I apologise for the length of this post, but I've been otherwise occupied and haven't got around to reading this until today. I will make no judgement on the content, just let you read it and interpret it yourselves. I think it paints the picture very clearly.
The following information is sourced directly from the CHC Group, Ltd., Form 10-Q filed with the United States Securities and Exchange Commission dated 4 March 2016.
CHC Group Ltd. - FORM 10-Q - March 3, 2016
ITEM 1A. RISK FACTORS
Our business faces many risks. Any of the risks discussed in this Quarterly Report or our other SEC filings, could have a material impact on our business, financial position or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. For a detailed discussion of the risk factors that should be understood by any investor contemplating investment in our ordinary shares, please refer to the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2015, as updated by each of our Quarterly Reports on Form 10-Q for the quarterly periods ended July 31, 2015 and October 31, 2015. There have been no material changes in the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended April 30, 2015 other than those set forth in each of the aforementioned Quarterly Reports on Form 10-Q or as set forth below.
The oil and gas industries on which we are largely dependent are suffering through a severe downturn, resulting in significant negative impact on demand for our services, and no assurance can be given that the downturn will not continue to be prolonged.
The oil and gas industry, on which we are largely dependent, continues to suffer through a severe downturn, resulting in significant negative impact on demand for our services, and the outlook remains depressed, with continued pricing and volume pressures forecasted. The downturn is proving to be more severe and is lasting longer than previous cycles, and there is no clear line of sight to a recovery. With a continued oversupply in global oil markets and soft demand growth, oil prices have continued to deteriorate in calendar 2016, which has further impacted market sentiment towards our industry. The effects of this protracted downturn are being seen throughout the oil and gas supply chain. As we navigate through the downturn, no assurances can be given that the downturn will not continue to be prolonged or of a recovery in the near term, which puts significant pressure on our liquidity and cash flows.
Our substantial level of indebtedness, operating lease commitments, purchase and other commitments could materially adversely affect our ability to fulfill our obligations under our debt agreements, our ability to react to changes in our business and our ability to incur additional debt to fund future needs.
We have a substantial amount of indebtedness, operating lease commitments, purchase and other commitments. As of January 31, 2016, we had $1.4 billion of long-term indebtedness, an additional $1.4 billion of operating lease commitments, as well as $236.8 million in purchase commitments and $244.6 million of additional flexible orders for the purchase of aircraft. The terms of certain of our debt instruments and helicopter lease agreements impose operating and financial limitations on us.
As of January 31, 2016, included within our long-term indebtedness was $1.0 billion of senior secured notes due 2020, $94.7 million of senior unsecured notes due 2021, $95.0 million under our senior secured credit revolving credit facility and $110.8 million under our ABL Facility. As of January 31, 2016, we had cash and cash equivalents of approximately $108.1 million and approximately $233.4 million of available borrowing capacity under our senior secured revolving credit facility and $34.2 million of available capacity under our ABL Facility. Since the end of the period, in light of challenging market conditions, we made the decision to strengthen our cash position by drawing the remaining $233.4 million of available borrowing capacity under our senior secured revolver and funding requests for approximately $19.0 million of the remaining capacity on the ABL Facility were submitted for three additional aircraft. In addition, since January 31, 2016, approximately $21.4 million of our available overdraft facilities were cancelled.
Our substantial debt has had important consequences in the past and may continue to do so in the future. These consequences include:
•making it more difficult for us to satisfy our obligations;
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other purposes;
•increasing our vulnerability to adverse economic and industry conditions;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
•placing us at a competitive disadvantage compared to our competitors that have relatively less debt; and
•limiting our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other purposes.
Unless we can benefit from improved operating conditions or are able to reach a satisfactory alternative with our lessors, obtain waivers or otherwise optimize our debt obligations and other financial obligations, our cash may not be sufficient to meet commitments as they come due for the next twelve months and we expect that noncompliance may occur within that period. If so, we would not expect to be able to remain in compliance with financial covenants in aircraft leases with remaining commitments of approximately $258 million during the first quarter of fiscal 2017.
