Wesco Aircraft Holdings, Inc. – Recently Assigned Judge Isgur Allows 120-Day (First) Extension of Exclusive Plan Filing Period; Debtors and 2027 Noteholder Langur Maize Exchange Fire (If Not Notes) Ahead of 2022 “Uptiering” Adversary Proceeding Trial

Wesco Aircraft Holdings, Inc. – Recently Assigned Judge Isgur Allows 120-Day (First) Extension of Exclusive Plan Filing Period; Debtors and 2027 Noteholder Langur Maize Exchange Fire (If Not Notes) Ahead of 2022 “Uptiering” Adversary Proceeding Trial

November 2, 2023 – The Court (Judge Isgur stepping in for Judge Jones) hearing the Wesco Aircraft Holdings, Inc. cases has extended (for a first time) the periods during which the Debtors have an exclusive right to file a Plan and solicit acceptances thereof, through and including January 27, 2024 and March 27, 2024, respectively [Docket No. 911]. Absent the requested relief, the Plan filing and solicitation periods were scheduled to expire on September 29, 2023 and November 28, 2023, respectively.

In the run up to the hearing, creditor Langur Maize and the Debtors, otherwise approaching the trial phase of an adversary hearing, used the exclusivity extensions as a pretext (2027 noteholder Langur Maize not actually objecting to the extensions) to trade accusations as to abuses of the Chapter 11 process and to point the finger as to who is responsible for chewing up time. The Debtors characterize Langur Maize as “an agent of chaos” using its tranche of the Uptiering Litigation (defined below) to create “hold-up value to the detriment of the estates.” 

Nonsense responds Langur Maize, which accuses the Debtors of using a “spurious” adversary proceeding to advance the interests of the Debtors’ sponsor, Platinum Equity, and others including Carlyle Global Credit Investment Management; Senator Investment Group LP who participated in the Debtors’ now notorious 2022 “uptiering” transaction (the “2022 Transaction”), which saw holders of @$1.75bn of debt get exchanged and promoted while @$540.0mn of debt, including $111.0mn of 2027 notes ($104.0mn principal), got left behind.

At filing, the Debtors provided the following summary of the 2022 Transaction [Docket No. 13.2, see also the “Prepetition Indebtedness” table below]

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The 2022 Transaction led to two lawsuits (the “Uptier Litigation”), one filed by BlackRock, JPMorgan, PSAM et al relating to the Debtors’ unexchanged 2024 and 2026 Secured Notes and a second filed by Langur Maize relating to its “majority” position in the unexchanged 2027 Unsecured Notes. Both of the lawsuits are stayed pending resolution of the adversary proceeding which bundles the Debtors’ attempts to mitigate liability in respect of both suits using bankruptcy.

Langur Maize characterizes its holdings, and the impact of the 2022 Transaction thereon, as follows: “On November 27, 2019, Wesco issued $525 million of unsecured 2027 Notes….In March 2022, 2027 Notes totaling approximately $421 million in face amount (i.e., less than all of the 2027 Notes), including those held by funds advised by Platinum (the Debtors’ sole shareholder and sponsor), Carlyle (the Debtors’ former owner), and Senator, were purchased by Wesco in exchange for new more valuable secured notes (the ‘New 1.25L Notes’). We refer to this transaction as the ‘Selective Exchange.’ The remaining 2027 Notes held by other holders were left behind and not exchanged. The 2027 Notes exchanged in the Selective Exchange were not selected for redemption or purchase either pro rata, by lot, or by any fair and appropriate method. Instead, 2027 Notes held by Platinum, Carlyle, and Senator were selected for purchase.”

Drilling down on the recent exchange of filings between the Debtors and Langur Maize (see more on the Debtors’ view of the overall status of the adversary proceeding below):

The Debtors stated [Docket No. 873]: “Langur Maize, an unsecured creditor of the Debtors and a party to the pending adversary proceeding (Wesco Aircraft Holdings, Inc., et al. v. SSD Investments Ltd. et al., Adv. Pro. No. 23-03091 (MI), the ‘Adversary Proceeding’), led what it styled a ‘Statement and Reservation
of Rights’…the Langur Maize Statement is not an objection to the Motion. Nevertheless, it purports to extend Langur Maize’s ‘right to object’ to some unspecifed date in the future ‘based upon discovery’ taken in the Adversary Proceeding…The Debtors are disappointed that the Langur Maize Statement continues Langur
Maize’s obstructionist role and conduct in these cases
….Langur Maize barely has an economic interest in the Debtors’ business or in conducting these cases efficiently, and, with little to lose, has repeatedly acted as an agent of chaos.

