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April 6, 2021 – The Debtors requested Court authority to (i) access $60.0mn of debtor-in-possession (“DIP”) financing in the form of a super-priority credit facility being provided by prepetition lender The Boeing Company (with $22.0mn to be available upon issuance of an interim DIP order) and (ii) use cash collateral [Docket No. 12 with credit agreement attached at Exhibit B].
Going forward, all of the Debtors' receipts will be used to pay down prepetition indebtedness leaving the Debtors entirely reliant on the DIP financing to fund current operations and see them through their sale process. The Debtors anticipate that as a result of this ongoing sweep, the DIP financing will ultimately provide about $29.5mn of new money (ie $60.2mn less the amount of receipts used to repay prepetion debt).
For these Debtors, all paths lead to (and from) Boeing, their largest secured (they recently bought the Debtors' $41.9mn of senior prepetition debt) and unsecured creditor ($18.3mn) and the center of the Debtors' existence. Nominally responsible for the Chapter 11 in the first place (both as the 737 Max manufacturer and as a lender requiring that the Debtors file for Chapter 11 in order to maintain a financing lifeline), Boeing has now offered several helping hands (buying the Debtors' defaulted senior debt, extending further critical financing under that defaulted senior facility and now providing DIP financing) in an attempt to keep what is clearly an important parts supplier alive….and in the right hands. Boeing is also insisting that the Debtors pursue an in-court asset sale path, a process that they were largely managing prepetition and will continue to closely monitor (and control) now that the Debtors have filed for bankruptcy protection.
In a declaration in support of the DIP financing (the "Burns Declaration" attached at Exhibit C to the motion), the Debtors’ investment banker provides: "Pursuant to the terms of the DIP Facility, all of the Debtors’ receipts will be swept daily to repay the Prepetition Obligations such that the Debtors’ operations and other costs incurred to administer the Debtors’ chapter 11 cases will be funded entirely from the proceeds of the DIP Facility. In addition…between entry of the Interim Order and the expected date of the hearing on entry of the Final Order (the ‘Final Hearing’), the Interim Borrowings will exceed the Debtors’ receipts by approximately $12.9 million. Moreover, I understand that between the Final Hearing and the anticipated Maturity Date, the Maximum Commitment will exceed the Debtors’ receipts by about $16.6 million. As a result, on the expected date when the DIP Facility will be fully drawn, it is anticipated that the DIP Facility will consist of approximately $29.5 million in new money post-petition financing in excess of the Debtors’ receipts.
The proposed DIP Facility will provide the Debtors with access to liquidity that is important to ensuring that the Debtors’ businesses are stabilized and value is maximized. As noted above, the Debtors also believe that the financing will provide comfort to the Debtors’ vendors, suppliers, customers, employees and prospective purchasers that the Debtors will be able to continue to meet their commitments. In consultation with Winter Harbor, I believe the DIP Facility is appropriately sized to meet the Debtors’ funding needs for the Debtors’ chapter 11 cases and proposed sale processes.
With respect to the material economic terms of the DIP Facility, the non-default interest rate is LIBOR plus ten percent (10.0%) and there are also customary fees for a DIP Facility of this type, including a commitment fee equal to 1.5% of the DIP Facility amount (which is earned and payable upon entry of the Interim Order) and a funding fee equal to 1.0% of each advance (which is earned and payable at the time of each advance).”
The Debtors’ requesting motion adds, “Prior to the Petition Date, the Debtors used the revolver under the Prepetition Credit Agreement as the primary source of funding for their operating expenses. On a daily basis, the Debtors’ customer receipts would be applied to the outstanding balance and the Debtors would draw on the revolver to fund day-to-day operating disbursements. As a result, the Debtors maintained a minimal amount of cash on hand to cover bank fees as needed. As of the Petition Date. The Debtors had very limited liquidity. Moreover, any cash the Debtors have on hand as of the Petition Date constitutes the Prepetition Lenders’ cash collateral (‘Cash Collateral’), along with any receipts the Debtors receive in the ordinary course of business after the Petition Date. Based on their projections, the Debtors cannot operate and otherwise fund these cases on Cash Collateral alone and therefore need immediate post-petition financing to fund expenses that will be due in the coming days, provide their stakeholders comfort that they will be able to operate through successful sales of their business, and to pay operating and restructuring expenses through sale processes in these chapter 11 cases. Accordingly, and as discussed in the Burns Declaration, the Debtors have an acute and imminent need for financing to fund their business operations and these chapter 11 cases. Access to funding under the DIP Facility will provide a clear message to the Debtors’ customers, employees, and suppliers that the Debtors will be able to continue operating post-petition, and honor their post-petition obligations, through the proposed sales of their assets.
As discussed in the Burns Declaration, the Debtors and their advisors (i) negotiated the terms of the potential DIP financing from Boeing and (ii) pursued alternative sources of financing. However, the Debtors and their advisors recognized, and the market test confirmed, that obtaining DIP financing other than from Boeing would not be in the Debtors’ best interests for at least three reasons. First, due to the Debtors’ imminent need for financing, there would not be an opportunity for a fulsome or extended marketing period. Second, substantially all of the Debtors’ assets are encumbered by existing liens under the Prepetition Credit Agreement, and no potential lender would be willing to extend credit or a junior or unsecured basis. Third, the Prepetition Lenders would not consent to a third-party lender priming their existing liens, and no potential third-party lender would be willing to engage in a ‘priming fight’, the outcome of which was uncertain, with the Prepetition Lenders to provide post-petition secured financing on a non-consensual, first priority basis. Imperial Capital LLC (‘Imperial’), the Debtors’ proposed investment banker, nevertheless conducted an expedited marketing process for potential alternative DIP financing; however, no potential lender proposed competing financing on any terms, for the reasons noted above.”