We are currently evaluating strategic alternatives to address our liquidity issues and high debt levels, and while we may seek consensual adjustments to covenant levels with our lessors, there can be no assurance that we will be successful. In the event of a potential cross-default and cross-acceleration, we would also expect to seek consensual adjustments with our note indenture trustees, lenders and lessors or seek a waiver of potential defaults or amendments to the relevant agreements. If these efforts are unsuccessful, our cash may not be sufficient to meet commitments as they come due for the next twelve months. We cannot assure you that any of our strategies will yield sufficient funds to meet our working capital or other liquidity needs, including for payments of interest and principal on our debt in the future, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations. In such event, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements or seek the authority provided by bankruptcy courts to renegotiate our indebtedness and commitments, including without limitation the senior secured notes and the senior unsecured notes, credit facilities, leases and purchase commitments. In such cases, the holders of our debt and equity securities may lose some or all of their investment in any such proceedings.
We may not be able to generate sufficient cash flows to finance our liquidity needs.
Our ability to repay our indebtedness, to fund our operations and make necessary capital expenditures depends on our ability to generate cash. Consolidated revenue decreased by $82.0 million to $333.1 million compared to the prior year quarter, a decrease of 19.8%. The decline resulted from the global crisis in the oil and gas industry and fluctuations in foreign currency exchange rates, among others. A number of these factors are beyond our control and are described elsewhere in this section. Despite our cost reduction efforts, we used $37.5 million in cash for our operating activities, and our net position in cash and cash equivalents decreased from $217.1 million at January 31, 2015 to $108.1 million at January 31, 2016.[B] As a result, any unexpected cash expenditures would place us at significant risk of a liquidity shortfall. Unless we can benefit from improved operating conditions or are able to negotiate a satisfactory alternative with our lessors, obtain waivers or otherwise optimize our debt obligations and other financial obligations, our cash may not be sufficient to meet commitments as they come due for the next twelve months and we expect that noncompliance may occur within that period.
We may not be successful in complying with financial covenants contained in our helicopter lease agreements or service all of our indebtedness, and our efforts to optimize our capital structure and negotiate with creditors and lessors in order to satisfy our obligations under our indebtedness and leases may not be successful.
As at January 31, 2016, we were in compliance with all helicopter lease covenants. Unless we benefit from an improvement in our operating conditions or are able to negotiate a satisfactory alternative with our lessors, obtain waivers or otherwise optimize our financial commitments, we do not expect to be able to remain in compliance with financial covenants in aircraft leases with remaining commitments of approximately $258 million during the first quarter of fiscal 2017. Generally, in the event of a covenant breach, a lessor has the option to terminate the lease and require the return of the helicopter, with the repayment of any arrears of lease payments plus additional damages which may include the present value of all future lease payments and certain other amounts which could be material to our financial position. The helicopter would then be sold and a percentage of the surplus, if any, returned to us, or leased with future lease payments reducing the aforesaid damages. If and when necessary, we intend to seek consensual adjustments to covenant levels with our lessors, but there can be no assurance that we will be successful. If unsuccessful, our cash may not be sufficient to meet commitments as they come due for the next twelve months.
Defaults on payment obligations in an aggregate amount in excess of $50 million would constitute an event of default under each of our senior secured notes, senior unsecured notes, our senior secured revolving credit facility and our ABL Facility. Upon a declared default, each note indenture trustee and each lender would be able to exercise its rights and remedies under the affected notes, facilities and leases, which could include the right to accelerate payment of amounts outstanding. Many of our other lease and financing agreements include cross-default and cross-acceleration provisions as a result of which a payment default (subject to a certain threshold), an acceleration, or a failure to respect financial covenants under one agreement may result in an event of default or acceleration event under such other agreements. In such an event, each note indenture trustee and the lenders could elect to declare all amounts outstanding under such facilities immediately due and payable. Although we would expect in the event of a potential cross-default and cross-acceleration to negotiate with our note indenture trustees, lenders and lessors to seek a waiver of such default or an amendment to the relevant agreements, we may not be successful. In the event of any acceleration of our debt under our other financing arrangements, we cannot assure you that our assets will be sufficient to repay our obligations in full and in that event we may need to seek the protection of Chapter 11 of the U.S. Bankruptcy Code and/or similar insolvency statutes in non-U.S. jurisdictions.