Despite being one of the noisiest voices in the courtroom, Langur Maize has never argued that its claim is secured, has never suggested that value breaks in the unsecured debt, and has never offered capital to support the Debtors’ restructuring. Nor has it advanced a plan of its own. Apparently recognizing that its unsecured position is unlikely to receive more than a de minimis distribution through the chapter 11 process, Langur Maize has focused its energies on suing non-Debtor third parties and otherwise creating ‘hold-up’ value to the detriment of the estates.”

For its part, Langur Maize [Docket No. 896] responds: “…the Debtors assert that Langur Maize has ‘acted as an agent of chaos’ and ‘has focused its energies on suing non-Debtor third parties and otherwise creating ‘hold-up’ value to the detriment of the estates.” Langur Maize did file an action in New York state court in March 2023 alleging claims solely against non-Debtors and solely for damages. Langur Maize is not seeking to and never has sought to change the Debtors’ capital structure or disrupt their reorganization. It was the Debtors who inserted themselves into Langur Maize’s New York state court litigation by filing an adversary proceeding on the very first day of these chapter 11 cases seeking to stay the New York action — even though the Debtors are not parties to that action. Langur Maize is thus an involuntary participant in these chapter 11 cases and is justifiably concerned that the Debtors have chosen to focus on defending their sponsor [ie Platinum Equity] in litigation that does not involve the Debtors rather than making progress in these chapter 11 cases.

The Debtors claim that their prosecution of the Adversary Proceeding against Langur Maize is not spurious because it is ‘driven by [the Debtors’] desire to use chapter 11 to improve operations and definitively determine the prepetition capital structure.’ But they do not (and cannot) explain why litigating against Langur Maize — which is not seeking to disrupt the Debtors’ operations or their capital structure —would achieve either of these ends. The Debtors also take shots at various actions that Langur Maize has taken in the course of these chapter 11 cases. But all of these actions were taken for the benefit of all unsecured creditors, not solely for Langur Maize, and certainly not for the purpose of ‘creating ‘hold-up’ value to the detriment of the estate’.”

Case Status

On June 1, 2023, privately held Wesco Aircraft Holdings, Inc. and 43 affiliated debtors (dba “Incora*” and together “Wesco” or the “Debtors”) filed for Chapter 11 noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($3.1bn of funded debt, see table below). At filing, the Debtors, “a leading global provider of innovative supply chain management solutions,” cited (i) the “devastating” impact of COVID on the aerospace industry, (ii) ensuing macro-economic factors including global supply chain issues, critical labor shortages and high inflation and (iii) litigation resulting from their 2022 “uptiering” transaction… as leaving it “unable to meet its near-term obligations, including interest payments on its notes that became due on May 15, 2023.”

* Incora is a Platinum Equity portfolio company, with the Beverly Hills, CA headquartered private equity house having purchased Pattonair from a private equity seller in October 2017 and subsequently merging it with Wesco Aircraft after acquiring the latter in a public-to-private transaction in January 2020. The combined entity was rebranded as “Incora” in March 2020.

On July 10th, the Court hearing the Wesco Aircraft Holdings, Inc. cases issued a final order authorizing the Debtors to access $190.0mn of what is in total $300.0mn of new money debtor-in-possession (“DIP”) financing being provided by certain prepetition first lien lenders and continue using cash collateral. With a June 2nd, interim DIP order, the Court hearing the Debtors’ cases had previously allowed the Debtors to access a first $110.0mn tranche of the new money DIP facility.

On August 9th, the Debtors requested a Court order authorizing a $24.0mn private sale of certain inventory owned by the Debtors’ affiliate, Pattonair (Derby) Limited to Rolls-Royce plc.

