Notes Payable and Accrued Interest

12 Months Ended

Dec. 31, 2019

Debt Disclosure [Abstract]

Notes Payable and Accrued Interest

At December 31, 2019 and December 31, 2018, the Company’s notes payable and accrued interest consisted of the following:

	December 31, 2019			December 31, 2018
MUFG Credit Facility:
Principal	$	84,084,100		$	122,400,000
Unamortized debt issuance costs		(3,084,200	)		(674,300	)
Accrued interest		376,200			139,300
Special-purpose financing:
Principal:
UK SPE Financing		-			9,211,200
Nord Term Loans		30,914,500			-
Unamortized debt issuance costs		(741,500	)		-
Accrued interest		89,300			16,000
	$	111,638,400		$	131,092,200

(a) MUFG Credit Facility

The unused amount of the MUFG Credit Facility was $915,900 and $47,600,000 as of December 31, 2019 and December 31, 2018, respectively. The weighted average interest rate on the MUFG Credit Facility was 10.23% and 5.92% at December 31, 2019 and December 31, 2018 respectively.

In addition to payment obligations (including principal and interest payments on outstanding borrowings and commitment fees based on the amount of any unused portion of the MUFG Credit Facility), the MUFG Credit Facility agreement contains financial covenants with which the Company must comply, including, but not limited to, positive earnings requirements, minimum net worth standards and certain ratios, such as debt to equity ratios.

As of December 31, 2018, the Company was not in compliance with the interest coverage, debt service coverage, no-net-loss and revenue concentration covenants under the MUFG Credit Facility agreement. The noncompliance resulted primarily from the Company recording aircraft impairment charges and losses on sales of aircraft totaling $3.4 million during 2018. The amendments included in the MUFG Credit Facility agreement in February 2019 discussed below cured the December 31, 2018 noncompliance and revised the compliance requirements through the extended maturity date of the MUFG Credit Facility.

In February 2019, the MUFG Credit Facility, which was to expire on May 31, 2019, was extended to February 19, 2023, and was amended in certain other respects. Also, four aircraft that previously served as collateral under the MUFG Credit Facility and two aircraft that previously served as collateral under special-purpose subsidiary financings were refinanced in February 2019 using non-recourse term loans (the Nord Term Loans) with an aggregate principal of $44.3 million.

During the third quarter of 2019 as a result of significant past due payments from the customer, the Company terminated the leases for, and repossessed, four of its aircraft held for lease The customer, a European regional airline and one of the Company’s largest customers based on operating lease revenue, subsequently ceased operations and declared bankruptcy. The Company applied the security deposits and a portion of collected maintenance reserves it held against past due rent due from the customer. The remaining balance of collected maintenance reserves equal to $17.0 million was recognized as maintenance reserves revenue. The Company also recorded impairment losses totaling $22.3 million for the four aircraft, one of which was sold during the fourth quarter, based on appraised values for three of the aircraft and expected sales proceeds for the fourth. As a result of the lease terminations, the three aircraft were newly appraised based on the maintenance-adjusted condition of the aircraft, rather than the basis previously used for their appraisal, which considered future cash flows under the leases.

During the third quarter of 2019, the Company also recorded impairment losses of $15,000 on another of its aircraft held for sale and $1.0 million related to airframe parts that are held for sale, both of which were based on estimated sales proceeds. As a result of payment delinquencies by two other customers that lease three of the Company’s aircraft subject to finance leases, the Company also recorded a bad debt allowance of $2.9 million during 2019. As a result of the aforementioned impairment losses and bad debt allowance, as of September 30, 2019, the Company was in default of its borrowing base covenant under the MUFG Credit Facility (the “Borrowing Base Default”), due to the outstanding balance under the MUFG Credit Facility exceeding the required minimum collateral value coverage set forth in the MUFG Credit Facility (a “Borrowing Base Deficit”) by approximately $9.4 million. Subsequent updated appraisal values for assets included in the borrowing base of the MUFG Credit Facility resulted in an increase in the Borrowing Base Deficit to $29.8 million at December 31, 2019. At that time, the Company reclassified two aircraft that were repossessed during the third quarter from held for lease to held for sale. The Company also reduced its bad debt allowance during the fourth quarter based on payments received in January.

The Company was not in compliance with various covenants contained in the MUFG Credit Facility agreement, including those related to interest coverage and debt service coverage ratios and a no-net-loss requirement under the MUFG Credit Facility, at September 30, 2019 and at December 31, 2019.

On October 15, 2019, the agent bank for the Credit Facility Lenders delivered a Reservation of Rights Letter to the Company which contained notice of the Borrowing Base Default and a demand for repayment of the amount of the Borrowing Base Deficit by January 13, 2020, and also contained formal notices of default under the MUFG Credit Facility relating to the alleged material adverse effects on the Company’s business as a result of the early termination of leases for three aircraft and potential financial covenant noncompliance based on the Company’s financial projections provided to the Credit Facility Lenders (the Borrowing Base Default and such other defaults referred to as the “Specified Defaults”). The Reservation of Rights Letter also informed the Company that further advances under the MUFG Credit Facility agreement would no longer be permitted due to the existence of such defaults.

