WASHINGTON (Reuters) - Hawker Beechcraft Inc, the aircraft maker owned by Goldman Sachs Group Inc’s (GS.N) private equity arm and Onex Corp OCX.TO, on Thursday filed for bankruptcy protection as part of a prearranged deal with lenders that will eliminate about $2.5 billion in debt and $125 million in annual interest expenses.
Hawker, which was bought by the private equity firms in 2007 for $3.3 billion, said the moves included a commitment for $400 million in debtor-in-possession financing, which would allow it to continue operating and paying employees, suppliers and vendors.
Hawker Chief Executive Steve Miller said the agreement would stabilize and improve the company’s capital structure after three years of “aggressive transformational changes in all operational functions.”
“Restructuring our balance sheet and recapitalizing the company in partnership with our debtholders will dramatically improve Hawker Beechcraft’s ability to compete in a rapidly changing environment,” he said.
Hawker said it was continuing to operate and would fill all orders for available products, including the recently announced sale of its T-6C trainer aircraft to Mexico. The company said it was also committed to continuing to compete for an U.S. Air Force contract to supply 20 light attack planes to Afghanistan.
Hawker said the agreement was reached with institutions representing more than two-thirds of the company’s bank and senior bond debt.
Once the Chapter 11 filing is approved, equity ownership in Hawker Beechcraft will be transferred to holders of the secured debt, bond debt and certain other unsecured creditors.
Separately, Hawker Beechcraft’s three pension plans are 56 percent funded, with $769 million in assets to cover about $1.4 billion in promised benefits for 20,000 workers and retirees, according to U.S. pension insurers.
The Pension Benefit Guaranty Corporation (PBGC) said in a statement that it was committed to working with the company and creditors to keep pensions going.
PBGC said it would cover most of the $611 million shortfall in benefits, if the accounts were terminated in bankruptcy as a cost-savings move.
Reuters reported in March that Hawker was negotiating a prearranged bankruptcy with its largest lenders, which include Centerbridge Partners, Angelo Gordon and Capital Research & Management, these sources said on Wednesday.
Goldman Sachs Capital Partners, the bank’s private equity fund, and Canada’s largest buyout firm, Onex, bought Raytheon Aircraft Co from Raytheon Co (RTN.N) in early 2007, at the height of the buyout boom, and renamed it Hawker Beechcraft.
But the purchase has proven to be ill-timed. The financial crisis of 2008 and the subsequent economic downturn led to a multi-year aviation industry downturn. The Wichita, Kansas-based manufacturer of business jets, general aviation turboprops and military trainers has seen sales of its small and medium-sized business jets fall.
Hawker competes against bigger U.S. rivals such as General Dynamics Corp’s (GD.N) Gulfstream and Textron Inc’s (TXT.N) Cessna, as well as foreign players like Brazil’s Embraer SA (EMBR3.SA) and Canada’s Bombardier (BBDb.TO).
Hawker is one of several buyouts from the 2006-2007 period to run into trouble. Several private equity firms at the time paid aggressive prices for companies, loading them up with huge piles of debt and hoping that economic growth would continue to sustain the investments. But the financial crisis threw a monkey wrench into their assumptions about growth, making these firms unviable.
Miller, who is also chairman of bailed-out insurer American International Group (AIG.N), is known for his ability to work with financially troubled companies and solve hard problems, even earning the moniker of “The Turnaround Kid” after he wrote a book in 2008 about his experiences fixing companies over the years.
Miller, who has come out of retirement several times to work on corporate restructurings, helped oversee bankruptcies of companies such as Delphi Corp and Federal-Mogul Corp FDML.O.
Hawker has a huge debt load stemming from its 2007 leveraged buyout and was hit especially hard by a sharp decline in business jet sales after the financial crisis. The company’s business plan had projected a recovery in the business jet market beginning in 2010, but that had only started to materialize this year.
Earlier this year, Hawker lost a contract to build 20 light attack planes for the U.S. Air Force, losing out in the bid to U.S. defense contractor Sierra Nevada Corp and Embraer.
The Air Force later canceled that contract citing inadequate documentation for the decision, giving Hawker -- which had challenged the contract award -- a chance to compete.
Reporting by Andrea Shalal-Esa and Soyoung Kim; editing by M.D. Golan, Bernard Orr