Honestly speaking, despite having covered the offshore drilling and service industry for years, I never heard of leading helicopter services provider PHI Inc. (PHII, PHIIK) until I stumbled over an article by fellow contributor Timothy Stabosz in late January.
While Timothy made a glowing case for the company to successfully address short-term debt issues by selling its air medical division, I turned skeptical after learning that PHI's CEO and controlling shareholder, Al Gonsoulin, secured himself the top spot in the company's capital structure by refinancing the company's legacy working capital credit facility with a $130 million term loan in September 2018, ahead of holders of the company's $500 million senior unsecured notes maturing today.
As it has turned out, my concerns were well founded as the company has filed for chapter 11 bankruptcy protection this morning without a pre-packaged plan of reorganization being in place:
"After working closely with our advisors since the spring of 2018, interacting with our various stakeholders, and carefully evaluating all possible options, the Board concluded that pursuing Chapter 11 protection is the most appropriate course of action to address our matured debt and strengthen our balance sheet. We are confident this will position the entire company for continued leadership in the industry and provide a platform for PHI's long-term success. We remain fully committed to all of our stakeholders and to operating with the highest standards of safety and quality as we navigate this process, which we believe is the best option for a timely and efficient resolution to our financial situation."
PHI remains in discussions with the holders of its $500 million in unsecured notes and their advisors to consider alternatives to address PHI's outstanding debt obligations. The Company is also engaged in ongoing discussions with its various lessors to address certain of its above-market lease obligations. Importantly, the Company believes that its creditors and lessors will be supportive of PHI and its prospective business strategy and, to that end, anticipates filing a plan of reorganization in the early stages of the Chapter 11 process.
PHI also secured $70 million in pre-petition financing by Blue Torch Capital, a new player in the corporate debt markets, founded by former Cerberus Capital Management executive Kevin Genda.
Some of the early documents filed with the bankruptcy court provide a truly sobering read, investors should particularly pay attention to docket 16:
Page 21 (emphasis added by the author):
The Company, through its advisors, contacted dozens of potential financial and strategic buyers for the Company, as a whole, and for the Air Medical business segment only. To date, the Company has not received any indications of interest from potential buyers that the Board views as actionable.
Page 22 (emphasis added by the author):
Following a public meeting held by the Company on February 6, 2019, led by the Company’s management and advisors, with each member of the Ad Hoc Committee and the Ad Hoc Committee Advisors present, the Company’s advisors sought to kick-start negotiations by delivering “strawman” restructuring terms to the Ad Hoc Committee Advisors. Over the course of the subsequent weeks, the Company received feedback on these terms from the Ad Hoc Committee Advisors. After reviewing this feedback, the Company and its advisors concluded that the prospects of negotiating a consensual restructuring framework prior to the maturity date seemed improbable. However, the Company continued to provide additional diligence information to the Ad Hoc Committee and the Ad Hoc Committee Advisors. This additional diligence information provided to the Ad Hoc Committee Advisors included the Company’s business plans for the years 2019, 2020 and 2021, as well as long-term operating cash flows and budgets. Ultimately, the “strawman” restructuring terms did not gain traction with the Noteholders, and the Company’s efforts shifted toward a focus on ensuring a smooth transition into chapter 11.
That said, the company remains optimistic to file a plan of reorganization quite soon, potentially allowing for the restructured company to emerge from bankruptcy within the next couple of months:
PHI, Inc. is working to emerge from bankruptcy in the summer of 2019 with a significantly reduced and more sustainable debt structure that will position the Company for long-term success.
So, what about the chances of a recovery for current equityholders at this point?
With a plan of reorganization yet to be filed, determining the ultimate outcome for shareholders is difficult but a quick look at the company's senior unsecured notes currently trading around 60% of face value already indicates that equityholders should prepare for a wipe-out or some kind of token recovery at best. In fact, there's little incentive for unsecured noteholders to leave much, if anything, on the table for equityholders other than perhaps to speed up the company's emergence from bankruptcy.
Not unexpectedly, PHI Inc. finally succumbed to its short-term debt issues and filed for bankruptcy protection. With the trading price of the company's senior unsecured notes suggesting a major haircut to be taken by bondholders, I do not expect any kind of recovery for common shareholders.
That said, this is pure speculation at this point as the company has yet to file a plan of reorganization with the bankruptcy court.
I will update investors on the company as things continue to develop.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.