November 4, 2023 – The Debtors requested Court authority to: (i) access $500.0mn under a proposed replacement debtor-in-possession (“DIP”) term loan facility (the “Refinancing DIP Facility”) to be provided by Castlelake* managed affiliate, CL-S Holdings, L.P. (the “New DIP Lenders”) and (ii) use cash collateral.
*Castlelake is also a member of the bidder consortium seeking to invest in SAS as part of the Debtors’ proposed chapter 11 exit transaction.
The interim and final hearings on the motion are scheduled for November 9th and November 21st, respectively, with the full amount of the DIP to be made available upon entry of an interim DIP order.
The proceeds of the new facility will be used to repay $350.0mn (as topped up by a $21.0mn “Tag Right Termination Fee”) owed to DIP lenders Apollo Global Management (“Apollo”) under the Debtors’ existing $700.0mn DIP financing facility, with the balance to be used to see the Debtors through their expected emergence from bankruptcy in June 2024. As the Debtors note, they have caught a few breaks recently (including, “the outperformance of SAS’ airline business relative to projections, and projected pilot strike costs which ultimately never materialized to the extent forecasted”), which meant that they have only need to tap about half of the existing DIP.
That good luck was further amplified by the fact tht one (of two) equity related features was not triggered. The original DIP provides for “two equity-linked features—the Call Option and the Tag Right. The Call Option (and the related “Call Option Termination Fee”) only came into play if the Debtors had to borrow “any amounts in excess of the Initial Borrowing,” ie any amounts beyond the $350.0mn okayed by the interim DIP order. Because that did not happen, the Debtors avoided the sizeable Call Option Termination Fee**; they have not, however, dodged a $21.0mn “Tag Right Termination Fee,” which will be paid to Apollo from proceeds of the replacement DIP.
In promoting the virtues of the replacement financing, the Debtors note that it offers more favorable terms (eg interest rate is 100 basis points lower) and, given that the Debtors’ expected emergence from bankruptcy is now after the maturity date of the existing DIP, avoids the need to pay Apollo a $11.4mn extension fee (which would in any event only get the Debtors through a final/last extension date of March 26th).
More significant, perhaps, than the relative merits of the terms of the two DIPs…is that it is required as a condition of a newly executed “Investment Agreement” entered into amongst the Detors and a “consortium comprised of Castlelake, L.P. (‘Castlelake’), Air France-KLM, S.A. (‘AFKLM’), Lind Invest ApS (‘Lind Invest,’ and together with Castlelake and AFKLM, the ‘Bidder Consortium’), and the Danish State (together, the ‘Investors’ and such agreement, the ‘Investment Agreement’).”
The November 4th Investment Agreement “requires the Debtors to refinance the Original DIP Facility with the Refinancing DIP Facility as a condition to the effectiveness of the Exit Transaction”; with the “[chapter 11] Exit Transaction” the now agreed blueprint/backbone of the Debtors’ Chapter 11 Plan involving “an investment in, and issuance of new equity interests and secured convertible debt by, reorganized SAS AB…resulting in $1.2 billion of new money to the Debtors and their estates…””
On July 5, 2022, SAS AB and 13 affiliated Debtors (“SAS” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0bn and $50.0bn; and estimated liabilities between $1.0bn and $10.0bn ($1.35bn of funded debt) [NB: The Debtors add: “On a consolidated basis, as of May 31, 2022, the total value of the Debtors’ assets is approximately $12.43 billion and the total amount of the Debtors’ liabilities is approximately $9.41 billion”]. At filing, the airline cite the impact of COVID-19 as exacerbated by the Ukraine conflict and the decision of the SAS pilots to go on strike.
On July 19th, the Debtors announced that they had reached new 5.5-year collective bargaining agreements with its pilots’ unions.
On September 9th, the Court hearing the SAS AB cases authorized the Debtors to access $700.0mn (approximately SEK 7.0bn) of DIP financing being provided by Apollo.
