Note 9 - Financing Arrangements

9 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Debt Disclosure [Text Block]

9. Financing Arrangements

On

April 1, 2015,

the Company replaced its existing

$7.0

million credit line with a senior secured revolving credit facility of

$20.0

million (the “Revolving Credit Facility”). The Revolving Credit Facility includes a

$500,000

sublimit for issuances of letters of credit. Under the Revolving Credit Facility, each of the Company and its wholly-owned operating subsidiaries

may

make borrowings. Borrowings under the Revolving Credit Facility bear interest (payable monthly) at an annual rate of

one

-month LIBOR plus a margin, which margin is based on a consolidated leverage ratio. At

December 31, 2016,

the annual interest rate on borrowings under the Revolving Credit Facility was LIBOR plus

1.50%.

In addition, a commitment fee accrues with respect to the unused amount of the Revolving Credit Facility at an annual rate of

0.15%.

Amounts applied to repay borrowings under the Revolving Credit Facility

may

be reborrowed, subject to the terms of the facility.

On

July 15, 2016,

the Company and its subsidiaries, Mountain Air Cargo, Inc., Global Ground Support, LLC, CSA Air, Inc., Global Aviation Services, LLC and Air T Global Leasing, LLC entered into a First Amendment dated as of

July 15, 2016, (

the “First Amendment”) with Branch Banking and Trust Company (“BB&T”) to amend the Credit Agreement (as amended, the “Credit Agreement”) governing the Revolving Credit Facility. The First Amendment modified the Credit Agreement to

not

require that Contrail Aviation Support, LLC and Delphax be joined as borrowers under the Credit Agreement, to permit the limited guaranty of certain indebtedness of Contrail Aviation Support, LLC, to revise certain covenants to address the treatment of Contrail Aviation Support, LLC and Delphax, and to effect conforming and other changes to defined terms. On

August 9, 2016,

the Company and such subsidiaries entered into a Second Amendment dated as of

August 9, 2016, (

the “Second Amendment”) with BB&T to further amend the Credit Agreement. The Second Amendment modified the Credit Agreement to increase the maximum amount available for borrowing under the Revolving Credit Facility from

$20.0

million to

$25.0

million, to extend the maturity of the Revolving Credit Facility from

April 1, 2017

to

April 1, 2018

and to adjust certain financial covenants.

Borrowings under the Revolving Credit Facility, together with hedging obligations, if any, owing to the lender under the Revolving Credit Facility or any affiliate of such lender, are secured by a

first

-priority security interest in substantially all assets of the Company and the other borrowers (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, and proceeds of the foregoing), but excluding interests in real property. As discussed in Note

10,

assets of Delphax can only be used to satisfy the obligations of Delphax. Furthermore, Delphax

’s creditors do

not

have recourse to the assets of Air T, Inc. or its subsidiaries.

The Credit Agreement contains affirmative and negative covenants, including covenants that restrict the ability of the Company and the other borrowers to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of their business, enter into certain operating leases, and make certain capital expenditures. The Credit Agreement also contains financial covenants, including a minimum consolidated tangible net worth of

18.0

million plus, on a cumulative basis and commencing with the fiscal year ending

March 31, 2017,

50%

of consolidated net income for the fiscal year then ended, a minimum consolidated fixed charge coverage ratio of

1.35

to

1.0,

a maximum consolidated leverage ratio of

3.5

to

1.0,

a minimum consolidated asset coverage ratio of

1.25

to

1.0

for the quarter ended

June 30, 2016

and the quarter ending

September 30, 2016,

1.50

to

1.0

for the quarters ending

December 31, 2016

and

March 31, 2017,

and

1.75

to

1.0

thereafter, and a covenant limiting the aggregate amount of assets the Company and its subsidiaries lease, or hold for leasing, to others to

no

more than

$5,000,000

at any time. The Company was

not

in compliance with the maximum consolidated leverage ratio covenant as of the

December 31, 2016

and

September 30, 2016

measurement dates. The lender has waived compliance with this covenant as of both of these measurement dates. The agreement governing the Credit Agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, certain changes of control of the Company, termination of, or modification to materially reduce the scope of the services required to be provided under, certain agreements with FedEx Corporation, and the occurrence of a material adverse effect upon the Company and the other borrowers as a whole.

As of

December 31, 2016,

the Company had outstanding borrowings under the Revolving Credit Facility of approximately

$18.3

million. This balance is classified within long-term liabilities on the accompanying

December 31, 2016

condensed consolidated balance sheet.

No

borrowings under the Revolving Credit Facility were outstanding at

March 31, 2016.

On

October 31, 2016,

the Company and its subsidiaries, Mountain Air Cargo, Inc., Global Ground Support, LLC, CSA Air, Inc., Global Aviation Services, LLC, Air T Global Leasing, LLC, Global Aviation Partners LLC and Jet Yard, LLC entered into a Loan Agreement dated as of

October 31, 2016, (

the “Construction Loan Agreement”) with

 the lender to borrow up to

$1,480,000

to finance the acquisition and development of the Company’s new corporate headquarters facility to be located in Denver, North Carolina. Under the Construction Loan Agreement, the Company

may

make monthly drawings to fund construction costs until

October 2017.

