Hawker, which was bought by the private equity firms in 2007 for $3.3 billion, is negotiating a prearranged bankruptcy with its largest lenders, which include Centerbridge Partners, Angelo Gordon and Capital Research & Management, these sources said on Wednesday.
Hawker and Onex declined to comment. Goldman Sachs and the lenders were not immediately available for comment.
The sources declined to be named because they were not authorized to speak to the media.
Centerbridge, a New York-based investment firm focused on leveraged buyouts and distressed investments, is the biggest lender, these sources said.
These lenders would also likely provide debtor-in-possession (DIP) financing to allow Hawker to continue to operate in bankruptcy, one of the sources said.
One of the sources also said the DIP financing is currently expected to be less than $500 million, but cautioned the number has not been finalized and could change.
Goldman Sachs Capital Partners, the bank's private equity fund, and Canada's largest buyout firm, Onex, bought Raytheon Aircraft Co from Raytheon Co 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 has led to a multiyear 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, Gulfstream and Textron Inc's Cessna, as well as foreign players like Brazil's Embraer SA and Canada's Bombardier.
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 put a spanner in their assumptions about growth, making these firms unviable.
TURNAROUND SPECIALIST
In February, the company's owners brought in turnaround specialist Steve Miller as chief executive officer. Hawker had previously hired Perella Weinberg Partners and law firm Kirkland & Ellis LLP as financial and legal advisers.
Miller, who is also chairman of bailed-out insurer American International Group, 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.
On Tuesday, Hawker clinched interim financing. It reached a deal with lenders that will provide a $120 million loan and defer the company's obligations to make certain interest payments.
This forbearance agreement, scheduled to expire at the end of June, has provided Hawker with more time to finalize the details of a prearranged bankruptcy with the main lenders, said these same the sources.
DEBT LOAD
Hawker has a huge debt load stemming from its 2007 leveraged buyout and was hit especially hard by a sharp decline business jet sales after the financial crisis.
One of the sources familiar with Hawker's management thinking said that 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 cancelled that contract citing inadequate documentation for the decision, giving Hawker -- which had challenged the contract award -- a chance to compete. But no details have been released on the follow-on competition and it remains unclear whether the financially distressed company has a better chance of winning this time.
"We view this as a positive development for Cessna and Embraer business jet orders," said Morgan Stanley analyst Heidi Wood in a research report responding to the Reuters story.
"Our discussions with our industry sources... have indicated increasing reluctance by business jet buyers to order jets from an OEM in serious financial straits," Wood said. "We expect both Cessna and Embraer to pick up share ceded by Hawker."
(Soyoung Kim & Andrea Shalal-Esa / Rueters)
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