On October 3, 2023, the Debtors notified the Court that they have designated Castlelake, L.P., on behalf of certain funds or affiliates (‘Castlelake’), Air France-KLM S.A. (‘Air France-KLM’) and Lind Invest ApS (‘Lind Invest’), together with the Danish State, as Successful Third-Party Bidders in accordance with the Debtors’ Equity Solicitation Procedures [Docket No. 1483]. The notice states that the successful bid is supported by the Official Committee of Unsecured Creditors (the “Committee”) appointed in their chapter 11 cases.
Refinancing DIP Facility
The Debtors’ requesting motion [Docket No. 1580] states, “SAS seeks this Court’s approval for authority to refinance and repay in full the Original DIP Facility with replacement financing on terms that are more favorable to the Debtors and their estates and which supports the highest and otherwise best exit financing proposal available to the Debtors. This refinancing will facilitate the Debtors’ path to emergence from these chapter 11 cases by mid-2024 under an Investment Agreement that the Debtors are simultaneously seeking this Court’s approval to enter into and perform under. Approval by the Court of this Motion will ensure, among other things, that the maturity date of the Debtors’ chapter 11 debtor-in-possession financing extends beyond both that of the Original DIP Facility of December 26, 2023FN3, and beyond the Debtors’ anticipated date for chapter 11 emergence of June 2024.
The Debtors’ proposed refinancing facility is a senior secured, super priority term loan facility (the ‘Refinancing DIP Facility’) in the principal amount of $500 million (SEK 5.5 billion) (the ‘DIP Commitments’),FN4 and is provided by a Castlelake managed affiliate, CL-S Holdings, L.P. (the ‘New DIP Lenders’)…
The Refinancing DIP Facility is an integral and inseparable component of the proposed Exit Transaction. Contemporaneously with entering into the Refinancing DIP Credit Agreement, SAS AB entered into that certain Investment Agreement, dated November 4, 2023, with a consortium comprised of Castlelake, L.P. (‘Castlelake’), Air France-KLM, S.A. (‘AFKLM’), Lind Invest ApS (‘Lind Invest,’ and together with Castlelake and AFKLM, the ‘Bidder Consortium’), and the Danish State (together, the ‘Investors’ and such agreement, the ‘Investment Agreement’).
The Investment Agreement documents a chapter 11 exit transaction for the Debtors that involves an investment in, and issuance of new equity interests and secured convertible debt by, reorganized SAS AB (‘Reorganized SAS’ and, such transaction, the ‘Exit Transaction’). Both the Investment Agreement and the Refinancing DIP Credit Agreement are the products of a months-long and value-maximizing equity solicitation and financing process (the ‘Equity Solicitation Process’), and, together, represent the highest and most executable offer for the Debtors to exit chapter 11. The Investment Agreement requires the Debtors to refinance the Original DIP Facility with the Refinancing DIP Facility as a condition to the effectiveness of the Exit Transaction. The Debtors and the Investors expect, subject to this Court’s approval, to close the Exit Transaction and emerge from these chapter 11 proceedings in June 2024. However, the Original DIP Facility matures prior to that date, on December 26, 2023. A refinancing of the Original DIP Facility, or a significant consensual extension to the maturity date thereof, is therefore required under all circumstances to provide the Debtors with the liquidity necessary to consummate the Exit Transaction and emerge from these chapter 11 cases.”
FN3: The Original DIP Facility may be extended, pursuant to the terms of the Original DIP Term Loan Agreement, for a third and final period to March 26, 2024 upon payment of an extension fee to Apollo equal to 1.50 percent of the unfunded DIP Commitments and DIP Loans (equal to approximately $11.4 million).
