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(Reuters) - Northstar Aerospace NAS.TO received a notice from a major customer claiming breach of obligations under certain contracts and the aircraft parts maker said it expects to violate its financial covenants as of January 31.
Shares of Northstar Aerospace, which provides gears for Black Hawk helicopters and Rolls-Royce's (RR.L) Trent engines, plunged to a two-and-half-year low of 35 Canadian cents on Monday morning on the Toronto Stock Exchange. The company's shares have lost more than half their value in the last six months.
Northstar Aerospace, which raised going concern doubts in September 2011, said it is still in talks with lenders to amend its credit agreement.
The company, however, cannot give a schedule for when the discussions may be completed with lenders, David Anderson, general counsel at Northstar Aerospace, told Reuters.
Northstar, which has a market capitalization of $24.5 million, had total liabilities of $155.9 million as of September 30, 2011, according to Thomson Reuters data.
Its key customers in the commercial market include GE Aviation, a unit of General Electric (GE.N), and Honeywell International (HON.N), while its defense clients include the U.S. government, Sikorsky Aircraft Corp and Agusta Westland.
TD Securities analyst Tim James downgraded the stock to "hold" from "speculative buy" and cut his price target to 80 cents from $1.50, citing concerns over the debt covenant and the customer contract breaches.
Northstar said the notification from the customer demands that it cure such breach or resolve the claims within 10 days.
General counsel Anderson, however, declined to clarify if it was a defense or a commercial customer.
"The company is evaluating the notice and has not reached any conclusions concerning the contents of the notice," Anderson said, adding, "I think it is premature to discuss the exact content of the notice until we have evaluated it."
Analyst James said the U.S. defense budget cut, which include unspecified delays in Army helicopter modernization, could weigh on the company's business.
Last week, the Pentagon unveiled a 2013 budget plan that would cut $487 billion in spending over the next decade by eliminating nearly 100,000 ground troops, mothballing ships and trimming air squadrons.
"This... if approved by Congress, could negatively impact Northstar's business beyond 2012," James wrote in a note to clients.
The budget plan would provide new challenges for Pentagon's top suppliers such as Boeing (BA.N), which is also one of Northstar's customers.
Shares of the company were trading down 50 percent at 40 Canadian cents. The stock was the top percentage loser on the exchange.
Reporting by Shounak Dasgupta in Bangalore; Editing by Joyjeet Das and Sriraj Kalluvila