On October 4th, the Court issued an order approving the $24.0mn private sale of certain inventory owned by the Debtors’ affiliate, Pattonair (Derby) Limited, to Rolls-Royce plc [Docket No. 787] with most of the details relating to the sale (eg, parts being sold) redacted/sealed. 

Exclusivity Extension Motion

The September 29th motion [Docket No. 781] states, “In parallel with the operational restructuring and the Uptier Litigation, the Debtors have made meaningful progress toward formulating a chapter 11 plan of reorganization. Over the past four months, the Debtors’ management team and advisors have worked hard to create a revised business plan that, once complete, will reflect the results of the Debtors’ operational restructuring efforts. The Debtors and their advisors have also engaged in dialogue with key stakeholder groups — including the Committee, the First Lien Noteholder Group, leading holders of 1.25 Lien Notes and the various litigants in the adversary proceeding — to obtain their preliminary views regarding the terms of a potential chapter 11 plan and to provide diligence that will inform their views on the business issues that will be central to the structure of any chapter 11 plan, such as valuation, debt capacity and liquidity needs.

In recognition of the progress that the Debtors have made toward their operational restructuring, the requisite DIP noteholders have extended the relevant milestones to allow further development of long-term projections and a chapter 11 plan. Currently, the milestone for filing of a plan is October 13, 2023, and the milestone for confirmation is December 29, 2023. The Debtors believe this deadline will be extended consistent with the extension request in this Motion. The Debtors remain confident that a plan can be proposed and confirmed before the March 1, 2024 maturity of the DIP facility….

The requested extension of the Exclusive Periods is necessary and appropriate to enable the Debtors to resolve the Uptier Litigation [litigation filed in state court concerning the March 2022 bond transactions (the “Uptier Litigation”];and complete the Debtors’ operational and financial restructuring… The Chapter 11 Cases are even further complicated by the need to renegotiate major customer contracts, develop a revised long-term business plan and conduct the Uptier Litigation, all at the same time. In a case of this size and complexity, 120 days is clearly inadequate to accomplish these objectives.

The Debtors cannot solicit votes on a chapter 11 plan without having long-term projections to include with a disclosure statement. The Uptier Litigation is a significant ‘unresolved contingency.’ Even if a Plan can be confirmed in December, it may not become effective until the following month. Accordingly, the Debtors submit that a 120-day extension of the Exclusive Filing Period through January 27, 2024, and a matching extension of the Exclusive Solicitation Period are warranted.”

Uptier Litigation Status

As of September 29th, the debtors provide: “For almost a year, the Debtors have been involved in the Uptier Litigation, in which two groups of prepetition noteholders have lodged attacks on the Debtors’ March 2022 bond transactions.

Immediately upon filing these Chapter 11 Cases, the Debtors initiated an adversary proceeding and an emergency motion to extend the automatic stay to the non-Debtor defendants in the New York State actions. The Court granted that motion on a temporary basis…and the parties subsequently agreed to stay the state-court litigation through the duration of these Chapter 11 Cases. The now-consensual stay of the state-court litigation will consolidate certain determinations of liability with respect to the Uptier Litigation in this Court. To that end, on July 9, the Debtors filed a First Amended Complaint and Counterclaim Answer, Adv. Docket No. 63, which seeks, among other things, a declaration against each of the state-court plaintiffs that the March 2022 transaction was permitted and properly executed under the applicable provisions of the Debtors’ pre-transaction indentures.

Since the Debtors filed their amended complaint, the Uptier Litigation has accelerated. The parties have exchanged significant written discovery, including over 23,000 documents delivered by the Debtors to the adversary proceeding defendants. Dispositive motions have been filed. The parties formulated a comprehensive scheduling stipulation in late July, and recently agreed to adjust the timeline to align with the Committee’s investigatory process. See Adv. Docket Nos. 141, 254. The most recent stipulation contemplates a mid-October hearing on the pending dispositive motions; completion of fact depositions by October 18; completion of all discovery by November 11; trial in late November or early December; and a hearing on any standing motions on the week of December 18 [NB: The parties are currently discussing additional extensions of certain dates set forth in this stipulation. The Debtors have also initiated settlement discussions with the adversary proceeding defendants (i.e., the leading holders of each series of unsecured notes) to resolve certain of the claims asserted in the Uptier Litigation and to integrate any such settlement into a chapter 11 plan.”

