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July 12, 2021 – Further to the Court’s June 7th bidding procedures order [Docket No. 256] and an auction held on June 30th [Docket No. 329], the Debtors have filed a revised executed asset purchase agreement (the “Boeing APA”) amongst the Debtors, the Boeing Company (“Boeing” or “Parent”) and Boeing’s acquisition vehicle Central Kansas Aerospace Manufacturing, LLC, (the “Buyer”) relating to the Debtors’ Kansas assets (the “Kansas Assets”) [Docket No. 369]. Amendments to the revised Boeing APA relate to offers of continuing employment.
The sale hearing, previously scheduled for July 9th, will now be held on July 13th. At that hearing, the Court will consider an outstanding objection [Docket No. 343] to the sale filed by back-up bidder NWI (defined below) which is comprised of entities controlled by Glass Holdings, LLC ("Glass") which also owns the Debtors. A second objection to the sale of the Kansas Assets filed by the Debtors' Official Committee of Unsecured Creditors has now been withdrawn.
As detailed further below, the Debtors' special committee has valued the Boeing bid at $38.8mn and the NWI bid at $35.1mn, with that alleged commercial edge bolstered by Boeing's role as DIP lender ("the DIP Agent likely would not consent to a sale to the NWI Buyers, thereby risking a default under the DIP Facility and immediate cutoff of the Debtors’ funding source."). For its part, NWI values its own bid at $45.6mn (see the executed NWI APA at p.12 of Docket No. 343).
In a reply to the objection [Docket No. 364], the Debtors note: "Following months of good faith efforts by the Debtors to achieve the highest or best offer for their assets, the Debtors are pleased to present to the Court and parties in interest the proposed Sale to the Boeing Buyer, as the Successful Bidder, which will provide $38.8 million of value to the Debtors’ estates, including the assumption of over $11.2 million of the Debtors’ liabilities, and offer continued employment of substantially all of the Debtors Kansas employees.
The remaining objection to the Sale was filed by the Back-Up Bidder. The objection seeks to supplant the Debtors’ sound business judgment by arguing that the Back-Up Bidder’s bid was the higher and better offer, not the Successful Bidder’s. The Back-Up Bidder alleges no unfairness related to the sale or Auction process, absent which the Back-Up Bidder lacks standing to challenge the Sale as a disappointed bidder. In any event, the Debtors, acting through the Special Committee and after consultation with the Committee, exercised sound business judgment in selecting the Boeing Buyer’s bid as the highest and best bid at the Auction because, among other reasons, it (i) satisfies more of the Debtors’ secured debt through the credit bid, (ii) provides additional cash for winding down the Debtors’ Kansas estates, (iii) allows the Debtors to monetize inventory and accounts receivable for additional benefit, and (iv) provides offers of employment to the Debtors’ Kansas employees and assumes employee."
Comparison of Boeing and NWI Bids
The Debtors’ reply to the NWI objection provides: “The evidence shows that the Debtors appropriately exercised their business judgment in selecting the Boeing APA as the Successful Bid over the NWI Buyers’ proposal. As discussed in the Burns Declaration and King Declaration, the Debtors, acting through the Special Committee and in consultation with the Committee, determined that:
- In total, the sale to the Boeing Buyer would confer value on the estates of approximately $38.8 million, whereas a sale to the NWI Buyers would confer approximately $35.1 million.
- The Boeing APA satisfies more of the Debtors’ secured debt than the NWI Buyers’ bid. The credit bid portion of the Boeing APA’s purchase price will retire $13.5 million of the Debtors’ outstanding secured obligations. The NWI Buyers’ proposal only included $13 million of cash. The Boeing APA provides $500,000 for the wind down of the Debtors’ Kansas estates, whereas a sale to the NWI Buyers would provide no funds for an orderly wind down. Because the NWI Buyers’ bid would not satisfy the Debtors’ outstanding secured obligations, all cash proceeds would be required to pay down the secured debt.
- The Boeing APA provides $5,844,000 in cash designated for payment of cure costs associated with the Designated Contracts, but the estates retain any excess over the actual cure costs and Boeing will pay directly any cure costs that exceed that amount.
- In addition to the Cure Cost Fund, the Boeing APA includes $5.43 million of other assumed liabilities, including those related to Transferred Employees.
