Bristow Faces Heavy Financial Headwinds

Things are about to get rougher in the offshore oil patch. Bristow Group could be headed for restructuring or acquisition. On February 11 the helicopter services company that primarily serves the offshore energy market broadly hinted that its next move could be bankruptcy, barring successful renegotiation with lenders. Twice in less than a week's time, the company abruptly canceled analyst conference calls. It also formally ended its attempt to acquire Columbia Helicopters for $560 million, filed notification of late filing of its latest quarterly and nine-month financial results with the U.S. Securities and Exchange Commission (SEC), and admitted “material weakness” in internal controls over financial reporting dating back at least two years. 

In a statement issued on February 11, Bristow said, “The Company is evaluating whether this material weakness in internal controls over financial reporting resulted in a misstatement in the Company's financial statements included in the Annual Report on [SEC] Form 10-K for the fiscal year ended March 31, 2018, and the impact on the financial statements of the Company as of December 31, 2018, including disclosures. The Company is specifically evaluating whether certain debt balances should be reclassified from long-term to short-term in those financial statements, whether related waivers can be obtained from lenders, if necessary, and the resulting impact on the assessment of the Company's ability to continue as a going concern.”

Bristow subsequently offered more specifics as to the “material weaknesses” in its internal controls it first revealed on February 11. The company said it is related to the fact that “certain pledged and leased helicopter engines were not matched to specific pledged or leased helicopter airframes or returned to such airframes within specified periods, as is required under certain of the secured financing and helicopter lease agreements.”  

According to Bristow, removal and replacement was part of its normal and ongoing maintenance operations. However, “since certain of those helicopter engines and airframes are pledged to lenders or leased from lessors, the removal of a pledged or leased engine from a pledged or leased airframe can create issues of non-compliance with certain of the secured financing and helicopter lease agreements.”

Bristow said the issue affected a small number of its 385 helicopter engines subject to secured financing or helicopter leases, noting the issue was discovered and cured for all but nine engines related to three agreements before Dec. 31, 2018. Those engines were not returned to pledged airframes due to delays with certain maintenance service providers, Bristow said, adding that it had obtained non-compliance waivers under applicable agreements related to those engines. 

The company said it needs to obtain waivers from secured equipment lenders and helicopter lessors related to non-compliance of non-financial covenants under related agreements as of Dec. 31, 2018, and prior periods. Without the waivers, certain debt balances would need to be reclassified from long-term to short-term under accounting rules.

Reclassifying the debt to short-term would require Bristow to insert a “going concern” warning in its current and applicable prior financial statements filed with the SEC. Certain equipment lending/lease covenants at Bristow require filing audited financial annual statements (Form 10-K) “without any going concern explanation or limitation.” If Bristow is forced to insert a “going concern” warning in prior financial statements, then a “going concern” waiver would need to be obtained from the appropriate lenders/lessors.

Bristow further said the delay in filing its latest quarterly report (Form 10-Q) could trigger a delisting warning from the New York Stock Exchange.

The helicopter services company did release “preliminary” financial results on February 11 that indicated that it lost at least $262.2 million for the nine months ended Dec. 31, 2018, including $85.94 million for the quarter ended on Dec. 31, 2018. The grounding of Bristow’s Airbus Helicopters H225 fleet resulted in charges totaling $96.4 million for the nine-month period, while the impairment of Bristow’s Eastern Airways assets during the same period generated another $20.8 million in losses. The company promised to release revised financial statements by February 19. Those nine month and quarterly losses, if confirmed, are up sharply from the same periods a year ago when the company lost $94.78 million and $8.274 million, respectively.

Bristow Group expected to file its latest quarterly financial report (Form 10-Q) with the U.S. Securities and Exchange Commission (SEC) in mid-February, some two weeks after its initial deadline, but needed “additional time” to “complete a review of its existing processes and controls to ensure compliance with non-financial covenants within certain secured financing and helicopter lease agreements” before filing the report. At press time, the reports had not yet been filed.

Columbia Deal Off

In announcing the collapse of the Columbia deal on February 11, Bristow chairman Thomas Knudson stated, "The decision to enter into a mutual termination of the purchase agreement was based on a number of developments following the entry into the agreement, which led both Bristow and Columbia to conclude that it was not possible to combine the two companies at this time.” Bristow has paid Columbia a $20 million termination fee. Bristow announced its intention to acquire Columbia in November 2018 but revealed a month later that it was having difficulty closing the deal. 

The Columbia acquisition required Bristow to raise $135 million by issuing senior secured convertible notes secured by common stock in Columbia, contribute $48 million in Bristow balance sheet cash, contribute $77 million in Columbia stockholders equity, and use $360 million in Columbia secured financing. Immediately after the deal was announced, the value of Bristow’s shares dropped by 20 percent to $7.96 per share and continued to decline in the ensuing weeks through the end of December. The proposed Columbia deal also drew the ire of some of Bristow’s larger shareholders including the Global Value Investment Corporation (GVIC), which noted that the deal relied on Bristow to issue up to 33.5 million shares of new stock, a move that could potentially dilute shareholder value by up to 93 percent. 

