Great Lakes Aviation no longer owes Raytheon Aircraft Credit Corp. any money, and the former aircraft maker no longer owns any of the regional airline’s stock.

The deal also gets Raytheon out of the aircraft financing business: Cheyenne, Wyo.-based Great Lakes was the last Credit Corp. customer for the defense electronics giant, which got out of the commercial aircraft business in 2007, when it sold Raytheon Aircraft—now called Hawker Beechcraft—to private equity investors for $3.3 billion.

“It’s the end of an era for both of us. They’re no longer in the regional airline business,” Great Lakes Chairman and President Doug Voss says. Raytheon was a “silent investor” in Great Lakes for the most part and never participated on its board, Voss says, but he noted that the relationship between Great Lakes and Raytheon started in 1985, when the airline started buying Beechcraft C99 aircraft.

“It’s been a long and healthy partnership,” he adds. “It’s worked well for both of us for a lot of years.”

Before Nov. 16 this year, Great Lakes owed Raytheon more than $37 million, including a $30.9 million balloon payment that would have been due on Nov. 17. Efforts to refinance the debt from another source had foundered—at least on the terms that Great Lakes desired—because of Congress’s inability to reach an agreement on Essential Air Service (EAS) funding. For the nine months ending Sept. 30, nearly 43% of Great Lakes’ total revenue came from the EAS program, which subsidizes service to rural communities.

Restructured Terms

Until Nov. 16, Raytheon was Great Lakes’ largest single shareholder, owning nearly 38% of the airline’s common stock. Great Lakes issued the shares to Raytheon in December 2002 as partial consideration for a series of transactions that included restructured terms for aircraft promissory notes, termination of aircraft operating leases, aircraft purchases, aircraft returns, modified aircraft operating leases and other debt restructuring.

Congress still has not reached an agreement on EAS funding, but on Nov. 16, Great Lakes entered into a new financing agreement with GB Merchant Partners and Crystal Capital. In details released Nov. 21 as part of it third-quarter 10-Q filing with the Securities and Exchange Commission (SEC), Great Lakes disclosed that the deal comprises a $24 million, four-year term loan and a $10 million revolving loan credit facility.

The agreement is secured by substantially all of Great Lakes’ assets, including all owned aircraft. The term loan bears interest at a floating, 30-day LIBOR rate plus 11%, with a minimum rate of 15.5%. (Under the deal with Raytheon, each of the aircraft notes bore interest at a rate of 6.75% per year, although that rate was raised to 8.75% in return for giving Great Lakes more time to make its balloon payment.)

The lack of congressional closure on the EAS issue affected the new financing deal. Voss said the difference in the interest rates between the old and new deals “reflects the instability and the risk that was associated with the EAS program being under threat.” The fiscal year 2012 funding levels for the program appear to have been settled by President Barack Obama’s Nov. 18 signing of an appropriations bill that sets FAA spending levels, including for EAS. But Congress could still change the criteria for EAS awards via the still-unsettled FAA reauthorization legislation, and 2013 funding levels also remain an open question.

On Nov. 16, Great Lakes obtained $29.5 million from GB Merchant Partners and Crystal Capital via the new loan and credit facility, using $27 million of the funds to satisfy all outstanding debts to Raytheon at a discounted rate and to repurchase the Raytheon-owned stock. The remaining $2.5 million was used to pay the closing fee and professional fees associated with the transaction.

Under the new financing agreement, Great Lakes will have to start making principal payments on Sept. 30 of each year from 2012 through 2015. That entails payments of $3 million in 2012, $3.5 million in 2013, $4 million in 2014 and $19 million in 2015.

Great Lakes, which has been reducing its dependence on the EAS program to the extent possible, says in its SEC filing that “the company’s ability to comply with the new debt may be impacted by government decisions related to funding of the EAS program.” But Great Lakes not only has been reducing its EAS dependence but also pulling out of markets at higher risk of being cut—the ones most heavily subsidized—and Voss says the airline is “comfortable with our ability to service the debt.” Great Lakes serves 42 airports in 11 states with a fleet of six Embraer EMB-120 aircraft and 26 Raytheon/Beechcraft 1900D regional airliners. It reported a $1.8 million profit in the third quarter, $900,000 less than in the same quarter of 2010. Its profit for the nine months ending Sept. 30 was $1.9 million, compared with $3.9 million in the comparable 2010 period, with the company attributing the difference primarily to higher fuel prices, which added $6.8 million to its costs.