Because of our current difficulties in generating net cash from our operating activities and our restricted access to external sources of financing as further described below, our ability to meet our short-term financial obligations and finance our capital expenditures and operating activities depends on the success of our restructuring efforts. If we are unable to meet our debt service obligations or fund our other liquidity needs, we could be required to refinance all or a portion of our debt before maturity, seek additional equity capital or sell additional assets. We cannot assure you that we will be able to pay our debt or refinance it on commercially reasonable terms, or at all, or to fund our liquidity needs.
We may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements. Because competition in some of the industries in which we operate is concentrated, certain potential purchasers may be deterred by competition law considerations from acquiring (or seeking to acquire) assets that we are seeking to dispose of, which may negatively affect the valuation of these assets. If we are unable to obtain the valuations that we expect for the assets we are disposing, we may be required to dispose of additional assets, including assets that we would otherwise have considered core activities with higher relative profitability and cash generating capacity, in order to satisfy compliance with our debt covenants. In addition, disposals of our assets and businesses may cause our revenues and operating income to decrease and, to the extent we are required to sell core assets, could dilute our cash-generating or earnings capacity.
These expectations of our future liquidity are forward-looking statements based on a number of assumptions, including assumptions regarding expected cash flows from operations and currency exchange rates. Assumptions regarding such factors are subject to inherent uncertainties, as well as the risks described elsewhere herein. Our assumptions and beliefs may prove incorrect, which could cause our actual liquidity to vary.
Other agreements governing our financial indebtedness contain financial covenants that we may fail to meet in the future.
Our ability to comply with other financial covenants will depend on our operating performance and level of indebtedness, as well as on events beyond our control such as changes exchange rates and interest rates. We cannot guarantee that we will be able to comply with those covenants. Any breach of a financial covenant could lead to the declaration of an event of default and/or acceleration of repayment. As described above, acceleration of amounts due under certain of our financing agreements could cause the acceleration of debt under other agreements. In such event, we cannot assure you that our assets would be sufficient to repay our obligations in full.
We may seek the protection of bankruptcy courts, insolvency or other reorganization proceedings, which may harm our business and place security holders at significant risk of losing some or all of their interests in the Company.
With the assistance of advisors, we are in the process of analyzing various strategic alternatives to address our capital structure, including strategic alternatives. However, a filing under Chapter 11 of the U.S. Bankruptcy Code and for similar filings in non-U.S. jurisdictions (“Bankruptcy Proceedings”) may be unavoidable. Seeking the protection of Bankruptcy Proceedings could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as Bankruptcy Proceedings continue, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. Bankruptcy Proceedings also might make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer Bankruptcy Proceedings continue, the more likely it is that our customers and suppliers would lose confidence in our ability to reorganize our businesses successfully and would seek to establish alternative commercial relationships.
Additionally, we have a significant amount of secured indebtedness that is senior to our unsecured indebtedness and a significant amount of total indebtedness that is senior to our existing preferred shares and ordinary shares in our capital structure. As a result, we believe that Bankruptcy Proceedings could result in a limited recovery for unsecured noteholders, if any, and place equity holders at significant risk of losing all of their interests in the Company.
Our independent registered public accounting firm may include an explanatory paragraph with respect to our ability to continue as a going concern in its report on our consolidated financial statements for the fiscal year ending April 30, 2016.
