Aviation Advisor Evdokimov Urges Air Baltic Noteholders to Reject DIP Priming Request, Withdraw from Ch.11 in Favor of Debt-for-Equity Swap

Aviation strategist and advisor Oleg Evdokimov, who fronts a European investor group that offered on Oct. 6 to buy Air Baltic’s Lufthansa ACMI contracts, is calling on Air Baltic bondholders to reject the company’s request to raise the planned super senior DIP financing, which will prime the airline’s existing €398 million 14.5% senior secured 2029 bonds. Bondholders have until Dec. 3 to vote and a general bondholder meeting is scheduled for Dec. 4.

Instead of following the company’s proposed Chapter 11 restructuring, Evdokimov proposes a withdrawal from the U.S. in-court process in favor of a debt-for-equity swap and a subsequent carve-up of Air Baltic into national carriers, Evdokimov told Octus.

The alternative proposal faces significant challenges though. Air Baltic filed for Chapter 11 on Sept. 14 in the Southern District of New York with just €1 million in its accounts. Management has so far drawn the first €175 million tranche of the €350 million DIP financing to cover aircraft acquisitions, pay overdue carbon emissions taxes and fund day-to-day operations. DIP lenders include Strategic Value Partners, Barclays, Hayfin Capital Management, Morgan Stanley and Oaktree Capital.

While the first DIP tranche did not prime bondholders, the next two will and the issuer is now asking noteholders to release their first ranking security in favor of the DIP financing. Following that step, the entire €350 million will rank ahead of the 2029 bonds, which would “severely” diminish bondholders’ potential enforcement recoveries, according to Air Baltic. The defaulted 2029 notes are trading at 7 cents, according to Solve.

Milbank, Air Baltic’s legal advisor, notes in the notice to bondholders that while it is more cost-effective to get bondholder support for the priming, the issuer is “confident that it will be able to successfully achieve the Priming without the consent of the Bondholders by proving before the Court that Bondholders will receive “adequate protection” for their existing Security.”

Asked about how he plans to overcome this significant hurdle, Evdokimov told Octus he believes the business is better off freezing the balance sheet and stop taking on any more expensive DIP financing. He then proposes to equitize 100% of the 2029 bonds to give noteholders control and replace what he called an “incompetent” management team led by CEO Erno Hilden.

Air Baltic did not respond to a request for comment.

Evdokimov’s turnaround plan revolves around splitting the group into, at least, two companies: a core Air Baltic passenger segment and an ACMI, or wet leasing, company, as reported previously. The spin-off would allow the two businesses to boost use levels, keep hundreds of at-risk crew in employment and generate cash to support the much reduced debt burden.

Evdokimov is also in talks with investors about splitting the Air Baltic passenger business into three national Baltic carriers; Air Tallinn, Air Vilnius and Air Riga. Air Tallinn and Air Vilnius would each lease six A220-300 aircraft while Air Riga would maintain 12. These flag carriers would fly to 24 European destinations, according to documents seen by Octus.

Earlier this week, Air Baltic signed new long-term wet lease agreements with Lufthansa for six aircraft. Lufthansa owns 10% of Air Baltic’s equity behind the Latvian state with 88.37%.

Evdokimov told Octus that “following the sharp reduction in Air Baltic’s new wet lease deal with Lufthansa to just six aircraft, spinning off an independent ACMI unit is critical to aggressively remarket the remaining A220-300 capacity to rival European airline groups—leveraging a restructured, low-debt cost base to keep crews active and generate high-margin cash flow.”

Evdokimov is open to launching a broad tender offer for the distressed 2029 bonds to effectuate the equitization himself. The tender price would be about 1.5% of par, he said.

As part of its priming proposal, Air Baltic is offering noteholders a total consent fee of 0.85% of their consented bonds, split into a 0.25% initial consent fee and 0.6% subsequent consent fee, released once the second DIP tranche has been funded. Bondholders can choose to receive junior commitments in Air Baltic’s DIP financing instead of cash. This option would see the 2029 bonds of consenting holders be rolled up into the DIP loan on a 1-1 basis, capped at €20 million. The interest rate on the roll-tranche is SOFR+6%.

The €20 million slice of DIP loan equates to a 5% recovery of the existing €398 million 2029 bonds.

Air Baltic’s prepetition funded debt is summarized below: