shl Doc 1556 Filed 03/01/17 Entered 03/01/17 19:53:48 Main Document Pg 1 of 10. In re : Chapter 11 Case No.

Transcription

1 Pg 1 of 10 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re : Chapter 11 Case No. REPUBLIC AIRWAYS HOLDINGS INC., et al., : (SHL) x Debtors. 1 : (Jointly Administered) DECLARATION OF JOHN E. LUTH IN SUPPORT OF CONFIRMATION OF DEBTORS SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE I, John E. Luth, hereby declare, pursuant to 28 U.S.C. 1746, as follows: 1. I am the Executive Chairman of Seabury Corporate Advisors LLC and Chairman, President and Chief Executive Officer of Seabury Securities LLC (together with its affiliates, Seabury ). 2. Since July 2015, Seabury has rendered investment banking and financial advisory services to Republic in connection with its efforts to restructure Republic s operational and financial commitments and explore options to retain the enterprise value of the organization. On March 23, 2016, the Court entered an Order approving Seabury s retention as financial advisor and investment banker to Republic nunc pro tunc to the Commencement Date (ECF No. 209). 3. I submit this declaration in support of the confirmation of the Debtors Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated 1. The Debtors in these chapter 11 cases are the following entities: Republic Airways Services, Inc.; Shuttle America Corporation; Republic Airline Inc.; Republic Airways Holdings Inc.; Midwest Air Group, Inc.; Midwest Airlines, Inc.; and Skyway Airlines, Inc. On January 31, 2017, Shuttle America Corporation was merged with and into Republic Airline Inc. The Debtors employer tax identification numbers and addresses are set forth in their respective chapter 11 petitions.

2 Pg 2 of 10 December 19, 2016 (the Plan ). 2 Except as otherwise indicated, the facts in this declaration are based upon my personal knowledge, information and belief, including my review of relevant documents, information provided to me by employees at Republic, or my opinion based upon experience, knowledge, and information concerning the operations of Republic and the airline industry generally. I am authorized to submit this declaration. If called upon to testify, I would testify under penalty of perjury to the facts set forth in this declaration. Professional Background and Experience 4. Seabury has one of the largest restructuring and management consulting practices in the world dedicated to the transportation sector, with its principal focus on the aviation and aerospace industries. Seabury has extensive experience working with financially troubled companies in complex financial restructurings both out of court and during chapter 11 cases. Seabury served as advisors with respect to financial restructurings, new capital raising, aircraft advisory services and/or other advisory assignments, to some of the world s largest and most sophisticated airlines, including Air Canada, America West Airlines, Frontier Airlines, Avianca, Continental Airlines, Northwest Airlines, Pinnacle Airlines, and US Airways Group, among others. 5. I have previously worked on many chapter 11 restructurings, advising both debtors and creditors in various cases and have vast experience working with companies in distressed situations. Selected current and previous advisory assignments in which I have participated include: Continental Airlines, Frontier Airlines, US Airways, Air Canada, and Northwest Airlines. 2. Capitalized terms not otherwise defined herein have the meaning ascribed to them in the Plan. 2

3 Pg 3 of Prior to founding Seabury in 1995, I held the roles of Chief Financial Officer and Chief Information Officer of Continental Airlines. Prior to those roles, I served as Vice President, Syndications within the investment banking division of Manufacturers Hanover. Prior to that role, I worked in the Corporate Finance Division of Exxon Corporation. 7. I hold an A.B. in Economics from the College of the Holy Cross and an M.B.A. in Finance from the Wharton Graduate School of the University of Pennsylvania. I am a FINRA Registered Principal with Series 7, 63, 79, and 24 qualifications, and FSA (UK) licensed. 8. I am familiar with the terms and conditions of the Plan, Modified Disclosure Statement for Debtors Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated December 23, 2016 (the Disclosure Statement ), and other documents related thereto, having participated in the negotiation and development thereof. I am familiar with the Republic s day-to-day operations, books and records, and business and financial affairs, including the financial reporting, treasury, and other functions of the Debtors finance organization. Additionally, I am familiar with the Republic s current and former capital structure. The Debtors Financial Projections 9. The Debtors initiated an extensive process in 2016 to develop the financial projections set forth in Exhibit C to the Disclosure Statement (the Financial Projections ). As set forth in more detail in the Declaration of Joseph P. Allman filed concurrently herewith, I understand that, to develop Financial Projections, Republic s senior management collected and analyzed data provided by the Republic s employees concerning historic operating results and performed extrapolations based upon this data. Additionally, I understand that the Financial Projections take in account various macroeconomic and microeconomic factors including: 3

