CHC Group Ltd and 42 affiliated companies petitioned to enter the US Chapter 11 process on 5^th May 2016, with outstanding debt obligations of approximately $1.6 billion. The Chapter 11 process has many of the features present in bankruptcy proceedings both in the US and other jurisdictions. However, it also provides additional benefits for debtors with mechanisms that allow the debtor, CHC in this case, to restructure its business. For example, the debtor can acquire financing and loans on favorable terms by giving new lenders first priority on the business’s earnings, cancelling outstanding debt and equity; the court may also permit the debtor to reject and cancel onerous contracts, such as asset backed loans and helicopter and property leases. The debtor is protected from litigation whilst in Chapter 11. This process is critical for the staff employed by the debtor as it provides an opportunity for many of them,79% of CHC staff in this case, to maintain their employment in the continuing business while a new business plan is developed, rather than going straight into liquidation and being made redundant. Exit from Chapter 11 occurs once a reorganisation plan is developed and approved by the US Bankruptcy Court; failing this, the debtor moves into liquidation proceedings.

Six months later, on October 11^th 2016, CHC lodged a court Motion seeking approval for a Plan Support Agreement (‘PSA’) that creditors will vote on and which will provide the necessary financial support to eventually exit Chapter 11.  The Motion states that CHC has been seeking to

“(1) Negotiate a “cornerstone” lease arrangement with one or more key aircraft lessors that provides for substantially improved economic terms and fleet flexibility; (2) develop a chapter 11 plan that provides for a significantly reduced balance sheet supported by the company’s go forward operations; and (3) attract one or more new capital investors to fund this plan and the reorganized entity’s future operations.” (Case 16-31854-bjh11, Doc 956 filed 11^th October 2016)

CHC believe that they have accomplished these goals and have a clear path forward with this PSA to exit Chapter 11.  Karl Fessenden, President and CEO stating:

“We are confident that this Plan, together with our strong and competitive operating model, will significantly enhance our financial flexibility and establish a sustainable capital structure that enables CHC to invest in and grow the business over the long-term.” (CHC Press Release, 11^th November 2016)

Critically, CHC have achieved the broad support of the majority of their creditors and the support of Milestone, a part of the GE Group, who will become their lead lessor of aircraft and provider of asset backed finance. There is also an agreement in principle with Waypoint, CHC’s other main helicopter lessor. The PSA Motion, Backstop Agreement and Milestone agreement was approved to go forward for creditor approval by the US Bankruptcy Court on December 20^th.  CHC still have processes to go through to finally exit Chapter 11 and the financial agreements are conditional on a Final Confirmation Order from the Bankruptcy Court of no later than March 17^th 2017. However, the Court approval of the PSA for submission to creditors to vote on is a major step forward.

The restructuring detailed in the PSA involves cancellation of the CHC debt and equity holdings and an investment of $300 million in the form of a pro rata rights offering to existing security holders and unsecured debtors of a debt called “New Second Lien Convertible Notes”.  This investment will be in a new Cayman Islands unlisted parent company that replaces the current US listed company. There will be no costly listings on stock exchanges and the SEC requirements will not apply. Eight investors, called “Backstop Parties” and listed in the Table below, will back CHC’s $300 million issue, underwriting it for a fee of $30.8m of additional Notes.  It is anticipated that this injection of fresh funds will provide the necessary liquidity and support for the CHC operations after emergence from Chapter 11.

The agreement with Milestone provides CHC with essential cost savings for their leased fleet and flexibility for their remaining leased aircraft. It is also an important agreement for Milestone who maintain a key client as a continuing outlet for their fleet, many of which would otherwise be idle and incurring storage fees. Milestone had 42 helicopters leased to CHC at the start of the Chapter 11 proceedings.  The main terms of the Milestone agreement are:

1. The restructuring of lease rentals for aircraft that will remain in the CHC fleet (i.e. reduced lease rates);
2. The return of some helicopters on agreed terms – CHC currently have 30 helicopters under lease from Milestone with a further 12 already returned by court order;
3. Options to extend the lease term of some helicopters and to lease additional helicopters, including new helicopters in the very near term before emergence from Chapter 11, at negotiated lease rates;
4. Agreement of unsecured debts claim of up to $267 million (subject to objection by the Unsecured Creditors Committee);
5. The provision of a $150 million new debt facility for the acquisition of 13 leased aircraft; and
6. Cash payments of $0.92m for professional fee reimbursement, and transaction fee cash payments in two installments of up to $4.25 million.