- The Boeing APA excludes from the Sale all accounts receivable and current inventory unrelated to Boeing statements of work, which the Debtors can monetize for the benefit of the estates. Contrary to the NWI Buyers’ assertion, the Debtors did adjust their valuation of those assets for the potential risks in monetizing them. Although the NWI Buyers also would exclude certain accounts receivable, a significant portion of those accounts would be subject to set off given the structure of the NWI Buyers’ bid. Therefore, the Debtors did not attribute significant value to them.
- Both bids propose to offer employment to substantially all of the Debtors’ Kansas employees and assume liabilities related thereto.
In addition to the Boeing APA’s superior economic benefits to the estates, the Debtors’ determined that there were three significant risk factors associated with a Sale to the NWI Buyers on the terms of their bid. First, the cash proceeds would not satisfy the Debtors’ outstanding secured obligations, leaving significant deficiency claims under the DIP Facility and Prepetition Credit Agreement.
Because of that, and for the reasons stated in the Sale Motion, among others, the DIP Agent [ie Boeing] likely would not consent to a sale to the NWI Buyers, thereby risking a default under the DIP Facility and immediate cutoff of the Debtors’ funding source. Finally, based on the foregoing, a sale to the NWI Buyers would leave the Debtors with no proceeds or go-forward funding with which to wind down these chapter 11 cases, resulting in significant harm to the estates and all parties in interest. Although the credit bid under the Boeing APA will not satisfy all outstanding obligations under the DIP Facility and the Prepetition Credit Agreement, the Sale pursuant to the Boeing APA will allow the Debtors and the Committee to continue engaging with Boeing, as DIP Agent, regarding the conclusion of these chapter 11 cases, including potential development of a chapter 11 plan."
4 NWI agreed to assume $7.889 million of estimated accounts payable and $1.952 million of estimated “received, but not yet invoiced” accounts payable for a total of $9.841 million of assumed accounts payable obligations.
5 NWI agreed to assume $745,000 of “other liabilities”, $402,000 of accrued health insurance obligations and $1.295 million of employee obligations for a total of $2.451 million.
6 In the NWI Bid, the Debtors retain all Boeing and Spirit AeroSystems accounts receivable.
On June 30th, the Debtors notified the Court that they had designated Boeing as the Successful Bidder in respect of the Kansas assets; with NWI Wellington, LLC, NWI Park City, LLC, and NWI Admin, LLC (together, "NWI") as the Back-Up Bidder. The Debtors filed the Boeing APA on July 2nd [Docket No. 336] but did not file an APA in respect of the Back-Up Bidder.
The Back-Up Bidder, which had its efforts to get named as stalking horse blocked by Boeing, is comprised of entities controlled by Glass.
On June 24th, the Court issued an order approving the $31.1mn sale of the Debtors Everett, Washington assets (the “Everett Assets”) to Wipro Givon USA, Inc. ("Wipro Givon") [Docket No. 313]. The Everett Assets stalking horse was handpicked by Boeing further to a marketing process which Boeing directly supervised; with Wipro Givon and Boeing also entering into a separate agreement regarding Wipro Givon’s proposal and related matters (the “Boeing-Wipro Agreement”) which has been filed under seal.
In respect of the Debtors' Kansas Assets, however, Boeing took a very different, if equally involved, approach. Boeing did not affirmatively select a stalking horse (in hindsight, it appears likely that Boeing always envisaged itself as the purchaser), but did effectively veto the Debtors’ own preferred choice, a non-Debtor affiliate controlled by current parent Glass. The Kansas Assets bidding procedures motion [Docket No. 192] provided: “the Debtors were prepared to enter into the asset purchase agreement [with Glass] to serve as a stalking horse bid in the process contemplated by this Motion…Boeing, as DIP lender, was not supportive of the Debtors’ entering into the asset purchase agreement.”