FN4: The Original DIP Facility is in the aggregate principal amount of $700 million. The Refinancing DIP Facility is in the principal amount of $500 million. Due to, among other things, the outperformance of SAS’ airline business relative to projections, and projected pilot strike costs which ultimately never materialized to the extent forecasted, the Debtors only drew down on the first tranche of the Original DIP Facility in the total amount of $350,000,000 (the “Initial Borrowing”)
The motion continues, “Although the Debtors already had the benefit of the Original DIP Facility, the Debtors and their advisors have nevertheless continuously monitored both the Debtors’ need for financing and the availability of existing and potential sources of financing. As part of the Equity Solicitation Process, the Debtors’ advisors, Seabury Securities LLC (together with its subsidiaries and affiliates, collectively ‘Seabury’) and Skandinaviska Enskilda Banken AB (‘SEB’), evaluated the Debtors’ cash flow and liquidity needs to determine the amount of incremental financing that would be required to operate the Debtors’ business and pay administrative costs and chapter 11 expenses through a plan process.
The main purpose of the Refinancing DIP Facility is repay the Original DIP Facility in order to extend out the maturity of the Debtors’ DIP financing to consummation of the proposed Exit Transaction. The Original DIP Facility expires on December 26, 2023, with the possibility of a third and final extension for three months to March 26, 2024, prior to the Exit Transaction’s anticipated closing in June 2024. The Refinancing DIP Facility has been structured to cover the period between its approval and closing and the date by which the Debtors expect to emerge from these chapter 11 proceedings. The initial term of the Refinancing DIP Facility is nine months, with the potential for two three-month extensions, through to approximately January 2025 (depending on when the Refinancing DIP Facility is approved and drawn), for a total potential maturity after 15 months.
The current DIP Budget reflects the Debtors’ need for limited incremental financing to fund the remainder of the Debtors’ chapter 11 cases and consummation of the Exit Transaction through to emergence, maintain an adequate liquidity cushion during this process, and otherwise fund implementation of the SAS FORWARD Plan. Without access to financing, even for a short period of time, or an appropriate extension of the maturity date under the Original DIP Facility, the Debtors will be unable to fund these chapter 11 cases, resulting in significant destruction of value to the detriment of all stakeholders in these chapter 11 cases.”
Key Terms of Refinancing DIP Facility
- Borrower: Scandinavian Airlines System Denmark-Norway-Sweden.
- DIP Lenders: Castlelake (on behalf of itself, affiliates and/or funds managed by it and its affiliates)
- Agent: Wilmington Savings Fund Society, FSB as the administrative agent and collateral agent.
- Guarantors: Each Subsidiary of SAS AB (“Parent”) that is a Debtor in these chapter 11 cases (the “Guarantors”).
- Commitments: The Refinancing DIP Facility provides for DIP Loans in the principal amount of $500 million to be made available to the Borrower.
- New Money: $500.0mn.
- Roll-up: N/A
- Interest Rates: 8% per annum plus Term SOFR, subject to a 1% Term SOFR floor.
- Default Rates: Additional 2% per annum above applicable rate.
- Upfront Fees: 1.75% of the initial DIP Commitments.
- Exit Fee: 4.5% of the initial DIP Commitments payable in cash upon the earliest to occur of (i) the Plan Effective Date, (ii) the Maturity Date then in effect and (iii) the date on which a Payment in Full occurs.
- Maturity Extension Fee: Payable on the date of the applicable Maturity Date Extension Request, a fee equal to (a) 0.75% of the aggregate amount of the initial DIP Commitments with respect to the first Maturity Date Extension Request, and (b) 1.25% of the aggregate amount of the initial DIP Commitments with respect to the final Maturity Date Extension Request.
- Administrative Agent and Collateral Agent: All fees set forth in the Agent Fee Letter in accordance with the terms thereof.
- Maturity Date: The “Scheduled Maturity Date” is nine months after the Closing Date, subject to the Borrower’s option to extend the term by an additional three months (upon payment of Maturity Extension Fee and the satisfaction of certain conditions set forth in the Refinancing DIP Credit Agreement) up to two times.