In October, November and December 2019, the Company, agent bank and the Credit Facility Lenders entered into a Forbearance Agreement and amendments extending the Forbearance Agreement with respect to the Specified Defaults under the MUFG Credit Facility. The Forbearance Agreement (i) provided that the Credit Facility Lenders temporarily forbear from exercising default remedies under the MUFG Credit Facility agreement for the Specified Defaults, (ii) reduced the maximum availability under the MUFG Credit Facility to $85 million and (iii) extended the cure period for the Borrowing Base Deficit from January 13, 2020 to February 12, 2020. The Forbearance Agreement also allowed the Company to continue to use LIBOR as its benchmark interest rate, but increased the margin on the Company’s LIBOR-based loans under the MUFG Credit Facility from a maximum of 3.75% to 6.00% and set the margin on the Company’s prime rate-based loans at 2.75%, as well as added a provision for paid-in-kind interest (“PIK Interest) of 2.5% to be added to the outstanding balance of the MUFG Credit Facility debt in lieu of a cash payment. The Company paid cash fees of $406,250 in connection with the Forbearance Agreement and amendments, as well as a fee of $832,100, which was added to the outstanding balance of the MUFG Credit Facility debt in lieu of a cash payment. The Forbearance Agreement was in effect until December 30, 2019, after which the Company and the Credit Facility Lenders agreed not to further amend the Forbearance Agreement. On February 12, 2020, the agent bank for the Credit Facility Lenders delivered a Reservation of Rights Letter to the Company which contained notice of the failure to cure the Borrowing Base Default by February 12, 2020.

The Company is currently in negotiations with the Credit Facility Lenders to convert the MUFG Credit Facility into the MUFG Term Loan. Therefore, the MUFG Credit Facility is expected to no longer be a source of acquisition financing. The Company has engaged an investment banking advisor to help (i) formulate a Recapitalization Plan and analyze various strategic financial alternatives to address the Company’s capital structure, strategic and financing needs, as well as corporate level transactions aimed at achieving maximum value for the Company’s stockholders; and (ii) locate and negotiate with potential lenders, investors or transaction partners who would play a role in the Company’s Recapitalization Plan. The Company’s ability to develop, obtain approval for and achieve its Recapitalization Plan is subject to a variety of factors. If the Company is not able to satisfy the requirements under the Recapitalization Plan, maintain compliance with its MUFG Indebtedness or raise sufficient capital to repay all amounts owed under the MUFG Indebtedness, the Company’s financial condition and liquidity would be materially adversely affected and its ability to continue operations could be materially jeopardized.

(b) Nord Term Loans 

On February 8, 2019, the Company, through four wholly-owned subsidiary limited liability companies (“LLC Borrowers”), entered into a term loan agreement with the U.S. branch of a German bank (“Term Loan Lender”) that provides for six separate term loans with an aggregate principal amount of $44.3 million. Each of the Nord Term Loans is secured by a first priority security interest in a specific aircraft (“Term Loan Collateral Aircraft”) owned by an LLC Borrower, the lease for such aircraft, and a pledge by the Company of its membership interest in each of the LLC Borrowers, pursuant to a Security Agreement (the “Security Agreement”) among the LLC Borrowers and a security trustee, and certain pledge agreements. Two of the Term Loan Collateral Aircraft that are owned by the Company’s two UK special-purpose entities were previously financed using special-purpose financing. The interest rates payable under the Nord Term Loans vary by aircraft, and are based on a fixed margin above either 30-day or 3-month LIBOR. The proceeds of the Nord Term Loans were used to pay down the MUFG Credit Facility and pay off the UK LLC SPE Financing. The maturity of each Nord Term Loan varies by aircraft, with the first Nord Term Loan maturing in October 2020 and the last Nord Term Loan maturing in May 2025. The debt under the Term Loans is expected to be fully amortized by rental payments received by the LLC Borrowers from the lessees of the Term Loan Collateral Aircraft during the terms of their respective leases and remarketing proceeds.

The Nord Term Loans include covenants that impose various restrictions and obligations on the LLC Borrowers, including covenants that require the LLC Borrowers to obtain the Term Loan Lender’s consent before they can take certain specified actions, and certain events of default. If an event of default occurs, subject to certain cure periods for certain events of default, the Term Loan Lender would have the right to terminate its obligations under the Term Loans, declare all or any portion of the amounts then outstanding under the Term Loans to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under applicable law, including foreclosing on the assets that serve as security for the Nord Term Loans. The Company was in compliance with all covenants under the Nord Term Loans at December 31, 2019.

One of the aircraft that was subject to Nord Term Loan financing was sold during the fourth quarter of 2019 and the related interest rate swap was terminated.

As discussed in Note 15, in March 2020, one of the Company’s customers, which leases two regional jet aircraft subject to Nord Term Loan financing, did not make its quarterly rent payment which, in turn, resulted in a loan payment default by the Company’s special-purpose subsidiary that owns the aircraft. The Company is currently discussing remedies with both the customer and Nord.