4 Pg 4 of 10 (i) fleet size, (ii) expected utilization for the contracted aircraft, (iii) contract reimbursement rates and annual adjustments thereto, (iv) the Debtors expected operating performance, (v) salaries, wages and benefits, include labor expenses based on labor contracts, expected fleet operating levels, and projected benefits, and (v) historical and projected maintenance and repair cost. 10. I have reviewed the Financial Projections and believe, subject to the risks described in Section X of the Disclosure Statement that they are reasonable, in part because the process, as I understand it, utilized to develop them was reasonable. Seabury assumed and relied upon the accuracy and completeness of all of the financial and other information available to it from public sources or as provided to Seabury by Republic or their representatives. Based on discussions with management and the work performed by Seabury, I believe that the Financial Projections have been reasonably prepared in good faith on a basis reflecting the Republic s reasonable estimates and judgment as to future operating and financial performance. Seabury did not perform an appraisal of any of the Debtors physical assets. 11. My opinion that Republic s Financial Projections are reasonable is not altered by currently prevailing macro-economic conditions or recent developments in the financial markets. Changes to projections could be warranted if there is a material and sustainable change in one or more of the following: a company s business, the markets in which it operates and macroeconomic conditions. The Debtors have not seen any such changes since the Financial Projections were developed and, consistent with this view, I understand that the Republic s recent performance is generally in line with expectations. Seabury s Valuation of the Debtors 12. Seabury estimated the range of consolidated equity value of the Reorganized Debtors (the Consolidated Equity Value ) for the purposes of (i) evaluating the range of 4

5 Pg 5 of 10 potential recoveries for holders of general unsecured claims and (ii) establishing an estimate of the initial stockholders equity value for fresh-start accounting. The valuation analysis, attached as Exhibit E to the Disclosure Statement (the Valuation Analysis ) also was undertaken for the purpose of evaluating whether the Plan satisfies the best interests test under section 1129(a)(7) of the Bankruptcy Code. 13. I personally oversaw the preparation of the Valuation Analysis. In preparing the Valuation Analysis, Seabury (i) reviewed certain internal financial and operating data of the Debtors, including projections provided by management relating to the Debtors businesses and prospects, (ii) met with certain members of the Debtors senior management to discuss operations, capital structure considerations, and future prospects, (iii) reviewed publicly available financial data and considered the market value of public companies that Seabury deemed generally comparable to the operating businesses of the Debtors, (iv) considered certain economic and industry information relevant to the Debtors operating businesses, and (v) conducted such other studies, analyses, inquiries and investigations as deemed appropriate by Seabury Using the Financial Projections as a basis for analysis, and its knowledge of the Debtors and Reorganized Debtors, Seabury used well-established valuation methodologies to estimate Debtors Consolidated Equity Value, assuming an effective date of February 28, Seabury has concluded that the adjusted enterprise value (the Adjusted Enterprise Value ) of 3. The Valuation Analysis is based on numerous qualifications and contingencies, including but not limited to: (i) the Debtors ability to achieve the Financial Projections, including, without limitation: certain cost reduction / cost containment initiatives, utilization by the Debtors code-share partners of contracted aircraft at forecast levels, and assumptions about future requirements, (ii) the Debtors ability to maintain sufficient capital to implement the business plan on which the Financial Projections are based, (iii) no material adverse change in the airline industry or in the Debtors operations due to further deterioration in the domestic economy, a prolonged recessionary environment or any other factor, (iv) the effect of exogenous events such as terrorist attacks, (v) the Debtors ability to maintain and utilize deferred tax assets, and (vii) other unexpected events not currently foreseeable by the Debtors 5

6 Pg 6 of 10 the consolidated Reorganized Debtors is estimated to range from approximately $2,375 million to $2,440 million. Seabury further concluded that the equity value available to unsecured creditors of the Consolidated Debtors is estimated to range from approximately $413 million to $478 million. 4 The table below describes the calculation of estimated equity value available for distribution to unsecured creditors. In Millions of Dollars 15. In arriving at its estimated enterprise value, Seabury considered two methodologies to value the Debtors enterprise. These two methodologies, which are described below, are routinely employed by Seabury s professionals as well as other investment bankers and financial professionals to value companies, both distressed and healthy. 5 Comparable Company Analysis Post-Effective Date Debtors Low High Enterprise Value 2,375 2,440 Plus: Total Cash Less: Capitalized Operating Leases (7.0x) (74) (74) Less: Secured Debt (2,021) (2,021) Equity Value The comparable company analysis estimates the enterprise value of a company based on a comparison of such company s actual and projected financial statistics with those for similar publicly-traded companies having operating and financial characteristics similar to those of the particular company being analyzed (the Comparable Company Analysis ). Criteria for 4. Certain estimates were made for the impact on equity value of incentive compensation to management. 5. Seabury considered incorporating valuation analyses based upon precedent or comparable recent transactions, another commonly-used methodology which estimates enterprise value by examining the economic terms of public merger and acquisition transactions involving companies similar to the Reorganized Debtors. However, due to the very limited number of transactions in the regional airline subsector, the volatile industry dynamics seen over the course of the last several years, and the idiosyncratic complexities of the few recent precedent transactions, Seabury concluded precedent transaction analysis would not meaningfully improve its estimates of Adjusted Enterprise Value. 6

