SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-13-1003300CL
DATE: 20130312

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE AND ARRANGEMENT OF SKYLINK AVIATION INC., Applicant

BEFORE: MORAWETZ J.

COUNSEL:
Robert Chadwick and Logan Willis, for the Applicant

S. R. Orzy and Sean H. Zweig, for the Noteholders

M. P. Gottlieb, for the Proposed Monitor, Duff & Phelps Canada Restructuring Inc.

C. Prophet, for the Royal Bank of Canada

R. S. Kukulowicz, for the Directors and Officers

HEARD &
ENDORSED: MARCH 8, 2013

REASONS: MARCH 12, 2013

ENDORSEMENT

[1] SkyLink Aviation Inc. (“SkyLink Aviation”, the “Company” or the “Applicant”), together with the SkyLink Subsidiaries (collectively, “SkyLink”), is a provider of global aviation transportation and logistics services (the “SkyLink Business”). SkyLink specializes in providing non-combatant aviation services and supporting activities in conflict-associated regions around the world. The customers who rely on SkyLink’s services include governmental agencies, inter-governmental agencies, commercial organizations and humanitarian relief organizations.

[2] SkyLink is responsible for providing non-combat life-supporting functions to both its own personnel and those of its suppliers and clients in high-risk areas. Any disruption to SkyLink’s ability to provide either its core services or its ancillary life-supporting functions to deployed personnel, could put the safety and security of those personnel at risk, including by potentially leaving them without life-supporting services in conflict zones.

[3] As set out in the affidavit of Jan Ottens and, as summarized in the comprehensive factum filed by the Applicant, it is apparent that SkyLink Aviation has experienced financial challenges that have necessitated a recapitalization of the company. SkyLink has chosen to do this under the Companies’ Creditors Arrangement Act (“CCAA”).

[4] At this time, SkyLink Aviation’s secured debts significantly exceed the value of the SkyLink Business. SkyLink is in default of its first lien secured credit facility (the “Credit Facility”) in favour of the first lien lenders (the “First Lien Lenders”) and the Indenture in respect of its senior secured second lien notes (the “Secured Notes”). The indenture trustee in respect of the Secured Notes (the “Trustee”) has accelerated all amounts owing under the Secured Notes and has issued a demand for payment by SkyLink Aviation and SkyLink Aviation USA II.

[5] After an extended period of extensive negotiations with representatives of the Company’s secured creditors regarding a recapitalization of the Company, a consensual going-concern recapitalization transaction (the “Recapitalization”) has been developed for implementation pursuant to a plan of compromise and arrangement under the CCAA (the “Plan”).

[6] The Applicant takes the position that the Recapitalization is a positive development for the Company and its stakeholders. The Recapitalization involves:

(i) the refinancing of the Company’s first lien debt;

(ii) the cancellation of the Secured Notes in exchange for the issuance by the Company of consideration that includes new common shares and new debt; and

(iii) the compromise of certain unsecured liabilities, including the portion of the Noteholders’ claims that is to be treated as unsecured under the Plan.

[7] The Company also contends that if implemented, the Recapitalization would result in SkyLink Aviation having an improved capital structure, stable working capital liquidity and enhanced flexibility to respond to volatility in the industry.

[8] The terms of the Recapitalization are supported by a significant majority of the creditors who have an economic interest in the Company. In particular, the First Lien Lenders have affirmed their support, and the holders of approximately 64% of the value of the outstanding Secured Notes (the “Initial Consenting Noteholders”) have signed the Support Agreement pursuant to which they have agreed to support the Recapitalization and to vote in favour of the Plan.

[9] The remaining Noteholders will be entitled to sign a joinder to the Support Agreement following the commencement of these proceedings. SkyLink Aviation anticipates that additional Noteholders will execute a joinder to the Support Agreement.

[10] It is noted that support of the First Lien Lenders and the Initial Consenting Noteholders is conditional upon the completion of the Recapitalization under the CCAA prior to April 23, 2013.

[11] A detailed summary of the salient facts is set out at paragraphs 11-42 of the factum.

[12] SkyLink Aviation is a privately held corporation under the laws of Ontario, with a registered head office located in Toronto, Ontario. Its central administrative functions are carried out at its Toronto headquarters.

[13] SkyLink Aviation is the direct or indirect parent company of a number of subsidiaries as detailed in the organization chart attached to Mr. Ottens’ affidavit.

[14] The SkyLink Subsidiaries are non-applicants. However, SkyLink Aviation seeks to have a stay of proceedings under the Initial Order and certain other relief extended to those SkyLink Subsidiaries that are also party to contracts with SkyLink Aviation (the “Subsidiary Counterparties”) so as to maintain the stability of the enterprise.

[15] SkyLink Aviation’s liabilities amount to approximately $149.42 million which includes the First Lien Indebtedness of $14.749 million, Secured Notes in the aggregate principal amount of $110 million, together with accrued but unpaid interest of approximately $6.4 million, and amounts owing to Noteholders under the Interest Payment Support Agreement totalling approximately $6.6 million.

