PHI Inc. - Creditors Come To Terms On New Plan Of Reorganization

by: Henrik Alex

Successful court-supervised mediation results in noteholders becoming the new majority owners of the restructured company.

Current CEO to leave after receiving almost $133 million in cash.

No recovery for existing equityholders under the new plan of reorganization but Equity Committee still in negotiations.

Discussing trading options for highly speculative investors.

Company anticipated to emerge from bankruptcy at the end of August.

After filing for bankruptcy in mid-March and coming up with a plan of reorganization in early April, leading helicopter services provider PHI Inc. (NASDAQ:PHII) (PHIIQ, PHIKQ) has faced major opposition from the Official Committee of Unsecured Creditors which, among other things, has made motions to potentially subordinate a $130 million senior secured term loan provided by the CEO, end the company's exclusivity period for filing a plan of reorganization and dismiss the company's advisor, Houlihan Lokey Inc. (HLI).


But after engaging in court-supervised mediation last week, PHI Inc.'s main secured and unsecured creditors agreed on a so-called "Settlement Plan Term Sheet" which will result in a significantly altered plan of reorganization (emphasis added by author):

  1. The so-called "Thirty Two Claim" representing the CEO's $130 million secured term loan provided to PHI in late September 2018 will now be satisfied in cash instead of being equitized.
  2. The so-called "Blue Torch Claim" representing the $70 million pre-petition financing entered into with Blue Torch Capital in March 2019 will either be refinanced or reinstated.
  3. Unsecured creditors (noteholders, aircraft lessors and holders of general unsecured claims) will receive 100% of the restructured company's new common stock, subject to dilution for a potential right offering and new management incentive program.
  4. Company emerging from bankruptcy with a maximum of $225 million of funded debt (inclusive of any restated debt) and at least $75 million of unrestricted cash. Financing proposals will be due by July 3, but the deadline might be extended until July 26.
  5. $75 million backstop commitment by certain unsecured creditors.
  6. CEO and controlling shareholder Al A. Gonsoulin to retire from PHI. Current president and COO, Lance Bospflug, will become the restructured company's new CEO.

In addition, "The Consensual Plan and Confirmation Order will contain customary mutual releases and exculpation provisions, including, without limitation, releases (to the fullest extent permitted by law) of all of the Debtors’ officers, directors, employees and advisors, as well as mutual releases by and among the Debtors, the Official Committee, Thirty Two, LLC, and Mr. Gonsoulin."

The term sheet also includes a preliminary milestone schedule with the restructured company currently anticipated to emerge from bankruptcy in late August:

Source: Settlement Plan Term Sheet, Docket 617

Not surprisingly, the new plan does not contemplate any kind of recovery for current equityholders which marks no change from the original plan.

That said, the recently appointed Official Committee of Equity Security Holders ("Equity Committee") might still succeed in avoiding a total wipe-out for existing shareholders as negotiations apparently continue (emphasis added by author):

Under the deal filed last night in federal court in Dallas, the official committee of unsecured creditors will drop its opposition to PHI’s reorganization plan, as well as the panel’s effort to sue company insiders, in exchange for 100% ownership, and Gonsoulin’s retirement.

That leaves a group of minority shareholders as the main opponent left to the reorganization proposal.

“This is a terrific result so far,” U.S. Bankruptcy Judge Harlin Hale said Wednesday during the hearing. “We have another piece of the puzzle with the equity committee, but I could not be more pleased.”

While there's very little incentive for creditors to leave much, if anything on the table for equityholders, potential concessions largely depend on the Equity Committee's ability to derail or delay the deal in a meaningful way.

After Thursday's 75% drop in the price of the company's non-voting shares (PHIKQ), the company's market capitalization is down to roughly $4 million calculated on the trading prices of 2.9 million outstanding voting shares (PHIIQ) and 12.9 million non-voting shares, representing a roughly 1% recovery based on the $442.5 million in post-restructuring equity value calculated by Houlihan Lokey. Should the Equity Committee succeed in negotiating better terms, the shares might have considerable upside from current levels, but, frankly speaking, I remain skeptical on a potential recovery.

That said, the company's voting shares (PHIIQ) are still trading at more than 6x the price of the non-voting shares (PHIKQ) despite the fact that both classes will be treated equally under the plan of reorganization. Given this issue, a pair trade shorting PHIIQ and going long PHIKQ would yield outsized returns under basically any given scenario but, unfortunately, shares will be hard to borrow at this point.

To illustrate the pair trade suggestion with an example:

Short Trade: 10,000 PHIIQ at a price of $0.75 for proceeds of $7,500

Long Trade: 10,000 PHIKQ at a price of $0.15 at a cost of $1,500

Should the proposed plan of reorganization be approved without changes, both PHIIQ and PHIKQ shares will be cancelled and the pair trade would yield $6,000 in gross proceeds before broker commissions and borrowing fees (which could be material). Investors won't be required to cover the PHIIQ short position prior to the cancellation of the shares.

Bottom Line:

Holders of the company's senior notes will become the new majority owners of the restructured PHI Inc. while current CEO and controlling shareholder Al A. Gonsoulin will be out entirely after recouping almost $133 million in senior secured claims.

While the new plan of reorganization once again contemplates a wipe-out for current equityholders, the recently appointed Equity Committee might still succeed in negotiating some form of recovery. Any amount above 1% of the new equity should result in an increase in the trading price of the non-voting shares.

Clearly, this bet is not for the faint of heart and positions should be kept at small size accordingly.

Should things develop as expected, a restructured PHI Inc. will emerge from bankruptcy in late August.

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.