Also in the most recent quarter, Bristow lost $14 million for terminating a contract with Sikorsky and another $1.4 million “for impairment of assets held for sale.” Bristow is attempting to recover its $12 million deposit on that contract via litigation. 

Financial markets reacted as expected to the news, with Bristow’s stock, which already had shed most of its value earlier in the year, falling from $3.08 to $1.12 within 48 hours of the company’s February 11 news. Investors sold millions of shares as Bristow’s market capitalization deteriorated to $43 million. Pursuant to Bristow’s latest stock crash, three separate law firms issued press releases saying that they had launched investigations against the company and its officers on behalf of investors for possible violations of federal securities laws. Those firms include Howard G. Smith of Bensalem, Pennsylvania; Bragar, Engel & Squire of New York; and Block & Leviton of Boston.

Bristow officers potentially targeted in these investigations include outgoing CEO Jonathan Baliff and L. Don Miller, chief financial officer (CFO). Bristow had previously announcement Baliff’s retirement, which was supposed to occur concurrently with closing of the Columbia acquisition. On February 11^th, Bristow disclosed the terms of said retirement. They include a monthly consulting fee of $30,000 for four months, a lump sum payment of $1.442 million (an amount equal to twice his base salary), paid health insurance for 36 months, outplacement services for 12 months, unspecified stock awards and cash bonuses, and future stock options in 2019, 2020, and 2021 in consideration of a two-year non-compete clause. 

Even before Bristow’s latest revelation concerning its financial reporting, the company had been under fire as early as 2016 for using non-GAAP (generally accepted accounting principles) metrics to explain financial results to investors. Use of the non-GAAP metrics launched potential breach of fiduciary duty claims against the company. Continued downward pressure on the company’s stock price and any adverse finding by the SEC could get Bristow delisted from the New York Stock Exchange (NYSE). The exchange bans the listing of those that trade for less than $1 for 30 consecutive days or ones that fail to comply with “SEC requirements in any material respect.” 

As Bristow implied in its February 11 statement, its fate is now largely in the hands of its creditors. 

Diversification Efforts

To steel itself against the continuing offshore energy downturn, Bristow diversified, but it also took on massive debt. Some of those diversifications, such as the UK SAR contract, produced predictable and solid revenues, but forays into fixed-wing operations and flight training proved disappointing. Bristow acquired a controlling stake in Australia’s Airnorth in 2015 following its acquisition of UK’s Eastern Airways. In 2007 Bristow bought the assets of Titusville, Florida-based Helicopter Adventures for $15 million plus $5 million in debt and via internal growth and acquisitions grew the “Bristow Academy” to three U.S. bases and one in the UK. At one time, the Academy was the world’s largest civil helicopter school, with 75 aircraft and 400 graduates annually. With the downturn, the Academy shrunk to 47 aircraft, and Bristow disposed of it for $1.5 million at the end of 2017 to be paid over four years.

The disposal of Bristow Academy came against a backdrop of a $200 million internal cost-cutting and corporate reorganization campaign in 2017 designed to “right size” the company and preserve liquidity. Also in 2017, Bristow borrowed an additional $630 million from a group of lenders that included Lombard North Central, Macquarie Bank Limited, and GE Capital Aviation Services/Milestone. Bristow also issued an additional $143 million in notes. In March 2018, Bristow issued $350 million in 8.75 percent five-year notes. By the end of Fiscal Year 2018, Bristow’s total debt amounted to $1.51 billion borrowed against a fleet with a market value of $2 billion, before the write-down of its fleet of 27 H225s. At the end of 2018, Bristow and its affiliates operated a fleet of 385 aircraft; affiliates operate 108 of those. Of Bristow’s fleet of 228 helicopters, 70 are leased; 16 of its 49 fixed-wing aircraft are leased. Bristow had 26 large helicopters on order and options for four more and 10 aircraft for sale. During Fiscal Years 2016-2018 Bristow posted a net loss of $452 million plus the likely $262 million loss in the first nine months of Fiscal Year 2019. (Bristow’s fiscal year ends March 31.) 

Meanwhile, Bristow’s revenues fell from $1.858 billion in Fiscal Year 2015 to $1.44 billion in Fiscal Year 2018. And based on the results released February 11, it looks like revenue is continuing on its downward trajectory at $1.002 billion for the first nine months of Fiscal Year 2019. 

Bristow was founded in 1955 by Alan Bristow to supply helicopter crews to oil companies operating in the Persian Gulf. He led the company until 1985. It expanded into Africa in 1960 and eventually expanded to operating one-third of the helicopter fleet supporting the world’s offshore energy market. U.S.-based Offshore Logistics bought 49 percent of the company in 1996, rebranded the company Bristow Group, and moved headquarters operations to Houston. Current CEO Jonathan Baliff joined Bristow in 2010 and became CEO in 2014. Bristow’s strategy under Baliff was to diversify to be less dependent on oil-and-gas revenues, cut costs, raise cash, and wait for the market to recover. But Baliff, like others, thought the rebound would come sooner rather than later.