Our independent registered public accounting firm may include an explanatory paragraph expressing substantial doubt relating to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended April 30, 2016. The inclusion of a going concern explanatory paragraph may negatively impact the trading price of our ordinary shares, have an adverse impact on our relationship with third parties with whom we do business, including our customers, vendors and employees, and could make it challenging and difficult for us to raise additional debt or equity financing to the extent needed, all of which could have a material adverse impact on our business, results of operations, financial condition and prospects. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.
Our failure to maintain compliance with all applicable OTCQX listing requirements could cause the OTC to downgrade our ordinary shares, which may have an adverse impact on the trading volume, liquidity and the market price of our ordinary shares.
Our ordinary shares are currently listed on the OTCQX. In order to maintain this listing we must comply with the continued listing standards set forth in Section 3.2(b) of the OTCQX Rules for International Companies (“OTCQX Rules”) which require that we maintain a certain ordinary share price and market capitalization, in addition to certain other financial and share distribution targets.
If we fail to maintain an average global market capitalization greater than $5.0 million for at least one of every 30 consecutive calendar days, as calculated by the OTC, we would be subject to delisting by the OTCQX. Under Section 3.2(b) of OTCQX Rules, we have a cure period of 180 calendar days to regain compliance with the standards for continued qualification.
During such cure period the minimum criteria must be met for 10 consecutive trading days. Our market capitalization, as defined by the OTC, as of market close on February 29, 2016 was $7.6 million.
Non-compliance with the continued listing standards of the OTCQX Rules does not directly affect our business operations or Securities and Exchange Commission reporting requirements. Our ordinary shares will continue to be listed on the OTCQX during the applicable cure period, subject to our compliance with other continued listing requirements.
In the event that we fail to regain compliance with the continued listing standards of the OTCQX Rules by the expiration of the applicable cure period, we may apply to list our ordinary shares on the OTCQB Marketplace (“OTCQB”) operated by the OTC. Listing on the OTCQB could negatively impact the trading volume, liquidity and market price of our ordinary shares. In addition, listing on the OTCQB could adversely affect our ability to raise capital on terms acceptable to us or at all and could reduce the number of investors willing to hold or acquire our ordinary shares.
Contingencies: (Extracts)
One or more of our subsidiaries are, from time to time, named as defendants in lawsuits arising in the ordinary course of our business. Such disputes may involve, for example, breach of contract, employment, wrongful termination and tort claims. We maintain adequate insurance coverage to respond to most claims. We cannot predict the outcome of any such lawsuits with certainty, but we do not expect the outcome of pending or threatened legal matters to have a material adverse impact on our financial condition.
The two securities class action lawsuits that were previously filed against the Company were consolidated into a single action, Rudman et al. v. CHC Group et al., which is pending in federal district court for the Southern District of New York. A consolidated amended complaint was filed on November 6, 2015. The amended complaint alleges that the Company and others failed to disclose in our IPO materials that one of our major customers, Petrobras, had suspended payments on certain contracts due to the global stand-down of Airbus H225 aircraft. The amended complaint seeks class treatment and unspecified damages. CHC has filed a motion to dismiss, with argument on the motion anticipated to be held in the spring of 2016. The Company maintains adequate insurance to respond to the lawsuit. Moreover, the Company disputes the allegations in the complaints and will vigorously defend against them.
In addition, from time to time, we are involved in tax and other disputes with various government agencies. The following summarizes certain of these pending disputes:
In the United Kingdom, the Ministry for Transport is investigating potential wrongdoing involving two ex-employees in conjunction with the SAR-H bid award processes. This arose from our self-reporting potential improprieties by these individuals upon their discovery in 2010. The SAR-H bid process was subsequently cancelled. We will continue to cooperate in all aspects of the investigation. On July 30, 2014, the UK Treasury Solicitors filed a claim for bid recovery costs of £17.8 million ($25.2 million) against us and other parties involved in our cancelled bid. We dispute the bases for the claim and intend to vigorously defend against it. At January 31, 2016, it is not possible to determine the outcome of this matter, or the significance, if any, to our business, financial condition and results of operations.