- Use of Proceeds: The DIP Loan proceeds shall be used:
- for payment in full and termination of the obligations under the Original DIP Term Loan Agreement, including, without limitation, fees and expenses in connection therewith;
- for working capital and general corporate purposes, including funding the Intercompany Loans (as permitted under the terms of the Refinancing DIP Credit Agreement and pursuant to the Intercompany Facility Agreement);
- for contributing equity to Subsidiaries (as permitted under the terms of the Refinancing DIP Credit Agreement);
- to pay interest, premiums, fees and expenses payable under the Refinancing DIP Credit Agreement to the New DIP Lenders and the Agent as provided under the DIP Loan Documents and in the Proposed Order;
- to pay restructuring costs and Professional Fees and fund the Fee Reserve Account in accordance with the terms of the Proposed Order;
- to make adequate protection payments, if any, as approved by the Court and provided for in the DIP Budget; and
- for any other purpose approved by the Court in the Proposed Order or other orders of the Court not inconsistent with the terms of the Refinancing DIP Credit Agreement and previously consented to by the Majority DIP Lenders in writing.
- Milestones: No milestones related to asset sales; Bankruptcy Milestones limited to the following:
- The Debtors shall have filed in the chapter 11 cases the Company Approved Reorganization Plan and related disclosure statement (the “Disclosure Statement”), no later than 45 days after the date the Investment Agreement is executed by the parties thereto (the “Investment Agreement Signing Date”).
- The DIP Order and the EPCA Approval order (as defined in the Investment Agreement) shall have been entered by the Bankruptcy Court, no later than 30 days after the Investment Agreement Signing Date.
- The Bankruptcy Court shall have entered an order in the chapter 11 cases approving the Disclosure Statement no later than 85 days after the Investment Agreement Signing Date.
- The Bankruptcy Court shall have entered the Confirmation Order no later than 140 days after the Investment Agreement Signing Date.
The motion continues, “Led by their co-investment bankers, Seabury and SEB, the Debtors solicited over 200 parties and attracted considerable interest from a wide range of potential investors across international capital markets, including from private equity firms, asset managers, strategic buyers, hedge funds, and other parties with experience in aviation or distressed opportunities. As part of the Equity Solicitation Process, the Debtors also sought refinancing of the Original DIP Facility as an optional component of bid submissions. The Debtors assessed bids received with the goal of optimizing their capital structure upon exit from these chapter 11 cases and providing the highest recovery possible to general unsecured creditors.
Ultimately, following lengthy negotiations, the Debtors selected the Investors’ proposal, which incorporated the agreement to provide the Refinancing DIP Facility. The Investors’ proposal was the highest and otherwise best actionable proposal for an exit transaction for the Debtors.
Importantly, the Refinancing DIP Facility cannot be viewed in isolation or otherwise separate from the Exit Transaction…”
Termination of Tag Right
The motion further states, “The Tag Right provisions of the Original DIP Term Loan Agreement and Original DIP Order expressly provide the Debtors with the option to terminate the Tag Right following this Court’s approval of their business judgment in doing so, and upon payment of the Tag Right Termination Fee.
Rejection of the Tag Right is a valid exercise of the Debtors’ business judgment and should be approved. The Investment Agreement, which was the result of the competitive and transparent Equity Solicitation Process, requires the Debtors to terminate the Tag Right and pay the Tag Right Termination Fee in accordance with the Original DIP Term Loan Agreement.
The Investors have agreed to fund to the Debtors, following receipt of written notice and entry by the Court of the Proposed Tag Right Order, the Tag Right Termination Fee Advance prior to closing of the Exit Transaction, so as not to cause a reduction in the Debtors’ cash-on-hand. Specifically, the parties have agreed that the Debtors may, in their business judgment and upon written notice to the Investors, use a portion of the Initial Escrowed Funds to pay in full the Tag Right Termination Fee. This arrangement was negotiated extensively by the Debtors and the Investors in connection with the Investment Agreement at arm’s-length and in good faith.
As termination of the Tag Right and payment of the Tag Right Termination Fee are each a precondition to a value-maximizing exit transaction for their estates and creditors, and given that payment of the Tag Right Termination Fee may be accomplished without impairing the Debtors’ liquidity, the Debtors submit that they are exercising valid business judgment in seeking to terminate the Tag Right and pay the associated Tag Right Termination Fee.”
