Global Eagle Entertainment provides in-flight internet connectivity and entertainment to the airline industry. This bankruptcy filing is a perfect example of a now-established trend: using Chapter 11 to recapitalize a company’s balance sheet and expedite an asset sale to hedge funds or private equity firms.
This pre-arranged bankruptcy case is designed to benefit its first lien lenders (listed below) at the expense of junior lien-holders and equity holders through a prompt asset sale supervised by the bankruptcy court. Under the proposed Section 363 sale, the first lien lenders will credit bid their debt to purchase the Debtors’ assets and thereby wipe out all junior creditors and public stock holders.
The proposed Section 363 sale will effectively transfer ownership of the company to Apollo Global Management, Inc., Eaton Vance Management, Arbour Lane Capital Management, L.P., Sound Point Capital Management, Mudrick Capital Management, BlackRock Financial Management, Inc.
Unsurprisingly, a major shareholder, Nantahala Capital Management, has filed an objection. Under a first-day order entered by the court, “substantial shareholders” like Nantahala are temporarily blocked from trading their public equity shares, and so are unable to cash out their positions during the current robust NASDAQ trading environment.
In its first-day motions, Global Eagle Entertainment claimed that the trading restriction on substantial shareholders was necessary in order to preserve net operating loss deductions and other interest deductions. But in preserving these benefits for the debtor (and its hedge fund owners) Nantahala and other major shareholders will be wiped out in the asset sale.
In objecting to this redistribution, Nantahala argued:
"The Bankruptcy Code is not designed to simply authorize a debtor to shift value from one group (i.e., a Substantial Shareholder like Nantahala) to a second group (the first lien lenders) without just compensation being paid to the first group."
We agree with Nantahala. Section 105(a) of the Bankruptcy Code allows the court to use its equitable powers to enforce the provisions of the Code, but not to add to these provisions. The combination of the proposed Section 363 sale, and the interim order blocking Nantahala from selling its position into the public market, introduces a novel distribution priority not otherwise found in the Bankruptcy Code. A hearing date on Nantahala’s motion is set for August 17, 2020.
The Global Eagle Entertainment bankruptcy petition lists $630.5 million in assets against $1.085 billion in liabilities.
What of the trade creditors? The largest 30 unsecured creditors are a veritable who’s who of the digital entertainment and airline worlds, including: American Airlines, Lionsgate Entertainment, Warner Brothers Music, and Sony. It is a good bet that the successor company buying the assets has already assured most–if not all–of the trade creditors that they will receive payment in full under existing agreements in exchange for continuation of services.
This Chapter 11 filing, along with the smaller Jaguar Distribution case, are at the front end of what promises to be a wave of entertainment-related Chapter 11 filings in coming months related to the pandemic shutdown.