Canada's Lynx eyed merger to cut shareholder debt - report

Insolvent Lynx Air (Calgary) approached Flair Airlines (F8, Kelowna) about a merger/buyout in the lead-up to its collapse because it needed funds to pay down debt to 25% shareholder Indigo Partners, according to the Calgary Herald newspaper and verified by court filings. In addition, in order to fund day-to-day operations, the ULCC had recently been issuing promissory notes to Indigo bearing 20% p.a. interest rates.

Lynx ceased operations on February 26 citing "compounding financial pressures associated with inflation, fuel costs, exchange rates, cost of capital, regulatory costs, and competitive tension in the Canadian market.”

It owes Indigo over CAD124.3 million Canadian dollars (USD91.3 million) after the Bill Franke-helmed private equity fund backed Lynx's start-up and later came to the party with debt financing facilities. Lynx also has significant debts with the Canadian Revenue Agency, Delta Air Lines (which serviced its aircraft), airports, aircraft lessors, and trade suppliers. The newspaper reports a local aviation commentator saying Lynx approached Flair as an "11th-hour Hail Mary."

A February 22 affidavit by Michael Woodward, interim chief financial officer at Lynx since March 2023, makes numerous references to a proposed deal with the 777 Partners-backed Flair. He called Flair a direct competitor, and the affidavit provides some information on the "substantially contemplated" transaction, which involved a term sheet signed on January 11.

"The proceeds of the consummation of the Flair transaction shall be used first to redeem in full all of the bridge notes, the second bridge notes and the notes, and to repay in full any and all interest relating to the bridge note purchase agreement (NPA), the second NPA, and this agreement," the affidavit reads.

Debt build-up

The same affidavit details the money owed to Indigo. The liabilities are the result of a December 2018 NPA (amended in June 2023), a bridge NPA dated February 2023 (amended in January 2024), a second bridge NPA dated October 2023 (also amended in January), a third bridge NPA dated January 2024, and a fourth and fifth bridge NPA dated February 2 and 7, respectively.

Indigo Partners provided CAD71.24 million (USD52.45 million) through the December 2018 NPA. This involved Indigo buying promissory notes bearing a 10% p.a. interest rate in seven tranches between then and December 2022. On June 30, 2023, Lynx asked Indigo for a deferral on interest rate payments, and the private equity firm agreed to a deferral until the fifth anniversary of the notes. As of December 31, 2023, with accrued interest, Lynx owed CAD91.5 million (USD67.36 million). The first notes matured on December 20. "The applicants do not have sufficient resources to redeem the initial notes," Woodward's affidavit said.

The February 2023 bridge NPA concerns an agreement by Indigo to buy convertible promissory notes up to USD9 million. The notes had a 20% p.a. interest rate with interest payable twice yearly. The same month, Lynx issued promissory notes valued at CAD7.11 million (USD5.23 million) and followed that up with a second round of notes in March valued at CAD5.17 million (USD3.8 million). As of December 31, Lynx owed approximately CAD14.49 million (USD10.67 million) on these notes.

The October 2023 second bridge NPA involved Indigo agreeing to buy CAD10 million (USD7.36 million) worth of promissory notes, again paying 20% p.a., with interest due semi-annually. Lynx issued these notes in the same month and, as of December 31, owed CAD10.354 million (USD7.63 million) on them.

In January 2024, when formal talks with Flair started, Indigo agreed to buy another USD5 million worth of promissory notes via the third bridge NPA, again paying 20% p.a. interest, with payments due twice yearly. Lynx issued the notes on January 12.

In February, as talks continued, Indigo agreed to a fourth and fifth bridge NPA under the same terms, each for USD5 million. Lynx issued notes for those amounts on February 2 and 7, respectively. Around three weeks later, with no merger or buyout deal in place, Lynx called time on operations.

As of December 31, 2023, Lynx's debt to its primary shareholder amounted to just over CAD100 million (USD73.6 million) for the principal and more than CAD24 million (USD17.7 million) in interest. "The applicants [Lynx] have in the past received debt financing from Indigo to fund its operating costs, [but] it has never been able to achieve profitability in order to become self-sustaining," the affidavit reads.

Woodward did not reveal why the talks with Flair failed, saying only that the airline had recently been unsuccessful in its efforts to find more capital. He added that as a result, Lynx couldn't repay Indigo, and it could no longer fund its day-to-day operations.

Before services ended, Lynx operated nine B737-8s sourced from five lessors on 12-year leases. It also had three engines on 12-year leases from Engine Lease Finance. The ULCC flew to 11 airports in Canada, six in the United States, and one in Mexico. Reportedly, the intention is now to liquidate the airline rather than attempt to sell or restart operations.