Petition Date Perspective

General Background

Amongst the list of the Debtors’ top 30 unsecured claims, are “Noteholder Plaintiffs,” ie “parties who have asserted claims in a pending action (Supreme Court of the State of New York, County of New York October 28, 2022)” which is comprised of numerous entities controlled by BlackRock and JP Morgan. Not on the list is a reference to a further group of litigants, led by the Carlyle Group Inc. and Senator Investment Group LP who filed a separate, albeit related, lawsuit at the end of March. Both lawsuits relate to a March 2022 refinancing “deal with bondholders led by Silver Point…raising $250 million in fresh financing and exchanging $450 million of bonds due in 2024 for new debt with maturities in 2026 and 2027.” See further below on proposed DIP agent Wilmington Savings Fund, FSB being named as a defendant in the Black Rock/JP Morgan uptiering litigation.

As noted at the time, a number of further stakeholders (not included in the exchange) were left unhappy with the impact of the transaction on their own bonds given that “the new bonds will be backed by collateral previously pledged to all bondholders, putting those left out behind the Silver Point-led group in any future restructuring or bankruptcy, according to the people familiar with the matter.” One year and two lawsuits later, that “creditor on creditor violence” is set to take center stage in Judge David R. Jones’ Texas court room.

The immediate need to seek bankruptcy shelter, however, has less to do with litigation over a contentious refinancing, then the underlying need to refinance…then and now.

The WSJ reports on a pair of semi-annual interest payment dates that left the Debtors with little choice in a market where refinancing options (beyond anything provided by Platinum Equity) had evaporated to zero with bonds trading in single digits and cash on hand only (possibly) seeing the Debtors through a first $100.0mn interest payment obligation in May: “The Fort Worth, Texas-based distributor of airplane parts had about $140 million of liquidity late last year, according to people familiar with the company’s finances. Incora has approximately $100 million in interest payments due in May [with a further $100.0mn falling due in November]….Incora’s 13.125% unsecured bonds due 2027 were recently quoted around 8 cents on the dollar, while its 8.5% unsecured bonds due 2024 traded around 12 cents…”

Filing Date Press Release

In an economical press release announcing the filing, the Debtors provided: “Incora intends to use the Chapter 11 process to improve its capital structure and position the business for long-term growth.”  

David Coleal, Chief Executive Officer of Incora added, “We expect that this decisive action will right-size our capital structure and allow us to confidently build and grow into the future.”

Goals of the Chapter 11 Filings

According to the Carney Declaration (defined below), “Incora intends to use these Chapter 11 Cases to repair its capital structure and address targeted operational issues. Incora’s management team has already made significant progress toward determining how to use the tools of chapter 11 to address Incora’s operational challenges, including by bringing its unprofitable customer contracts and other burdensome contractual arrangements in line with current economic and commercial reality. Demand for Incora’s services remains strong, and Incora is poised for growth as the commercial aerospace industry continues its recovery from the COVID-19 pandemic. Incora has already been able to win new business and boost operating income in the last year despite its various challenges and intends to continue this positive trajectory during and after its Chapter 11 Cases.

It is my every expectation that Incora will emerge from the Chapter 11 Cases a healthier and more nimble company that can execute on its strategic initiatives, retain a talented workforce and continue to provide its global customer base with the reliable and innovative supply chain solutions that have made Incora a trusted partner and market leader.”

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Carney Declaration”), Raymond Carney, the Debtors’ chief financial officer, detailed the events leading to Wesco’s Chapter 11 filing. The Carney Declaration provides: “The COVID-19 pandemic in early 2020 devastated the aerospace industry. Incora’s business was no exception. Travel restrictions were implemented early in the pandemic and grounded most of the global commercial airline fleet, causing customer demand for parts and services to decrease rapidly. Notably, COVID-19 occurred just as Incora was formed through the consolidation of Wesco and Pattonair, as discussed below. The ensuing economic and commercial aerospace slowdown made it difficult to implement some of the synergy initiatives that motivated the transaction.