Petition Date Perspective
- Leading Airline Files Chapter 11 with $1.35bn of Funded Debt
- Chapter 11 Goals Include Restructuring of Debt Obligations, Fleet Reconfiguration and “Significant” Capital Injection
- October 2020 Restructuring ($1.4bn of New Capital) Falls Short as COVID-19 Lingers
- Other Factors Included Increased Competition from Low Cost Carriers, Ukraine War and Spiralling Fuel Costs
- Talks “Advanced” as to $700.0mn DIP with Multiple Potential Lenders
- Just Launched Pilots’ Strike (Impacting 50% of Flights) Poised to Cost $10-13mn a Day
The Debtors, whose October 2020, COVID-driven restructuring efforts raised approximately $1.4bn of new capital, clearly under-estimated the length and impact of the pandemic; with a just commenced pilots’ strike, “if prolonged,” likely to have a further material impact on the Debtors’ liquidity and financial position. In urging the pilots “to end their strike and engage constructively as part of this [restructuring] process,” the Debtors note that with stakeholder support they anticipate their ability to “restructure the Company’s debt obligations, reconfigure its aircraft fleet, and emerge with a significant capital injection…in 9-12 months.”
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $10.0bn and $50.0bn; and estimated liabilities between $1.0bn and $10.0bn ($1.35bn of funded debt) [NB: The Debtors add: “On a consolidated basis, as of May 31, 2022, the total value of the Debtors’ assets is approximately $12.43 billion and the total amount of the Debtors’ liabilities is approximately $9.41 billion”]. Documents filed with the Court list the Debtors’ six largest unsecured creditors as (i) Intertrust (Sweden) AB ($599.5mn state hybrid bonds claim), (ii) Intertrust (Sweden) AB ($161.4mn commercial hybrid bonds claim) and (iii) Kingdom of Denmark ($154.3mn Danish government term loan claim), (iv) Eksportfinansiering Norge ($150.7mn Nordea loan claim), (v) Swedish National Debt Office ($149.6mn Swedish government term loan claim) and (vi) Citibank N.A., ($133.9mn Swiss bond claim).
In a press release announcing the filing, the Debtors advised that: “The purpose of the filing is to accelerate SAS’ transformation by implementing key elements of its SAS FORWARD plan. These steps are consistent with SAS’ announcement on May 31, 2022, that SAS FORWARD involves complex multiparty negotiations and that the Company might seek to utilize one or more court restructuring proceedings designed to assist in the resolution of SAS’ financial difficulties and help accelerate the implementation of SAS FORWARD. Through this process, SAS aims to reach agreements with key stakeholders, restructure the Company’s debt obligations, reconfigure its aircraft fleet, and emerge with a significant capital injection. SAS expects to complete its court-supervised process in the U.S. in 9-12 months.”
The Debtors’ President and Chief Executive Officer Anko van der Werff, commented further: “Over the last several months, we’ve been working hard to improve our cost structure and improve our financial position. We are making progress, but a lot of work remains and the on-going strike has made an already challenging situation even tougher….Becoming a more competitive airline will require the full team’s effort and burden-sharing from all stakeholders. We urge SAS Scandinavia pilots’ unions to end their strike and engage constructively as part of this process.”
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Hilden Declaration”) [Docket No. 3], Erno Hildén, the Debtors’ Executive Vice President and the Chief Financial Officer, provides: “The COVID-19 pandemic has battered the airline industry. SAS is no exception. Over the past two years, SAS has experienced substantial reductions in revenue directly attributable to the COVID-19 pandemic and measures put in place to prevent it from spreading. These measures, including travel bans, border closings, and social distancing policies, have directly and significantly impacted the demand for air travel. As a result, SAS’s revenues during fiscal years 2020 (the early part of which pre-dated the onset of the COVID-19 pandemic) and 2021 fell approximately 56% and 70%, respectively, compared to fiscal year 2019.