Borrowings under the Construction Loan Agreement bear interest at the same rate charged under the Revolving Credit Facility. Monthly interest payments began in

November 2016.

Monthly principal payments (based on a

25

-year amortization schedule) are to commence in

November 2017,

with the final payment of the remaining principal balance due in

October 2026.

Borrowings under the Construction Loan Agreement are secured by a mortgage on the new headquarters facility and a collateral assignment of the Company’s rights in life insurance policies with respect to certain former executives, as well as the same collateral securing borrowings under the Revolving Credit Facility. At

December 31, 2016,

outstanding borrowings under the Construction Loan were

$77,000.

As of

December 31, 2016,

Delphax, through its Canadian subsidiary, Delphax Canada, maintained a debt facility pursuant to the Senior Credit Agreement consisting of a

$7.0

million revolving senior secured credit facility, subject to a borrowing base of North American accounts receivable and inventory. Because the Senior Credit Agreement prohibits the payment of cash dividends, at

December 31, 2016,

the facility has

not

been a source of liquidity to Air T, Inc. or any of its subsidiaries. Neither Air T nor any of its subsidiaries is a guarantor of Delphax

’s obligations under the Senior Credit Agreement. The facility is secured by substantially all of Delphax’s North American assets, expires in

November 2018,

and is subject to certain financial covenants. The facility provided for interest based upon the prime rate plus a margin and an additional margin applicable during the pendency of a default (a total interest rate of

10.5%,

including the default margin, as of

December 31, 2016).

As of

December 31, 2016,

Delphax had aggregate borrowings of approximately

$1.2

million (approximately

$1.8

million at

March 31, 2016)

outstanding under the Senior Credit Agreement. As was the case at

March 31, 2016,

Delphax has advised that at

December 31, 2016

it was

not

in compliance with financial covenants under the Senior Credit Agreement. Due to Delphax

’s noncompliance with financial covenants, at

December 31, 2016

the Senior Lender had the contractual right to cease permitting borrowings under the Senior Credit Agreement and to declare all amounts outstanding due and payable immediately. On

September 1, 2016,

the Senior Lender gave Delphax notice of such default, applied the default interest margin, and communicated that it would be reducing the eligible inventory advance rate under the Senior Credit Agreement by

0.5%

per week for each week commencing

September 9, 2016.

Delphax has been permitted to continue to make borrowings under the Senior Credit Agreement notwithstanding the defaults entitling the lender to terminate such access and demand immediate repayment of the full outstanding balance. As described in greater detail in Note

16,

on

January 6, 2017

the Company acquired the rights and obligations of the Senior Lender under the Senior Credit Agreement, which was amended as of that date. 

In connection with and upon consummation of the Contrail acquisition, Contrail Aviation entered into a Credit Agreement (the “Contrail Credit Agreement”) with BMO Harris Bank N.A. The Contrail Credit Agreement provides for revolving credit borrowings by Contrail Aviation in an amount up to the lesser of

$12,000,000

or a borrowing base. The borrowing base is computed monthly and is equal to the sum of

75%

of the value of eligible inventory (up to a maximum of

$9,000,000

) and

80%

of outstanding eligible accounts receivable. The borrowing base at

December 31, 2016

was

$2.2

million. Borrowings under the Contrail Credit Agreement bear interest at a rate equal to

one

-month LIBOR plus

2.80%,

and mature in

January 2018.

The obligations of Contrail Aviation under the Contrail Credit Agreement are required to be guaranteed by each of its subsidiaries (if any), and are (and the guaranty obligations of any such subsidiary guarantors are required to be) secured by a

first

-priority security interest in substantially all of the assets of Contrail Aviation and any such subsidiary guarantors, as applicable (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, real property, and proceeds of the foregoing). The obligations of Contrail Aviation under the Contrail Credit Agreement are also guaranteed by the Company, with such guaranty limited in amount to a maximum of

$1,600,000,

plus interest on such amount at the rate of interest in effect under the Contrail Credit Agreement, plus costs of collection (the “BMO Limited Guaranty”).

The Contrail Credit Agreement contains affirmative and negative covenants, including covenants that restrict the ability of Contrail Aviation and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains financial covenants applicable to Contrail Aviation and its subsidiaries, including a minimum debt service coverage ratio of

1.75

to

1.0,

a maximum ratio of total liabilities to tangible net worth of

2.5

to

1.0,

and a

$10,000

limitation on annual operating lease payments.

The Contrail Credit Agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, actual or asserted invalidity of loan documentation, the failure of Mr. Kuhn to continue to serve as chief executive officer of Contrail Aviation, and the Company

’s failure to own, legally and beneficially, at least

51%

of the voting equity in Contrail Aviation.

At

December 31, 2016,

Contrail Aviation had

no

outstanding borrowings under the Contrail Credit Agreement. Contrail was in compliance with its bank covenants at

December 31, 2016.

The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements.