Briefing: Lessons from JP Lease’s A350 JOL Ch. 11 restructuring

A year on, Ishka examines the legal takeaways from a heavily contested Chapter 11 bankruptcy restructuring used to prevent an attempted auction of leased Airbus A350s by a distressed debt investor at the expense of JOL investors and junior debt holders

 

What happened?

After the start of the COVID pandemic, many lessees became unable to pay the rent due on their leases due to operational liquidity constraints.  For aircraft that were securing debt, such as under JOLCO leasing structures, that often gave rise to potential enforcement actions against aircraft lessors by their lenders. 

That is the situation that arose with respect to two JOL leasing transactions for A350s owned by JP Lease through two Japanese special purpose companies, JPA No. 111 Co. Ltd. and JPA No. 49 Co. Ltd (the title holders of the two A350s leased to Vietnam Airlines, MSNs 067 and 173) (the “JOL SPVs”). 

In late 2021 FitzWalter Capital (FitzWalter) – an investment fund then in the process of launching a leasing platform – acquired the senior debt portions on separate JOLs and JOLCOs from a range of banks (see Insight: ‘Why FitzWalter's 'hyper-aggressive' A350s sales process has shaken the JOL/JOLCO market’)

Specifically, FitzWalter became the senior lender on two separate JP Lease-arranged JOL A350s leased to Vietnam Airlines after acquiring a majority of the secured debt of the two JP Lease managed JOL SPVs from French Bank Crédit Agricole CIB (CACIB) and succeeding the bank as security agent. Sources last year confided to Ishka that Vietnam Airlines was in default of the non-recourse debt since January 2021.

According to a subsequent lawsuit by JP Lease in February 2022, the investment fund was looking to acquire aircraft at discount via a sales process, potentially at the expense of junior noteholders and Japanese equity holders via a “loan-to-own” strategy.

JP Lease alleged that FitzWalter then attempted a “fast-track” seven-day foreclosure sales process in order to gain control of the assets at a discounted price, and did so without offering any notice to JP Lease or the other debtors (see earlier Insight: ‘Why FitzWalter’s ‘hyper-aggressive’ A350s sales process has shaken the JOL/JOLCO market’). Also, as part of its enforcement actions, FitzWalter, the majority senior lender also caused itself to become the replacement security trustee and facility agent in the JOL transactions.

When JP Lease discovered the pending enforcement sales of the JOL SPV’s assets, it reacted by filing for U.S. Chapter 11 bankruptcy protection for the JOL SPVs, in an effort to stall the impending sale, and allow for an alternative disposal process which would repay all of the lenders.

Within a week of filing for U.S. Chapter 11 protection, the JOL SPVs had arranged and executed binding term sheets contemplating a stalking horse auction process with affiliates of investment fund SVP Global for the A350s (for both the aircraft and leasehold assets) which could satisfy “all creditors’ allowed claims in full”, including FitzWalter who had commenced the enforcement actions.

Judge Jones from the United States Bankruptcy Court for the Southern District of New York determined that even though the JOL SPVS are foreign entities involving non-U.S. transactions because the JOL SPVs had some U.S. assets (the legal retainers paid to the JOL SPVs’ bankruptcy counsel), the Chapter 11 cases of the JOL SPVs in the United States were appropriate.

The Bankruptcy Court then ruled that those SPV debtors could conduct stalking horse auctions for their assets.  In making these rulings, Judge Jones overruled the objections raised by FitzWalter, paving the way for a further ruling, over more objections from FitzWalter, that approved the sale of the assets to the SVP Global  

FitzWalter also commenced litigation against JP Lease (and related entities) in several other jurisdictions. In the end, Ishka understands that all parties settled, allowing for the sale of the JOL SPVs’ assets to the SVP Global purchasers in June (who had increased their bid in the associated auction process) and for the confirmation of a Chapter 11 plan of reorganisation for the JOL SPVs, which resulted in all creditors being paid in full and for the surplus to be paid to JP Lease.

Why did JP Lease file for Chapter 11 for its JOL SPVs?
 

JP Lease was responding to an accelerated enforcement sale process by its majority senior lender (FitzWalter) to take ownership of the A350s and related leasehold assets. Facing an impending enforcement sales of their assets, JP Lease had four broad options in how to respond to the threatened actions.

1. The first was to do nothing. 

2. The second was to seek either a temporary restraining order or an injunction either in England or in New York to stop or delay the sale.

3. The third option was to let the takeover happen and after the enforcement sales were completed, to sue for damages on the basis that the sale was improperly conducted in violation of applicable law (including the advance notice requirements of the Cape Town Treaty and/or New York law). 

4. The fourth option was to have the special purpose entities file for U.S. Chapter 11 reorganization protections and then effect a restructuring and/or sale within such proceeding. 