7 Pg 7 of 10 selecting comparable companies for the Valuation Analysis include, among other relevant characteristics, similar lines of businesses, business risks, growth prospects, maturity of businesses, market presence, size and scale of operations. The analysis establishes benchmarks for valuation by deriving financial multiples and ratios for the comparable companies, standardized using common variables such as revenue or Earnings Before Interest, Taxes, Depreciation, Amortization and Rent ( EBITDAR ). 17. The selection of truly comparable companies is often difficult and subject to interpretation. However, the underlying concept is to develop a premise for relative value, which, when coupled with other approaches, presents a foundation for determining firm value. The selection of appropriate comparable companies is difficult because there is only one public, pure-play competitor of the Debtors in the United States, namely SkyWest, Inc. ( SkyWest ). In performing the Comparable Company Analysis for the Debtors, Seabury focused on SkyWest. as the principal comparator. 18. Seabury deemed EBITDAR multiples as most relevant for deriving a value estimate for the Debtors based on historical trading multiples for both the Debtors and SkyWest. Seabury determined the appropriate multiple range to be 6.25x to 6.75x times the Debtors estimated EBITDAR. This range considers a number of potentially positive and negative factors, including (i) an illiquidity discount for the anticipated relative lack of marketability for new common shares of the Reorganized Debtors and (ii) the Debtors reorganized business and single fleet. Discounted Cash Flow Analysis 19. The Discounted Cash Flow valuation methodology ( DCF Valuation Methodology ) relates the value of an asset or business to the present value of expected future 7

8 Pg 8 of 10 free cash flows to be generated by that asset or business. The DCF Valuation Methodology discounts the expected future free cash flows by a theoretical or observed discount rate (the Applicable Discount Rate ), which rate is determined by estimating the average cost of debt and equity for the subject company based upon financial analyses of similar publicly-traded companies. This approach has two components: (i) the present value of the projected unlevered, after-tax free cash flows for a determined forecast period and (ii) the present value of the terminal value of cash flows (the Terminal Value ). The Terminal Value represents the value of future free cash flows beyond the time horizon of the financial projections. 20. The DCF calculations were performed based on unlevered, after-tax free cash flows for the period beginning April 1, 2017 through December 31, 2021 (the Projection Period ) discounted to March 31, In performing these calculations, Seabury utilized the Financial Projections and made assumptions for (i) the Applicable Discount Rate used to calculate the present value of expected future free cash flows and (ii) the terminal EBITDAR multiple (the Terminal EBITDAR Multiple ), which is used to determine the value of free cash flows in the time period beyond the Projection Period. Seabury used a range of 7.75% to 8.25% per annum for the Applicable Discount Rates reflecting a number of company- and market-specific factors. Seabury used a Terminal EBITDAR Multiple range of 6.25x to 6.75x. The rationale for the range is consistent with that incorporated in the Comparable Company Analysis. Results of Valuation Analysis 22. Seabury weighted the results of the Comparable Company Analysis and the DCF Valuation Analysis equally and estimates the Consolidated Equity Value distributable to 8

9 Pg 9 of 10 creditors to be to be $413 million to $478 million (the Distributable Value Range ). The midpoint of the Distributable Value Range is approximately $445 million. 23. Based upon the estimated Consolidated Equity Value and an estimated $1,000 million of allowed unsecured claims against the Consolidated Debtors, I estimate the recovery under the Plan by holders of allowed unsecured claims against the Consolidated Debtors to be 41 cents to 48 cents per $1 of unsecured claim, with a midpoint of approximately 45 cents, which includes an illiquidity discount associated with the Consolidated Debtors emergence from chapter 11 as a private company. [Remainder of the Page Intentionally Left Blank.] 9

10 Pg 10 of 10 1st March