The Burns Declaration notes: “Prior to entering into the DIP Agreement, the Debtors also sought financing from third-party sources (i.e., parties other than the Prepetition Lenders). The Debtors and their advisors recognized that it would be difficult to secure financing from such sources because, for among other reasons, (i) the time constraints, (ii) substantially all of the Debtors’ assets are already encumbered by existing liens under the Prepetition Credit Agreement and (iii) no third party lender would be willing to lend on an unsecured or junior basis. The Prepetition Lenders (who are the same parties as the DIP Secured Parties) also indicated that they would not consent to a ‘priming’ DIP financing provided by a third party. Thus, to obtain third-party DIP financing, the Debtors would be required to engage in a ‘priming fight’ with the Prepetition Lenders. The Debtors and their professionals believed that the outcome of such a fight was, at best, uncertain and that, in all events, any such fight would be costly and highly disruptive to the Debtors’ reorganization efforts.
Nonetheless, at the direction of the Debtors, in March 2021, Imperial commenced an expedited marketing process to identify possible alternatives to the DIP Facility. Imperial contacted seven parties that are in the business of extending post-petition financing to borrowers under similar circumstances. None of these parties was willing to engage in a ‘priming fight’ to provide post-petition secured financing on a non-consensual basis. Moreover, none of these institutions was willing to lend on a junior or unsecured basis. To date, none of these institutions has proposed a competing financing facility on any terms, let alone terms equal to or better than the terms of the proposed DIP Facility.
Key Terms of the DIP Financing:
- Borrowers: TECT Aerospace, LLC, TECT Hypervelocity, Inc., TECT Aerospace Wellington Inc. and Sun Country Holdings, LLC
- Guarantors: TECT Aerospace Group Holdings, Inc., TECT Aerospace Holdings, LLC and TECT Aerospace Kansas Holdings, LLC
- DIP Lender: The Boeing Company
- DIP Agent: The Boeing Company
- Amount and Type of Facility: $60.2mn senior secured, super-priority credit facility, with $22.0mn made available following entry of the Proposed Interim Order.
- Interest Rate: 30-day LIBOR rate plus ten percent (L+10%), per annum, fluctuating daily.
- Default Rate: 5% above the non-default rate, per annum.
- Commitment Fee. 1.5% of the Aggregate Revolving Commitments (as defined in DIP Agreement § 1.01), earned and payable upon entry of the Proposed Interim Order.
- Funding Fee. 1.0% of the aggregate principal amount of each advance provided under the DIP Facility, payable in cash in immediately available funds immediately following the funding of the advance, or if agreed by the Lender, netted out of the proceeds of the advance.
- Maturity Date: The earliest to occur of (i) August 6, 2021, (ii) acceleration of the Obligations (as defined in DIP Agreement § 1.01) pursuant to written notice given by the DIP Agent on three business days’ notice to the Debtors after an Event of Default (as defined in DIP Agreement § 9.01), (iii) the effective date of a sale of all or substantially all assets of the Debtors, and (iv) the effective date of a chapter 11 plan that provides for payment in full of all Obligations or is otherwise acceptable to the DIP Agent (the “Maturity Date”).
- Use of Proceeds: The Debtors will use the proceeds of the DIP Facility for working capital and other general purposes, including paying professional fees in these chapter 11 cases, to pay the reasonable fees and expenses of the DIP Secured Parties, to pay certain interest and fees that are payable in connection with the DIP Facility, and to pay claims in respect of certain prepetition creditors in accordance with other orders of the Court, in each case, in accordance with the Approved Budget.
- New Money: $29.5mn
- Roll-Up: Actually an estimated $30.7mn repayment of prepetition indebtness as receipts are swept up to pay down that debt. The Proposed Interim Order grants adequate protection to the Prepetition Lenders, including in the form of applying the Debtors’ post-petition receipts in satisfaction of the Prepetition Obligations then outstanding.
- Deadline to file bidding procedures motion: Within ten days after the Petition Date for the Debtors’ Everett, WA assets (the “Everett Motion”) and Within 60 days after the Petition Date, the Debtors will have filed a bidding procedures and sale motion for the Debtors’ Kansas assets (the “Kansas Motion”)
- Deadline to file Plan and Disclosure Statement: Within 90 days after the Petition Date
- Deadline for bidding procedures order: Within 35 days after the Petition Date (For Everett Motion) and Within 105 days after the Petition Date, the Court will have entered an order granting the sale of the Debtors’ Kansas assets;
- Deadline for sale hearing and sale order: Within five business days after any auction
- Deadline to close sale: No later than three business days after entry of an order approving the sale pursuant to the Everett Motion and No later than three business days after entry of an order approving the sale pursuant to the Kansas Motion, the closing of the sale will have occurred;
- Deadline for Plan confirmation order: within 90 days of its filing
- Deadline for effectiveness date: within 30 days after entry of the order confirming the plan.
As of the Petition date, the Debtors had approximately:
- $41.9mn of outstanding secured obligations under their prepetition credit agreement comprised of (i) a revolving facility ($36.8mn balance) and (ii) two term ($2.3mn and $2.7mn balances, respectively),
- approximately $1.25mn of outstanding obligations under equipment loan agreements,
- approximately $19.7mn of outstanding unsecured obligations to affiliates for amounts related to rent and equipment lease payments and support services provided by Stony Point and OSS, and
- approximately $35.0mn of outstanding unsecured obligations to ordinary course trade creditors.
Budget (See Exhibit 1 to Docket No. 12)Further Background
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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