The fourth option was the one JP Lease’s JOL SPVs ultimately chose. Speaking to Ishka, Vedder Price shareholder, Cameron Gee, states JP Lease chose this option because it provided the highest likelihood of success and asset protections.

“Doing nothing would both cause the complete destruction of any equity value and, in fact, would have caused all other creditors, other than the majority senior lender, to receive either partial or no payment.  The option of seeking a temporary restraining order or injunction in either New York or in England faced material risks of being denied due to choice of law issues (most of the documents were governed by English law) and because the damages could be characterized as not being appropriate for injunctive relief.”

“A Chapter 11 restructuring, in contrast, would impose an immediate, automatic stay of all enforcement actions and potentially allow the JOL SPVs an opportunity to conduct a process – albeit a truncated one – to sell their assets in the market for an amount that would be sufficient to repay all creditors in full and allow some return to equity,” adds Gee.

Arranging a “stalking horse” bidder upon very short notice was key to the success of the U.S. Chapter 11 cases, as that demonstrated to the Bankruptcy Court that all parties’ interests could be fully protected by allowing the bankruptcy stalking-horse sales processes to proceed. 

A “stalking horse” bidder is a third-party bidder in a sale who pre-commits to purchase the assets being offered for sale for a specified price, which becomes a baseline for higher and better bids in the subsequent auction sale overseen by the U.S. Bankruptcy Court.

 In the JOL SPV cases, the SVP Global purchasers made the stalking horse bid in an amount that paid (i) the secured debt in full, including costs, expenses and indemnity amounts, (ii) $2.5 million per aircraft plus certain claims recoveries to equity. 

 This demonstrated to the United States Bankruptcy Court that JP Lease’s assertion that there was equity value and that the auction sale process protected the interests of all creditors and interest holders – as opposed to the enforcement sale processes initiated by the majority secured lender who was only seeking to enhance its own interests.

The stalking horse bid was therefore key to helping JP Lease and the JOL SPVs shield themselves from their majority senior lender’s various enforcements actions and its various bankruptcy objections because such binding bid demonstrated that the Chapter 11 process could return value for all parties with an interest in the cases – including all senior secured lenders, and not just the majority lender, the mezzanine lenders, all of whom were fully repaid from the sales proceeds, and JP Lease’s equity investors, who received some return too.

 

The Ishka View

Historically, distressed debt investors have not been particularly active in aviation finance. However, the pandemic resulted in billions of dollars in amended debt facilities, formal and informal restructurings and non-performing loans resulting in increased activity by specialist funds.

Several notable court cases, including the Chapter 11 process involving JP Lease’s JOL SPVs, have helped investors become more aware of the risks associated when senior debt holders, including purchasers of such debt, attempt to foreclose on aircraft assets without providing any notice to the equity holders or borrowers.

The immediate takeaway from the JP Lease’s JOL SPV matters is that certain US bankruptcy courts, such as the Southern District of New York, can be utilized as a mechanism to ensure that all involved parties’ interests are fairly treated, protected and repaid.  The only requirement to initiate such protective Chapter 11 cases is that the borrowers must have at least some assets located in the United States prior to the filing (which in the JOL SPV cases, was satisfied by the legal retainer paid to bankruptcy counsel a couple of days before the Chapter 11 cases commenced). 

Perhaps the more significant takeaway is the recognition that there are widely differing protections and rules around the foreclosure and enforcement notice periods and processes required under different contracts and different sets of governing law. 

As an example, take the difference in approach for debt holders with US commercial law mortgages vs English Law mortgages. Unless advance notice is required under the English law contract, under an English law mortgage a senior debt holder is likely able to secretly foreclose, and have such an enforcement sale upheld by a UK court.

 In contrast, any foreclosure sale governed by the Uniform Commercial Code from a jurisdiction within the United States requires at least ten business days advance notice to the borrower. 

Similarly, if the aircraft is leased to, or registered, in a jurisdiction which is a signatory to the Cape Town Convention, then enforcement sales of either the aircraft or the associated leasehold assets require at least 10 working days’ notice to the borrower.  Furthermore, under transactions governed by the Cape Town Treaty, the Uniform Commercial Code, or certain other relevant laws/treaties, at least a month’s notice is required for public foreclosure sales.

The recent burst of activity from debt investors during the pandemic means many of these protections are now being tested in several ongoing court cases – the results of which may have a profound impact upon investing structures and enforcement norms.

In the meantime, aircraft lenders, lessor and investors should make sure future aircraft loans and leases contain more detailed requirements for enforcement notice periods and enforcement procedures. The risk if they don’t is that they may become the subject of secret/no-notice enforcement actions in which aircraft and associated leasehold asset ownership is transferred before any notice is given to the aircraft owners, lessors and lessees.

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