The Debtors’ bidding procedure motion continues: “The Debtors filed these chapter 11 cases to maximize value for their stakeholders by pursuing sales of their assets under section 363 of the Bankruptcy Code. By the procedures described in this Motion, the Debtors will continue to market their Kansas assets and solicit bids therefor in order to maximize value for the estates. Over the past two years, the Debtors’ business has been severely impacted by shifts in the airline industry’s procurement decisions due to the COVID-19 pandemic and related travel restrictions, as well as production halts related to The Boeing Company’s (‘Boeing’) 737 MAX aircraft. As a result, the Debtors pursued strategic alternatives, eventually determining to file these chapter 11 cases to pursue sales of substantially all of their assets. This Motion seeks to establish a process for the sale of the Debtors’ assets related to their two Kansas manufacturing facilities and headquarters (collectively, the ‘Assets’) to maximize the value of the Assets for these estates. By separate motion, the Debtors have sought to establish a process for the sale of their Everett, Washington assets.”
Key Terms of the Boeing APA
- Seller(s): TECT Aerospace Holdings, LLC; TECT Aerospace Wellington Inc., TECT Hypervelocity, Inc., and TECT Aero
- Buyer: Central Kansas Aerospace Manufacturing, LLC, a Delaware limited liability company and a wholly-owned subsidiary of The Boeing Company or "Parent")
- Purchase Price: Comprised of (i) Credit Bid and release each Seller from the corresponding portion of the Existing Secured Claims, in an amount equal to $13,500,000 (the "Credit Bid Amount"), pursuant to a release letter, in form and substance reasonably acceptable to the Sellers and the Buyer, (ii) a "Cash Payment" of $500k, (iii) a "Cure Cost Fund" equal to $5,844,000 and (iv) assumed liabilities. The Parent has also agreed to establish a $2.9mn retention plan for retained employees.
- Credit Bidding: Parent or the Buyer, in partial consideration of the Purchased Assets, may credit bid up to (100%) of the "Existing Secured Claims,) ie amounts outstanding under the Debtors' DIP financing or the Debtors" June 2017 Credit Agreement (originally with PNC Bank, National Association, as agent) which has now been assigned to Parent.
- Milestones: Outside Closing Date of December 31, 2021
The motion explains, “…in late 2020 the Debtors began to explore strategic options. Among the options explored was a potential out-of-court sale of the Debtors’ Kansas assets to NWI Aerostructures LLC (‘NWI’), a related Glass-owned entity. However, the Debtors and their significant stakeholders were unable to reach agreement on a consensual out-of-court path for such a transaction. Nevertheless, NWI and its affiliates remained interested in pursuing a transaction as the Debtors continued to explore their options.
In March 2021, the Debtors engaged Imperial Capital LLC (“Imperial”) as their investment banker. Since its initial engagement, Imperial has contacted about 80 potentially interested parties regarding a transaction for some or all of the Debtors’ assets (i.e., not only the Assets). As of the filing of this Motion, more than 30 of those parties have executed an NDA and others are in the process of negotiating an NDA. Imperial has also (i) set up a confidential data room for diligence and loaded it with relevant information on the Assets, (ii) responded to diligence requests from potentially interested bidders, and (iii) coordinated site visits for some parties. Since the Petition Date, Imperial has continued, and will continue, to market the Assets as well as the Debtors’ Washington assets.
Prior to filing this Motion, the Debtors engaged in extensive discussions with an affiliated party interested in acting as a stalking horse bidder for the Sale. Those discussions included advanced negotiations regarding a form of asset purchase agreement. After due consideration by the Special Committee, the Debtors were prepared to enter into the asset purchase agreement to serve as a stalking horse bid in the process contemplated by this Motion. The Debtors presented the proposed stalking horse bid to Boeing, as DIP lender, consistent with their obligations under the DIP Facility. However, it is the Debtors’ understanding that, because Boeing believed the potential stalking horse bid, among other deficiencies, (i) did not provide sufficient consideration to the estates, (ii) did not accurately reflect the economics of the transaction, and (iii) was inconsistent with the priorities in the Bankruptcy Code, Boeing, as DIP lender, was not supportive of the Debtors’ entering into the asset purchase agreement. Given the urgent need for the Debtors to move the process forward for the Sale of the Assets, the Debtors have filed this motion without a stalking horse but they intend to continue to engage with all interested parties to foster a robust bidding and Auction process.”
Boeing Relationship and Sale Efforts
The Martin Declaration provides: "On February 26, 2021, with the parties unable to reach agreement regarding a consensual path forward, Boeing notified TECT that after March 22, 2021 it would no longer advance funds under the Prepetition Credit Agreement [Boeing acquired the PNC loan in February 2021] except through an agreed debtor in possession financing as part of a bankruptcy proceeding.