In late 2021 and early 2022, Incora retained advisors and began searching for liquidity-enhancing transactions that would enable it to survive the pandemic-driven downturn and return to normal operations. After considering options under its debt documents and in light of the prevailing market conditions, Incora pursued two parallel paths: (1) an amendment to its asset-based credit facility to provide incremental liquidity (which was consummated in February 2022) and (2) a comprehensive out-of-court recapitalization.

Throughout the process, Incora was committed to identifying the best possible financing solution. Incora appointed Patrick Bartels as an independent director to the board and engaged in good faith negotiations with all its stakeholder groups. Incora also provided diligence to, and assessed a proposal from, a minority noteholder group. In the end, Incora’s board of directors determined that the minority group’s proposal — which provided significantly less liquidity, did not address upcoming maturities, and carried material litigation risk — was inadequate.

In March 2022, after careful consideration of numerous term sheets and input from all stakeholder groups, Incora’s board determined to engage in a recapitalization transaction (the ‘2022 Transaction’) that was sponsored by a majority of its secured noteholders and supported by strong majorities across the capital structure. The 2022 Transaction provided Incora with $224 million of much-needed cash (after accounting for transaction costs), extended maturities on large portions of its existing debt, substantially decreased cash interest obligations and allowed for the suspension of payment of management fees to Incora’s principal equity owner. These benefits generated significant liquidity for Incora, which it sought to leverage in what appeared to be an improving commercial environment. Subsequently, Incora secured new business, grew revenue by over $120 million and improved adjusted EBITDA performance by nearly 40% in 2022.

The 2022 Transaction positioned Incora to recover from the effects of the pandemic and to turn its business around. But while Incora’s financial performance has improved considerably, it has not been enough to overcome a confluence of unforeseeable events, all beyond Incora’s control. Incora was beset by significant disruption in the global supply chain, critical labor shortages and the extended closure of the Chinese markets following COVID-19, which further delayed the expected rebound in the aerospace industry. High inflation also put increased pressure on gross margins….

As Incora devoted itself to addressing and mitigating these operational challenges, certain unsecured noteholders filed suit in the Supreme Court of the State of New York against Incora and certain of its noteholders to, among other things, unwind the 2022 Transaction. This action was followed by a similar action naming only Incora’s noteholders and affiliates, also in the New York Supreme Court. These cases have caused yet another drain on Incora’s financial resources (including on account of Incora’s indemnification of the parties that participated in the 2022 Transaction) and distraction for its management team and key employees at a time when focus on operations and reorganization could not be more critical.

All of the foregoing issues severely strained Incora’s resources. Incora has managed to keep its business sound and continues to be a reliable source of inventory for its customers, but it cannot generate sufficient cash to meet its existing obligations. Despite Incora’s efforts, its liquidity has been insufficient due to continuing cashflow issues and its leveraged capital structure. As a result, Incora is unable to meet its near-term obligations, including interest payments on its notes that became due on May 15, 2023.

In January 2023, Incora engaged with its senior stakeholders to negotiate a consensual restructuring… Incora and its senior secured noteholders reached an agreement on the terms of a debtor-in-possession financing (the ‘DIP Financing’).”

Prepetition Indebtedness

Incora’s prepetition capital structure was initially established in late 2019 and early 2020 in connection with the consolidation of Wesco and Pattonair and was later modified by the 2022 Transaction and related subsequent exchanges. A chart summarizing approximate principal amounts and accrued interest under Incora’s funded debt is set forth below:

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About the Debtors

According to the Debtors: “Incora is the trade name for the group of companies formed by Wesco Aircraft and Pattonair, a leading provider of comprehensive supply chain management services to the global aerospace and other industries. Beginning with a strong foundation in aerospace and defense, Incora also utilizes its supply chain expertise to serve industrial manufacturing, marine, pharmaceutical and beyond. Incora incorporates itself into customers’ businesses, managing all aspects of supply chain from procurement and inventory management to logistics and on-site customer services. The company is headquartered in Fort Worth, Texas, with a global footprint that includes 68 locations in 17 countries and more than 3,800 employees.”

Corporate Structure ChartPumyOxBkH 20231003165708861555

 

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