Discovery Air debenture holders stand united
A potentially nasty battle is developing between the holders of $34.5 million of convertible debentures issued by Discovery Air Inc. in 2011 — and meant to mature on June 30 — and the company’s owner, the publicly listed Clairvest Group Inc., over the way they’ve been treated.
The debenture holders are getting organized to ensure they receive full value for their investment from the issuer, which was privatized last year and filed for Companies’ Creditor Arrangement Act (CCAA) protection last month. They have formed an ad hoc creditor committee, have received financial support from owners of about half the debentures (at least one broker is paying his client fees) and have put forward the name of a person to be the chief restructuring officer during the CCAA process.
Stephen Campbell, the retired former chief financial officer of the Canadian Medical Protective Association, is the acting co-chair of the ad hoc committee. Randy Durig of the Oregon-based Durig Fixed Income, a distressed debt hedge fund, is also playing a pivotal role. But time is tight: The debentures, which were suspended from trading on March 21, are to be delisted on April 27.
Through a group of subsidiaries, Discovery Air provides specialty aviation services and logistics support, largely in Canada’s North. Until December it also provided combat airborne training services to the Canadian Armed Forces, through Discovery Air Defence Services, an entity now known as Top Aces and largely owned by Clairvest. Discovery Air still retains a 9.7 per cent stake (down from 100 per cent), which is in the process of being sold under the CCAA proceedings.
In his 21-page affidavit filed with Ontario’s Superior Court of Justice and in a letter to fellow debenture holders, Campbell said, “since 2016, Discovery Air has engaged in a series of related party transactions that are oppressive and unfairly prejudicial to the legitimate interests of the holders of its unsecured debentures, to the benefit of Clairvest, its majority shareholder and senior secured lender.” Clairvest is also providing the debtor-in-possession financing to Discovery Air during the CCAA proceedings and has submitted stalking horse bids for all the remaining assets held by the company.
Those transactions include credit and loan agreements with Clairvest, Discovery being taken private by Clairvest, by Clairvest exercising preferential options to acquire majority ownership of Top Aces and then last December by bringing in a JP Morgan led syndicate as another investor.
The net effect is that through those transactions, value was given up by Discovery Air, value that would otherwise be available to pay the debt holders. (In its March 21 factum, Discovery Air said, “it does not have the funds to make these payments and Clairvest has said it will not fund them.”)
The question is how much value did Discovery Air give up?
The calculation starts from the $195.3 million value implied when JP Morgan made a $50 million investment to acquire a 25.6 per cent stake in Top Aces. After adjusting for the $25 million of treasury shares issued, and the $41.2 million debt for treasury shares swap with Clairvest, the enterprise value when Discovery Air had full ownership of Top Aces before last December’s transactions is reduced to $129.1 million. With Discovery Air now only holding 9.7 per cent of Top Aces, it gave up a 90.3 per cent stake (valued at $116.6 million), but did not enjoy the equivalent value in return. Instead it received only $43.4 million in proceeds of disposition ($18.4 million from Clairvest and $25 million from JP Morgan) — a difference of $73.2 million.
When all the calculations are done, the ad hoc creditor’s committee concludes that “by structuring the transaction as Clairvest did, the net result was the inequitable transfer of approximately $64 million of Top Aces value to Clairvest.” Value that is more than sufficient to redeem the $34.5 million of debentures held by the third-party minority investors, along with any accrued and unpaid interest.
What does Clairvest say?
We were advised to look at the CCAA proceedings and it didn’t respond to questions about Campbell’s affidavit.
Financial Post