Accordingly, in consultation with their advisors and professionals, the Debtors began exploring restructuring options to pursue through the chapter 11 process. Notwithstanding any formal agreement to extend the March 22, 2021 deadline, Boeing has continued to fund under the Prepetition Credit Agreement through the date hereof.
Over the past several months, TECT has evaluated restructuring alternatives and continued its discussions with Boeing and other parties to explore such alternatives, including potential out of court options. TECT, having considered the alternatives, believes that a sale will maximize the value of TECT’s assets.
Although it appeared that out of court restructuring was no longer an option, Boeing, recognizing that in order for it to continue to receive the necessary parts for its airplanes and TECT’s need for additional funding, continued to support the TECT business by providing funding under the Prepetition Credit Agreement. From the time it acquired the loan under the Prepetition Credit Agreement from PNC through the Petition Date, Boeing provided TECT with over $13.2 million in net new funding.
Further, TECT, understanding Boeing’s critical role as the most significant customer of TECT’s Everett, Washington facility, agreed in late 2020 to allow Boeing to begin exploring discussions with potential purchasers for the Everett operations. TECT believes that any potential purchaser would only be interested in considering a transaction for the Everett assets if it was confident that Boeing would continue to support the Everett operations as a customer. Boeing, the world’s largest aerospace company, has the knowledge and experience with respect to other similarly suited aerospace part manufacturers and, as a result, Boeing began contacting potential third party acquirers to determine their interest in a sale of TECT’s Everett business.
Further, the Debtors initiated their own sale process to find a potential buyer or buyers of their assets. In March 2021, the Debtors retained Imperial Capital, LLC (‘Imperial’) to provide investment banking services in connection with a potential sale. Imperial is currently evaluating certain prepetition offers for the various business units and developing a fulsome marketing and sale process.
As of the Petition Date, the Debtors have not entered into any agreements with respect to the sale of their assets. As set forth above, the Debtors are in the process of marketing their assets and are hopeful that this process will result in an executed asset purchase agreement or agreements that will allow the Debtors to sell all or a portion of their assets in the near term pursuant to section 363 of the Bankruptcy Code."
About the Debtors
According to the Debtors: “TECT Aerospace manufactures high-precision, complex components and assemblies and specializes in global supply chain management, featuring TECT Hypervelocity®, a fully integrated manufacturing process producing high-speed aluminum monolithic parts capable of jig and jigless assembly.
At our five facilities in the U.S., and with more than 65 years of aerospace experience, TECT Aerospace manufactures complex aerostructure components, parts and assemblies from the full spectrum of traditional and aerospace alloys. We specialize in complex, structural and mechanical assemblies, machined components, and sheet metal fabrication for countless aerospace applications. We currently produce thousands of assemblies and parts that are used in flight controls, fuselage/interior structures, doors, wings, landing gear, struts & nacelles, and cockpits.
TECT Aerospace is a privately held, independently managed aerospace company. Everything we manufacture runs through our integrated supply chain, so your parts deliver on time every time with competitive pricing. Make TECT Aerospace a part of your supply chain, and discover how you can increase the velocity of your value stream."
The Martin Declaration adds: "The Debtors are privately held companies owned by Glass Holdings, LLC ('Glass') and related Glass owned or Glass controlled entities.
The Debtors manufacture high precision components and assemblies for the aerospace industry, specializing in complex structural and mechanical assemblies, and, machined components for a variety of aerospace applications. The Debtors produce assemblies and parts used in flight controls, fuselage/interior structures, doors, wings, landing gear and cockpits. As is commonplace throughout the aerospace industry, the Debtors’ business functions under a tiered supply chain structure whereby the Debtors manufacture and service specialized aerospace components that are in turn utilized and incorporated by customers into their platforms and planes. Established in 2004, the Debtors supply many of the largest aerospace manufacturers in the world, including Boeing, and their products are used by customers in the commercial, business, military, and general aviation markets.
The Debtors operate manufacturing facilities in Everett, Washington, and Park City and Wellington, Kansas and their corporate headquarters is located in Wichita, Kansas. The Debtors currently employ approximately 400 individuals nationwide.
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