Southern Air files Chapter 11 plan of reorganization, settlements

By Jim Witters

Wilmington, Del., Oct. 18 - Southern Air Holdings, Inc. filed its Chapter 11 plan of reorganization in connection with its pre-packaged bankruptcy filing on Oct. 18 with the U.S. Bankruptcy Court for the District of Delaware.

The filing came after Southern Air reached an agreement with its lenders to restructure its balance sheet and significantly reduce its more than $285 million of legacy debt by more than two-thirds.

Settlement agreements

Embedded in the Chapter 11 plan of reorganization are settlement agreements with claim and equity interest holders, including agreements among the debtors, consenting lenders, the Oak Hill entities and Southern Management.

The Oak Hill entities are Oak Hill Cargo 360, LLC, Oak Hill Capital Partners II, LP, OHAA and OHAA Designee.

Southern management includes Daniel J. McHugh, president and chief executive officer; David Soaper, chief operating officer; Thomas R. Pilholski, chief financial officer; Jon E. Olin, general counsel; and Oliver Gritz, managing director Europe.

The agreements include:

• On the plan effective date, the Oak Hill leases will be amended and payments owed by the debtors or reorganized debtors may not be set off against any payment owing from the Oak Hill entities or under the Oak Hill stipulation 1110 or the OHAA funding agreement;

• The Oak Hill stipulation 1110 will be terminated on the plan effective date and the Oak Hill entities will make the following payments: Monthly payments of $833,333 to reorganized Southern Air to a total of $10 million; four monthly installments of $166,666 ($2 million a year) to an aggregate of $10 million;

• If the Oak Hill entities' obligations to Boeing credit remain outstanding on the plan effective date, Oak Hill will assist the reorganized debtors in utilizing the Boeing credit to discharge Southern Air's obligations to Boeing;

• OHAA will receive 17.5% of the common stock of the reorganized Southern Air parent company and warrants with a term of 10 years exercisable in two tranches. The tranche one warrants vest on a straight line basis upon the equity value of the reorganized Southern Air parent reaching $80 million. The tranche two warrants are exercisable at any time by payment in cash of $9.4 million, or on a cashless basis when the equity value of the reorganized parent reaches $125 million;

• The prepetition lenders will share in exit term loans of $17.5 million and 82.5% of the common stock of the reorganized Southern Air parent;

• The prepetition lenders also agreed to forgo a portion of their recoveries to facilitate payments to holders of allowed general unsecured claims and holders of allowed convenience claims, if those creditors vote to approve the plan;

• Southern management will have the option to purchase up to 5% of the common stock of the reorganized parent company otherwise allocated to holders of allowed prepetition lender claims;

Treatment of creditors

Under the proposed plan:

• Holders of allowed administrative claims and allowed priority non-tax claims will be paid in full in cash;

• Holders of allowed priority tax claims will be paid in full in cash on the plan effective date, be paid in quarterly installments over a five-year period or under terms agreed to by the claimant, the debtors and the requisite lenders;

• Holders of other allowed secured claims will receive payment in full in cash, the proceeds of the sale of the collateral assets, the property securing the claim or other distributions under the bankruptcy code or agreed upon by the parties;

• Holders of allowed general unsecured claims will a share of creditor cash if each of the classes four through 21 vote in favor of the plan. If any of the classes four through 21 vote to reject the plan, general unsecured claims receive no distribution;

• Holders of allowed claims of $2,000 or more may elect to be treated as convenience claims. Holders of convenience claims will receive cash equal to 25% of the allowed claim;

• Holders of allowed general liability insured litigation claims will be allowed to proceed with the liquidation of the claim;

• Holders of allowed subordinated claims will receive no distribution;

• Preferred equity interests and holdings equity interests will be extinguished on the plan effective date;

• Cargo 360 equity interests, Southern Air equity interests and Air Mobility equity interests will be deemed in full force and effect;

• 21110 LLC, 21111 LLC, 21221 LLC, 21550 LLC, 21576 LLC, 21590 LLC, 21787 LLC, 21832 LLC, 23138 LLC, 46914 LLC, 24067 LLC, CF6-50 LLC Aircraft 21380 LLC and Aircraft 21255 LLC, equity interests will be extinguished and the assets of 21110 will be distributed to reorganized Southern Air; and

• Intercompany claims will be reinstated to the extent determined appropriate by the debtors or be adjusted, continued or capitalized.

Southern Air, a Norwalk, Conn.-based cargo carrier, filed for bankruptcy on Sept. 28. Its Chapter 11 case number is 12-12690.

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