Assuming the Court extends Norwegian Air Examinership for another 50 days, the big billion dollar question remains: Will Norwegian be allowed by the Court to return 36 planes to their owners?
This is the biggest question of this review. And that’s probably the most important question to be answered in any reviewer to date, not least given the sums we’re talking about.
But because this is such a big question and so much is at stake, for the reasons set out later in this note, there is a good chance that, in the end, the Court will not be called upon to answer it. all. Sorry.
Let’s briefly recap how we got here.
As consumers of trips to Ireland, we’ve grown accustomed to seeing Norwegian’s livery on the tarmac at Dublin Airport and elsewhere as it seeks to capture the transatlantic market. In 2017, 2018 and 2019, the airline’s turnover increased to € 4 billion, including € 3.2 billion in ticket sales.
Two major catastrophic events then occurred, first the grounding of the Boeing 737 Max in 2019 and the second COVID-19 in 2020. To what extent did these two disasters affect the company? Bookings fell 99% in the second quarter of 2020. Between January 2020 and November 2020, Norwegian carried 6.3 million passengers compared to 28.62 million for the same period in 2019, a decrease of 78%. Revenue for the 3rd quarter fell by 91% to € 119 million compared to € 1.13 billion for the same period in 2019. Annual revenue at the date of the examiner’s appointment request in November 2020 is down -76%. Operating losses for the year quadrupled.
Norwegian’s strategy has shifted from growth to survival. In April / May 2020, it converted € 1.2 billion of debt and leasing commitments into equity. He adjusted market rentals based on the value of the planes. He introduction “Power per hour” arrangements where he paid aircraft owners only for the time the aircraft was in flight. He has postponed operations outside of Norway until the COVID-19 pandemic subsides. It raised € 37 million in new liquidity and equity through a public offer. All this enabled it to benefit from Norwegian state aid in the form of loan guarantees of 278 million euros. He realized additional savings in restructuring negotiations with aircraft owners. All of this meant that by the time he applied for the appointment of an examiner in November 2020, he had sufficient cash flow to complete it until the end of the first quarter of 2021. But only if he obtained the protection of the Court by appointing an examiner.
With all of this work going on, what were the immediate catalysts that compelled Norwegian to seek court protection? Well, there were several. But before listing them, remember that a business cannot request the appointment of an examiner if a liquidator has already been appointed. Or if a receiver has been appointed for more than three days. If you think either of these things is going to happen to you, you better go to the High Court. Although if you wait until any of these things have happened or are about to happen, you are already way too late. A lot of work needs to be done before we can ask the court to appoint an examiner.
On November 6, 2020, Aviation Capital Group was tried against Norwegian for $ 6.287 million in the UK and this was due to be paid by December 18, 2020. On November 9, 2020, the Norwegian government confirmed that it was no longer going provide support to Norwegian. Leasing company Wings Capital has issued claims and notices of default for $ 2.2 million. Several other lessors have served notice of termination reserving their rights in general. And Boeing was withholding large advance payments for undelivered planes, according to the Norwegian. All of these things combined led to Norwegian making the decision to appoint the Examiner when she did, which she had been planning to do for a long time, as is clear from the documents filed with the court.
The most important of these and the most important document of any reviewer (with the exception of judgments of course) is the independent expert report. Its aim is to outline the reasons why the business is insolvent and the reasons why the business is likely to survive as a going concern once the Court has approved an arrangement with its creditors. In this case, the IER said that as an operating company Norway would have a positive net asset position of $ 2.4 billion. On the other hand, its deficit at liquidation would be 7.1 billion dollars. This anomaly between its negative and positive asset position determined by solvency is largely driven by a value attributable to “Right of use” assets. This is an accounting treatment for leased aircraft that depreciate over the term of the lease. This value is not achievable by the companies concerned, regardless of the value of the aircraft. IER noted, however, that Norwegian would run out of working capital in January 2021.
The IER presented a survival plan that required several goals to be achieved: adjusting aircraft lease payments to market value; longer term “Power per hour” deals to save money while planes were parked; an extension of existing power through time agreements beyond Q1 2021; adjust future aircraft orders to future operating needs; and deferrals and restructured payments for necessary aircraft guaranteed loans. The independent expert considered that, “The process of restructuring the entire operating fleet and raising new capital is expected to be intertwined, as fleet creditors and potential new capital providers will want to know that the other is committed to the business in the future ”.
He also explained that in his view Norwegian had a realistic prospect of survival if: court protection was granted; donors provided support during and after the review; it obtained additional working capital in the form of new capital investments; it restructured its long-term obligations under aircraft acquisition contracts, including prepayment agreements; and the High Court upheld the proposed plan of arrangement.
Leaving aside the specifics of the industry, these are standard requirements throughout IER. In all successful reviewer positions, creditors are required to support the business. In this case, it now appears that the main support of its main creditors, the aircraft owners, is for them to get back on their plane. It was not immediately obvious when the petition was presented. The lease repudiation request was not filed until early January and it caused, as you can imagine, quite a stir.
I have already written about repudiation of leases. Repudiation of leases was the central issue of the New Look Examinership. The difference between this case and this one is that the problem was live from the start in New Look. But it wasn’t until recently that he jumped his head in this one, more than 70 days after kickoff.
Repudiation of leases is not automatic. It is well known that the examiner is the only way known under Irish law to repudiate an onerous lease. But just because you have one or more lease payments under which you pay above market rent, that doesn’t automatically give you the right to receive court protection. The lease must be onerous, that is, it must have a significant negative impact on your ability to survive. You must have evidence explaining in detail how the leases jeopardize the success of the plan of arrangement. Moreover, since the law describes the onerous contract as a “under which an element of performance other than payment remains to be rendered by both the company and the other contracting party” – that is, not just the payment of rent – then it is necessary to explain what it is. Another element, such as the execution of works or the provision of services, must be pending before the Court can hear the application. Obviously, it helps greatly if the reviewer agrees with the point of view. And as we now know from the New Look case, before you seek court protection against your landlords, you must first have tried to negotiate with them. In New Look, the court dismissed the motion for the appointment of an examiner.
The big question in this case is therefore whether the court will allow Norwegian to repudiate its leases and return the 36 aircraft to their owners. If the issue is to be decided by the Court, there are two possible solutions. First, Norwegian is allowed to return the plane, in which case the owners of the plane will lick their injuries and turn to their own backers for help. Some of them may even have to seek court protection themselves in time. Second, Norwegian is not allowed to return the aircraft. Well, it looks like it won’t survive at all, so aircraft owners will have to take them back anyway.
When so much is based on a binary outcome determined by someone else, in this case a judge, sane people speak to determine the outcome. And that’s what’s probably going to happen here. And it’s going to be discussions. Last Friday, 105 online lawyers attended the provisional hearing of Norwegian examiners representing Norwegian, the examiner and several dozen creditors. This means that we could look at the mother and father of all settlement negotiations, which would result in the mother and father of all settlement agreements, which will allow the court to present an agreed plan of arrangement at the start. of April. And even then, the Court has no obligation to approve any plan of arrangement and it has complete discretion.
So it looks like hundreds of legal fingers, seriously bloated by frantic drafting efforts to strike a deal, will be anxiously chewed on as the court decides whether the deal is correct after all.
KPMG’s Examiner Kieran Wallace is set to ask the High Court to extend the period he has to work on a bailout for the ailing airline by 50 days from his current deadline of February 25 .