Great Lake airline is in loan default.
Form 8-K
Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.
As previously disclosed in a Form 10-Q filed on August 14, 2015 with the Securities and Exchange Commission by Great Lakes Aviation, Ltd. (the “Company”), the Company was not in compliance with the fixed charge coverage ratio covenant contained in the Loan Agreement dated as of December 22, 2014 between the Company and Callidus Capital Corporation (the “Lender”). Because of the Company’s non-compliance with this financial covenant, on August 28, 2015, the Company received notification (the “Notice”) from the Lender that it was in default under the Loan Agreement. As a result of being in default, the Lender has the right to declare the Company’s debt obligations (approximately $27.5 million) to be immediately due and payable, to terminate the Lender’s obligation to advance any additional borrowings under the original terms of the Loan Agreement, and to take possession of substantially all of the Company’s assets. In addition, the event of default increases the rate of interest the Company will pay on outstanding obligations from 14% per year to a default rate of 17%.
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Form 10-Q
Liquidity
On December 22, 2014, we entered into a Loan Agreement (the “Loan Agreement”) with Callidus Capital Corporation (the “Lender”). The Lender agreed to make available to the Company: (i) a $25,000,000 single advance term loan facility, (ii) a revolving loan facility with availability of up to $6,000,000 and (iii) a second revolving loan facility with availability of up to $3,000,000. The $25,000,000 term loan was disbursed at closing, and substantially all of its proceeds were used to pay all outstanding borrowings, fees and expenses under our prior credit agreement.
The term loan and revolving credit facilities mature on December 22, 2017 at which time any outstanding balances will be due and payable. At that time, in order to pay the principal amount, the Company would need to raise cash by obtaining new debt financing, raising additional equity financing or selling owned aircraft or a combination thereof. We are not required to make any principal payments under the Loan Agreement until December 22, 2017, absent an event of default.
We have experienced a shortage of qualified pilots which has caused us to curtail operations and reduce capacity. The pilot shortage and its effect on operations are expected to continue until we can hire and train enough pilots to reestablish operations in those markets in which we were forced to suspend service or expand into new markets.
As a result of a higher than expected pilot shortage and related curtailment of operations in the second quarter of 2015, as of June 30, 2015, the Company was not in compliance with the fixed charge coverage ratio financial covenant contained in the Company’s Loan Agreement. Specifically the Company is required to maintain a fixed charge coverage ratio, calculated by dividing trailing 12 month earnings before interest, taxes, depreciation and amortization (EBITDA), less unfinanced capital expenditures, by trailing 12 month interest expense, as defined by the Loan Agreement, of 0.76:1 or more. The Company does not expect to be in compliance with its fixed charge coverage ratio covenant throughout the balance of 2015 as EBITDA is calculated on a trailing 12-month basis. Under the Loan Agreement, the Company has until August 28, 2015 (the “Cure Period”) to cure this covenant violation. During the Cure Period the Lender has no obligation to make further loans under the Loan Agreement. We do not expect to be able to cure the covenant violation upon the expiration of the Cure Period. If we fail to cure the covenant violation during the Cure Period, an event of default under the Loan Agreement will occur which will permit the Company’s Lender to exercise its right to declare our debt obligations to be immediately due and payable, to terminate the Lender’s obligation to advance any additional borrowings under the original terms of the Loan Agreement, and to take possession of substantially all of the Company’s assets. As a result of not being in compliance with the terms of the Loan Agreement and the expectation that the Company will not be in compliance with the terms of the Loan Agreement throughout 2015, all borrowings (approximately $26.5 million) under the Company’s senior credit facility are classified as current maturities as of June 30, 2015.
As a result of the covenant violation the Company also reclassified the related debt issuance costs from long-term other assets to other current assets. Additionally, the event of default triggers an accelerated payment due for the 1.25% facility fee of $425,000 which is included in accrued liabilities.
We are working with our Lender to negotiate a modification of our Loan Agreement to allow for additional borrowings, subject to the limitations of our collateral values, reset fixed charge ratios, and reinstate the maturity dates of our existing loans.
In the event that the Company is unsuccessful in modifying our Loan Agreement on commercially reasonable terms, the Company will need to consider several alternatives, including, but not limited to, additional equity financings, debt financings, and other funding transactions, including the sale or sale-leaseback of certain aircraft.
The Company cannot make assurances that its assets or cash flow from operations will be sufficient to repay borrowings under its existing debt obligations, either upon maturity or if accelerated, or that it will be able to renegotiate favorable terms of the proposed modifications to our existing Loan Agreement. In addition, the Company cannot make assurances that any additional sources of capital or liquidity would be available. This would have a material adverse impact on our liquidity and financial position.
Until the Company is able to cure the covenant violation or to successfully renegotiate our existing debt obligations, it is expected that the Company will not have sufficient liquidity to service its existing debt obligations for the next 12 month period. These factors raise significant doubts about our ability to continue as a going concern.
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But don't worry, some people will be take care of, at least for a while.
Form 8-K
b), (c) and (e) On September 2, 2015, Michael O. Matthews resigned from his position as Vice President and Chief Financial Officer of Great Lakes Aviation, Ltd. (the “Company”). In connection with Mr. Matthews’ resignation, the Company entered into a separation agreement and release (the “Separation Agreement”) with Mr. Matthews dated September 2, 2015. Pursuant to the Separation Agreement, Mr. Matthews agreed to make himself available to provide certain consulting services to the Company and to release the Company from any legal claims, and the Company agreed to pay Mr. Matthews severance and consultation pay of $12,500 per month for ten months and to provide Company flight benefits for a period of ten months.