A judge allows a bankrupt Petters company to use a refund from Airbus to keep Petters' bankrupt airline aloft.
Sun Country Airlines won approval Wednesday from a bankruptcy judge to borrow money from a Petters Aviation subsidiary so it can pay its bills over the next few months.
It was an ironic twist for Sun Country, which filed for bankruptcy protection in early October, shortly after its primary shareholder, Tom Petters, was arrested on fraud charges.
The Mendota Heights-based carrier had counted on Petters to provide it with an operating loan to get Sun Country through a cash crunch before ticket revenue spikes during the heavy winter flying season.
Petters remains jailed without bail on federal investment fraud and money laundering charges, which are unrelated to Sun Country's operations. But one of Petters' many companies, Elite Landings, was tapped as the source of temporary funding for the airline.
"This is a really good deal for Sun Country Airlines," U.S. Bankruptcy Judge Robert Kressel said Wednesday when he gave Sun Country the green light to borrow money from Elite Landings.
Although the parties did not release the interest rate or the amount of the loan, the judge said in court that Sun Country would pay an annual interest rate of 10 percent.
Sun Country attorney Michael Meyer said the company expects to repay the money by the end of April. The only other option Sun Country had was accepting less favorable terms from a group called Minnesota Hometown Airline Financing, which expected 18 percent interest, Meyer said.
Attorneys for the Petters Aviation Creditors Committee and for Acorn Capital Group, a creditor in the Petters Aviation bankruptcy case, objected to the loan.
Acorn attorney Michael Rosow argued that it was too risky to make a loan to Sun Country. Rob Kugler, an attorney for the Petters Aviation creditors, argued that the assets of Petters Aviation, including those held by Elite Landings, need to be liquidated for the benefit of the creditors. He complained that he was shut out of the negotiations on the terms of the loan.
Kressel overruled them, saying that "10 percent interest is still real money."
Elite Landings had cash available to lend to Sun Country because it recently got a $9.5 million refund from Airbus after canceling some aircraft orders. When Petters was trying to increase his footprint in the aviation industry, Elite Landings was created as a vehicle for marketing Airbus corporate jets.
Petters holds all the voting shares in Sun Country. Kressel said the value of the Sun Country stock would be increased by granting the airline the loan it needs.
Jim Rubenstein, an attorney for Elite Landings, acknowledged that the deal was peculiar because one bankrupt company would be lending money to another bankrupt business owned by the same person. He told the judge that he couldn't find any case law with a similar circumstance.
But attorneys for Sun Country, Elite Landings and Doug Kelley -- the court-appointed receiver of the Petters assets -- supported the arrangement. Fruman Jacobson, attorney for the airline's creditors committee, said the loan would allow Sun Country to continue its "turnaround."
The airline had a net loss of $47 million on operating revenue of $251 million in the four quarters that ended in June.
But Stan Gadek, Sun Country CEO, said after Wednesday's hearing that he expects the airline to make money in the first quarter.
"Based on our projections, I do believe that Sun Country will be profitable for fiscal year 2009," Gadek said in an interview.
Since he became the carrier's top executive in March, Gadek has cut jobs, raised fees and added military charters to the carrier's business.
"The dramatic reduction in fuel prices has also significantly improved our financial outlook," Gadek said. In July, oil reached a record $147 a barrel, but it has been hovering below $50 this week. Sun Country doesn't have any fuel hedges, so it has reaped immediate benefits from the plummeting fuel prices.
The new financing "should remove any doubt that people may have about our viability going forward," Gadek said.
At some point, Petters' shares in Sun Country are expected to be sold to new investors. Proceeds from such a sale would be turned over to Kelley, the receiver of Petters' assets.
Raymond James and Associates, an investment banking firm, is expected to evaluate sale options for Sun Country.
Liz Fedor • 612-673-7709