalking Horse Agreement.

The Debtors have already commenced marketing their assets, and already have reached out to 86 potential buyers and commenced negotiating non-disclosure agreements with potential interested purchasers. The Debtors now seek to formalize that marketing process. The proposed Bidding Procedures make clear that the Debtors will run a comprehensive marketing process and may accept offers for individual assets and for sub-groups of assets that are less than all of the Debtors’ assets. If the Debtors determine in their business judgment that such a bid or bids represent a higher or better offer, then the Debtors may pursue an alternative transaction.”

Further Background

In a press release announcing the filing, the Debtors advised that: “The Company has proposed in one of its Chapter 11 motions an auction sale ('Auction Sale') for its assets in order to fund repayment of its indebtedness to its sole secured lender, Drake Asset Management Jersey Limited ('Drake'). The Company has entered into a stalking horse agreement with Drake to acquire the aircraft collateral securing the Drake indebtedness, subject to higher and better bids. In the event Drake is the successful bidder, the closing of the purchase will resolve all of the Company’s outstanding indebtedness to Drake.

As of March 29, 2021, the Company owned twelve aircraft. Ten of those aircraft are encumbered by a first priority lien securing the Company’s approximately $83.2 million of secured indebtedness of the Company held by Drake, while two are on lease to lessees in Kenya and not subject to the first priority lien of Drake."

About the Debtors

According to the Debtors: “The Debtors are engaged in the business of investing in used regional aircraft and leasing the aircraft to foreign and domestic regional air carriers. The Debtors’ principal business objective is to acquire aircraft assets and manage those assets in order to provide a return on investment through lease revenue and, eventually, sale proceeds. The Debtors strive to achieve this objective by reinvesting cash flow from operations and using short-term and long-term debt and/or equity financing. The Debtors believe their ability to achieve this objective depends in large part on their success in three areas: (i) asset selection and acquisition, (ii) lessee selection and (iii) obtaining financing to acquire aircraft and engines.

The Debtors hold aircraft for lease or for sale, depending on the arrangement with each particular customer. As of the Petition Date, the Debtors’ aircraft portfolio consists of six aircraft held under operating leases, two aircraft held under financing leases and five aircraft held for sale in whole or as parts. Most of the Debtors’ aircraft are mid-life regional aircraft, and their globally diverse customer base consists of six airlines operating in five countries: the United States, Canada, Croatia, Norway and Kenya."

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