[16] Material claims against the Company of which SkyLink Aviation is aware of include:

(i) approximately $3.45 million in respect of the exercise of various warrants and options issued to several members of the senior management team in May 2012; and

(ii) six pending litigation claims against the Company that collectively allege approximately $16.6 million in contingent claims or damages.

[17] As of March 6, 2013, SkyLink Aviation owed approximately $7.7 million in accounts payable relating to ordinary course trade and employee obligations.

[18] As a result of the existing Events of Default, the First Lien Lenders are now in a position to terminate the Credit Facility and proceed to enforce their rights and remedies against SkyLink Aviation and Loan Guarantors, including the acceleration of all amounts owing under the Credit Facility. In addition, the Company does not have the funds required to make payments now due to the Participating Noteholders under the Interest Payment Support Agreement.

[19] In light of its financial circumstances, SkyLink Aviation contends that it is not able to obtain additional or alternative financing and there is no reasonable expectation that the Company, in the near term, will be able to generate sufficient cash flow through its operations to support its existing debt obligations. In addition, the Company contends that as further evidenced by the valuation performed by Duff & Phelps Valuations, the aggregate value of the Company’s assets, property and undertaking, taken at fair value, is not sufficient to enable payment of all of its obligations, due and accruing due. Consequently, the Applicant takes the position that it is insolvent.

[20] The Applicant requests a stay of proceedings.

[21] The Applicant also requests authorization to make payments in the ordinary course in respect of employee compensation, rent, procurement, utility services and other supplier obligations, all with a view to maintaining operations.

[22] The Company has also negotiated for a DIP Loan and the concurrent granting of a DIP Lenders’ Charge. Details in respect of the DIP Loan and the DIP Lenders’ Charge are set out at paragraphs 29-32 of the factum. A proposed Monitor and Administration Charge as well as a Directors’ and Officers’ Charge is also requested. These requests are set out at paragraphs 33-37 of the factum. A KERP and a KERP Charge is also contemplated and the reasons for this are detailed at paragraphs 38 and 39 of the factum. There is no opposition to this requested relief.

[23] The Applicant also seeks the appointment of the Monitor as the Foreign Representative, should recognition of these proceedings in the United States pursuant to Chapter 15 of the United States Bankruptcy Code, become necessary.

[24] Having reviewed the record and hearing submissions, I am satisfied that the Applicant is a “debtor company” to which the CCAA applies. The basis for this finding is set out at paragraphs 43-52 of the factum.

[25] For the reasons set out at paragraphs 56-60 of the factum, I have been persuaded that it is appropriate in this application to include a stay of proceedings in favour of the Subsidiary Companies.

[26] I am also satisfied for the reasons set forth at paragraphs 61-65 of the factum that it is appropriate to authorize certain pre-filing payments to be made.

[27] The basis for the granting of the DIP Lenders’ Charge, the Administration Charge, Directors’ Charge and KERP Charge is set out at paragraphs 66-84 of the factum. I have been persuaded that, in the circumstances, the granting of these charges on the terms set out is appropriate.

[28] I have also been satisfied that it is appropriate to the appoint the Monitor as the Foreign Representative of the Applicant, for the reasons set out at paragraphs 85-87.

[29] The Applicant also requests a postponement of the Annual Shareholders’ Meeting. For the reasons set out at paragraphs 88-91 of the factum, I am in agreement that this request is reasonable in the circumstances.

[30] The Applicant has requested that the “Confidential Supplement” to the Monitor’s Pre-filing Report be sealed. This Confidential Supplement contains copies of:

(i) the financial statements of SkyLink containing the confidential financial information of SkyLink;

(ii) the Duff & Phelps Valuation Report (the “Valuation Report”) which the Company contends contains sensitive competitive and confidential information of the Applicant; and

(iii) the KERP letters containing individually identifiable information and confidential information of eligible employees.

[31] With respect to the financial information, I am satisfied that adequate information is contained in the public record that would enable the affected parties to make an informed decision as to the financial circumstances facing the Company.

[32] For the reasons set out at paragraphs 92-100 of the factum, I have been persuaded that it is appropriate to issue a sealing order at this time. In arriving at this determination, I have taken into account the principals set out in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41, 2002 S.C.C. 41.

[33] For the above reasons, I have been persuaded that an Initial Order should be granted in respect of the Applicant.

[34] SkyLink also brought a motion for the Claims Procedure Order and Meetings Order. The Company is seeking these orders at this time because it wishes to effectuate the Recapitalization on an expeditious basis. The basis for the request for these two orders is set out in the second factum submitted by the Applicant. The basis for the requested relief is set out at paragraphs 11-34 of the factum.

[35] The legal basis for proceeding with the motion for the Claims Procedure Order and the Meetings Order is set out at the factum commencing at paragraph 43. I recognize that it is unusual to request such relief at this stage of the proceeding. However, in the circumstances of this case, and considering the significant support that the proposed restructuring appears to have achieved, I accept the submissions and grant the requested relief. In doing so, I am mindful that a full come-back hearing has been scheduled for March 20, 2013, at which time these issues can be revisited.

[36] The motions for the Claims Procedure Order and Meetings Order are granted and the orders have been signed.

MORAWETZ J.

Date: March 12, 2013