In its proposal to buy Hawker Beechcraft, there’s something Superior Aviation Beijing Co. of China won’t be acquiring – the liabilities of the company’s pension plans.
Generally speaking, that’s a typical provision in a deal such as this, said the former president of the American Bankruptcy Institute, Bob Keach.
“Normally, you wouldn’t see the assumption of the pension benefits,” Keach said. “When somebody buys a company with a defined benefit plan, that’s something they definitely don’t want to take on.”
On Monday, Hawker Beechcraft announced it will seek permission from the bankruptcy court to enter a 45-day exclusivity period with Superior to perform due diligence while the two companies negotiate the definitive documentation of the transaction to sell the company to Superior for $1.79 billion in cash.
The company filed for Chapter 11 bankruptcy protection on May 3.
A letter from Superior to Hawker Beechcraft filed with the bankruptcy court this week spells out Superior’s proposal.
In the letter, Superior said it plans to retain key executive personnel and keep the corporate headquarters in Wichita.
“Superior has no plan to relocate or terminate any manufacturing facilities or product lines,” it said in the letter.
The company wants to acquire 100 percent of the equity of a reorganized Hawker Beechcraft with substantially all of its tangible and intangible assets, with some exceptions.
In a sale, Superior won’t acquire the cash, except for customer deposits on airplanes, or its defense business.
And “for the avoidance of doubt,” it won’t assume any of the liabilities in its three retirement income plans, which include pension plans for hourly and salaried employees.
If a buyer wants to maintain the existing workforce and manufacturing plant, then it will have to make some changes in its pension plans for employees, Keach said. Usually, in such a situation, new plans would be negotiated with workers, he said.
“If they were to rehire a substantial portion of the union workforce, then they have to negotiate new contracts with the union,” Keach said. And benefit packages would be put in place for nonunion employees.
Defined benefit plans are “old style,” he said. Typically in a sale, those get changed to a defined contribution plan or 401(k).
For retirees, it’s too soon to know what will happen with their pensions.
It depends on how the pension plans are funded, Keach said.
In May, Hawker Beechcraft warned it may have to terminate its defined benefit pension plans as it goes through Chapter 11 bankruptcy.
The company’s three pension plans are 56 percent funded, with $769 million in assets to cover $1.4 billion in anticipated obligations.
If the plans were terminated, they would be taken over by the Pension Benefit Guaranty Corp., a federal agency that pays the benefits, but with caps, when an employer is no longer able to pay.
It’s too soon to say what will occur. It’s up to the court to decide whether the agency needs to step in to deal with funding shortfalls.
That’s something that will be debated in court, said Thomas Brous, a pension lawyer at Stinson Morrison Hecker in Kansas City, Mo.
The PBGC is already “in the red on existing plans they’ve had to take over,” Brous said. “They will fight not to take on any more.”
In court, the agency will try to get as much money as it can out of the bankruptcy estate to fund the pension plans, he said
If the plan is sufficiently funded, the PBGC wouldn’t take it over, he said.
But it’s too soon to know how that will play out.
It’s even too soon to know whether the sale to Superior will move forward.
Superior must perform due diligence of the company and obtain U.S. and Chinese regulatory approvals, among other things.
Once an agreement is reached, there will be an auction of Hawker Beechcraft’s assets.
That could take place sometime in mid- to late October.
In its letter, Superior calls itself a “stalking horse bidder.”
A “stalking horse bidder” is an initial bidder on a bankrupt company’s assets. The bankrupt company chooses the “stalking horse” to make the first bid.
According to the website Investopedia, the method allows the distressed company to avoid low bids.
“Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company’s assets,” Investopedia said. “In essence, the stalking horse sets the bar so that other bidders can’t low-ball the purchase price.”