SAS has continued to experience operating losses in the billions of dollars in the past two fiscal years. That financial distress was triggered largely by the emergence of COVID variants, including Delta and Omicron, which caused passenger demand to recover at a much slower pace than anticipated. In that regard, business travel, a critical source of pre-pandemic revenue for SAS, fell dramatically during the last two fiscal years compared to pre-pandemic levels and continues to be substantially below historical levels (particularly in the case of intercontinental travel).
SAS also faces mounting competition in the European markets from low cost and ultra-low cost carriers and in its long-haul markets by network carriers. These competitors generally have lower labor, aircraft and other costs, lower levels of debt, and superior access to equity capital when compared to SAS. Also, the closure of Russian airspace as a result of the ongoing war in Ukraine led the Company to suspend most long-haul routes to Asia. The situation also has led to increased operating costs with respect to the Company’s long-haul traffic and spiking jet fuel prices.
The Company also has been unsuccessful in reaching agreements with labor to reduce labor costs. Indeed, on July 4, 2022, the day before the Commencement Date, the SAS Scandinavia pilots’ unions formally instituted a strike involving approximately 900 pilots. The strike is expected to result in the cancellation of approximately 50% of scheduled flights for the duration of the strike, which is not yet known. The Company estimates the strike will cause it to lose $10-13 million each day.
Without concessions from these key stakeholders, and in light of the significant uncertainty and strain the labor action places on the Company, the Company concluded it could not complete the necessary debt-for-equity exchange and attract new equity capital from the market. Accordingly, the Company decided it would be prudent to file chapter 11 now, while it continues negotiations with lessors, to maximize its current liquidity runway and finalize its DIP financing (which will lengthen its runway) thereby mitigating the adverse effects of the strike on its cash position and preserving its prospects for reorganization.”
An earlier pandemic-driven restructuring effort was completed in October 2020 with that effort diluting then existing shareholders by approximately 95% and leaving each of the Government of Sweden and the Government of Denmark holding approximately 21.80% of the Debtors’ equity (see structure chart below). In addition to converting SEK 2.25 billion of debt to equity, the October 2020 restructuring raised proceeds corresponding to approximately SEK 12 billion before issue costs and hence restore equity by an amount corresponding to SEK 14.25 billion. NB: At the time, the SEK was at about 10.4 to the USD.
Elements of the October 2020 retructuring included:
- a directed issue of common shares of approximately $200 million3 to the governments of Denmark and Sweden;
- a rights issue of common shares of approximately $400 million to existing shareholders;
- an issue of new hybrid notes to the governments of Denmark and Sweden totaling approximately $500 million;
- an issue of new hybrid notes to the government of Denmark totaling approximately $100 million;
- a conversion of existing hybrid notes totaling approximately $150 million to common shares; and
- a conversion of existing senior bonds totaling approximately $225 million to $60 million in common shares and $160 million in new commercial hybrid notes.
As of the Petition date, the Debtors had outstanding funded debt obligations in the aggregate principal amount of approximately $1.35bn.
The Debtors provide: “The Company is in well advanced discussions with a number of potential lenders with respect to obtaining additional debtor-in-possession financing for up to USD 700 million (the equivalent of approximately SEK 7.0 billion), to support its operations throughout this court-supervised process.” [NB: This is the now replaced Apollo DIP].
About the Debtors
According to the Debtors: “SAS, Scandinavia’s leading airline, with main hubs in Copenhagen, Oslo and Stockholm, is flying to destinations in Europe, USA and Asia. Spurred by a Scandinavian heritage and sustainable values, SAS aims to be the global leader in sustainable aviation. We will reduce total carbon emissions by 25 percent by 2025, by using more sustainable aviation fuel and our modern fleet with fuel-efficient aircraft. In addition to flight operations, SAS offers ground handling services, technical maintenance and air cargo services. SAS is a founder member of the Star Alliance™, and together with its partner airlines offers a wide network worldwide. ”
Corporate Structure Chart (appended to the Petition)
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