SkyLink, a buyout gone bad, files for bankruptcyFRANK RUMPENHORST/The Associated Press
A leveraged buyout gone bad has resulted in Canada's SkyLink Aviation Inc. filing for protection from creditors, after it could not support the debt load resulting from a private equity takeover done by Apollo Group.
The Toronto-based company's fate illustrates the peril of hanging fixed debt costs on a variable cost and revenue business.
SkyLink specializes in arranging air transport for customers such as military clients and aid groups that need to get to far-flung destinations such as Afghanistan. That business went into decline as military interventions around the globe have been scaled back. But the interest payments on debt taken on in recent years remained.
"While SkyLink continues to enjoy a strong market reputation and an excellent performance track-record, the SkyLink business has suffered from shrinking industry demand, largely deriving from the disengagement of allied military and humanitarian personnel from Afghanistan and Iraq," Jan Ottens, the chief executive officer of Skylink, said in an affidavit accompanying the filing. He said that debts "significantly exceed" the value of SkyLink's business, and the company is in default.
Apollo led a group that bought SkyLink for $125-million in 2009, after a decade of growth for the company. It used debt to finance the transaction. In 2011, SkyLink refinanced by selling $110-million of bonds in the Canadian high yield market. Apollo bailed out late last year, selling its stake in the company, according to the affidavit.
As for those bonds, they had been recently trading in the 30 cent on the dollar range, signalling the company was in deep trouble.
The issue is that SkyLink had built a business with variable costs. It used relatively few employees, and mostly worked with consultants. It also used leased aircraft, owning only two of its own. A business like that can be scaled up and down as revenues rise and fall. But the interest payments on debt don't change.
The 12.25 per cent coupon on the bonds sold in 2011 meant SkyLink had to fund $13.5-million a year in interest payments.
Now that debt will be eliminated. The company said that a majority of holders of its secured notes have agreed to a recapitalization plan that would reduce debt by more than $100-million. In return, the company's ownership will be handed over to lenders.
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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