The day after the announcement of the proposed Milestone agreement with CHC I met with Ed Washecka, the CEO of Waypoint and a competitor of Milestone.   Waypoint had also entered negotiations with CHC to adopt lead lessor status and were concerned that they had not been involved in continuing discussions with CHC to achieve that status. At the Chapter 11 petition date Waypoint had 44 helicopters leased to CHC: 12 have already been returned to them by court order.  The announcement of the Milestone proposed tie up with CHC was clearly a blow to Ed Washeka and the Waypoint team. Waypoint have claims against CHC of just over $90 million including lease rejection damages of just over $64 million and unpaid lease rental claims of about $17 million. If CHC rejected the rest of the Waypoint leases their exposure could have been well in excess of $300 million. However, after some pretty vigorous legal correspondence between the parties, CHC and Waypoint reached

“…an agreement in principle on a proposal for an overall transaction that [CHC] believe will provide them with significant flexibility in their fleet and cost savings, consistent with their overall fleet restructuring goals… With this agreement in principle…[CHC] will have reached a favorable result with both of their largest lessors consistent with the goals set forth in the Debtors’ business plan.” (Revised Proposed Disclosure Statement for the second Amended Joint Chapter 11 Plan of CHC Group, 19^th December 2016, p.35)

It looks like Waypoint have eventually reduced their ongoing lease rates for the aircraft that will remain in the CHC fleet, and any new aircraft in the future, as well as taking some aircraft back voluntarily on reduced return terms.  CHC gained another major backer for the PSA approval and avoided potentially lengthy litigation with one of its two largest lessors. CHC had 18 different lessors at the start of the Chapter 11 proceedings and has now reached agreement with eight of the main ones, including Lobo .

The court approval to move forward on the basis of the PSA is critical for the future of CHC. It had set expectations with its clients for an an early 2017 exit from Chapter 11 and needed to enhance their confidence to survive.   That schedule is now achievable.  However, it will still not be easy, even with the financial and leasing support, to maintain the business in the current environment. Although Chapter 11 will deliver the much needed strategy of fleet rationalisation, reduction of the balance sheet and cutting of annual fixed costs from $417m in 2016 to a planned $142m in 2019, the business will also need to look at other strategies post Chapter 11. For example:

• A further diversification of income is needed as a priority to increase the current 10% of revenue from non oil and gas sources and embrace related areas that are not dependent on what is likely to be a long term volatile oil and gas market – keeping and extending existing SAR contracts and developing new ones will be a priority.
• CHC are likely to emerge from Chapter 11 with a fleet of about 130 helicopters with a planned reduction to a fleet of 90-100 by 2019. A total of 74 aircraft have already been returned to lessors and five have been abandoned to security holders; there are a further 26 pending court approval. The fleet reduction plan may lead to the development of a regional focus, including regional alliances with other operators, and withdrawal from some existing geographies where future prospects look marginal even on their own analysis.  CHC’s stated intention in the PSA documentation is to remain global and maintain operations on six continents – this doesn’t sound like a focused approach given the planned size of the fleet unless there are other plans to use part of their global assets in a different business model.
• Personnel only contracts generate lower margins but good stable low risk revenue if they are properly contracted to manage risk with a partner aircraft lessor. They are an ideal vehicle for some new developing markets. CHC themselves recognise that one of the market risks going forward is leasing companies and OEMs placing helicopters directly into their clients: this risk is also an opportunity.
• The CHC relationship with GE is strengthened even further with the Milestone agreement: five senior CHC managers, including the CEO and Chairman, have considerable prior experience working at GE. On 31^st October 2016 GE announced that they are to buy 62.5% of Baker Hughes taking advantage of the low market prices to make a strategic acquisition to enhance further GE’s expanding oil and gas division. An offshore helicopter operator with a global presence and different models of providing a helicopter service also enhances the offering for GE clients in the oil and gas services market.

These are just some of the various strategies that are possible.  What is clear is that just standing still is not an option in this competitive market and not an approach that you would expect from a relatively new and very experienced CHC management team that will soon break free from Chapter 11 and listing restrictions. They have secured significant support in terms of cash and, perhaps of more importance, a key fleet backer from a company who knows their management team very well.

Other offshore operators may be fearful.  In a relatively small market an effective Chapter 11 exit can provide the affected operator with a significant commercial advantage going forward: in this case a fast and very economic fleet rationalisation, significant balance sheet improvement, and reduced fixed costs including improved aircraft lease terms.  However, such fears can be exaggerated as:

• CHC have actually helped the offshore helicopter market during this economic downturn by taking out very quickly 100 aircraft. Many of these helicopters will remain mothballed until the market recovers; the older types are likely to be scrapped or sold into markets that should not impact the main offshore operators. When the H225/ L2 grounding comes to an end this will put over 120 aircraft back into the market if clients will fly them but about 40 of these are CHC returned aircraft that are stored.  The timing of the H225 return to real service, as opposed to current EASA / FAA approval for service, will probably be early to mid-2017.  The Aviation Authorities in UK and Norway and the major offshore operators and their clients are unlikely to lift their restrictions until publication of the Accident Investigation Board Norway final report clarifying the “root cause” of the accident, and satisfaction is assured regarding Airbus remediation .
• A regional approach to focusing operations would benefit other global and regional operators. Of course competition regulations prevent the carve up of markets, but they do not prevent independent economic decision making on which markets are viable in the future and the development of cost effective alliances;
• The market was never helped by an operator running at a clear loss – that in itself depressed the margins of others as they bid for business;
• Market helicopter lease rates should fall as a result of the excess of aircraft held by lessors and the lower terms negotiated by CHC with their lessors.

The fear will however be real for those operators with diminishing cash reserves and no viable strategy for the current and future offshore environment including long term significant reduction of fixed costs.   Some helicopter operators will struggle, but the well known larger global and regional operators appear to have secured access to sufficient liquidity at present to get them through the downturn even though they are still eating into cash, investment reserves, revolving credit facilities and adjusting financial covenants with lenders. Bristow Group announced on November 14^th 2016 that it had secured a confidence boosting finance agreement with Lombard of $200m for eight of its UK SAR fleet, illustrating the huge benefit of long term non oil and gas revenue for offshore operators. However, Erickson, who bought Evergreen in 2013 in an acrimonious acquisition that has delivered little value, entered Chapter 11 on November 8^th 2016. Their focus is not offshore oil and gas, with most of the business in firefighting, heavy-lift construction and timber harvesting.   Following their debt laden acquisitions (they also acquired Air Amazonia), Erickson was very heavily leveraged and ended up with a diverse range of old helicopter types many with low value in the current market. It’s not just in oil and gas that helicopter operators need to rethink their strategies and emerge stronger and more resilient to market change.

The price of oil is recovering but any improvement will not necessarily lead the oil and gas companies to ramp up exploration quickly and could be quickly brought to halt by US shale producers turning the taps back on.  They will wait to see whether any revival can be sustained and need to focus on sustainable profitability rather than enhancement of reserves at high extraction costs. The recent BP announcement not to proceed with their high cost exploration in the Great Australian Bight with co-sponsor Statoil, despite having already committed substantial cash and a very high profile political commitment to the project, is an example of continuing caution in the Final Investment Decision process as profits decline. Recent BP deals to take 10% in Abu Dhabi’s onshore Adco concession and a 62% interest in Kosmos Energy’s blocks in Mauritania and Senegal illustrate a cautious focus on low cost developments to replenish reserves. Shell, a large CHC client, is still looking to sell $30 billion of assets, including Norwegian assets, to offset the price it paid for BG.  In September 2016 Shell had a significantly increased debt of $86 billion, rising from $52 billion at the end of 2015.  The price of oil is not leading to attractive sell off prices for Shell to reduce this high level of debt.  Even as exploration recommences in a cautious manner, oil and gas companies will not want to give up the significant cost reductions that they have secured from their helicopter providers and other suppliers as they focus on making profit at $50 per barrel or less.

Against this background, there isn’t much time for the CHC management to catch its breath to embark on the next strategic challenge following the arduous, stressful but ultimately successful Chapter 11 process. With a broad range of committed investors and a key lead lessor to support, advise, and even cajole, CHC have given themselves a good opportunity to continue as a main player in the future offshore helicopter market.  The restructuring agreements secured by CHC are great news for the staff who remain at CHC: the humming bird seems set to rise out of the ashes of Chapter 11.

Copyright and full responsibility for the content of this article remains with Allan Blake, an independent Aviation Consultant. He was Regional Director (Asia Pacific) with the Bristow Group for seven years. He is also the author of “Dynamic Directors: Aligning Board Structure for Business Success” (Macmillan).