Analysts watch for Hawker Beechcraft’s next move

Some say filing for bankruptcy is “when, not if.”

03/11/2012 5:00 AM

08/08/2014 10:09 AM

Analysts are closely watching Hawker Beechcraft Corp. to see what the financially troubled company’s next step may be.

Several analysts said it is possible — some said likely — that the company will file for Chapter 11 bankruptcy protection this year.

“Unless things turn around, this company could go bankrupt soon,” said Scott Chan, an analyst with Canaccord Genuity in Toronto. “Time is running out.”

The company is not turning much cash flow, he said, and it’s close to breaching some debt.

It could file for bankruptcy protection, “unless Mr. Miller (Hawker Beechcraft Inc. CEO Steve Miller) can turn things around or finance the debt or something like that,” Chan said.

Hawker Beechcraft declined comment for this story.

One analyst who asked not to be named because it’s against his company’s policy for him to talk publicly, said a bankruptcy filing is a matter of time.

“I think everybody is pretty sure it’s when, not if,” said the analyst.

With Hawker Beechcraft bonds trading for pennies on the dollar, analysts said the market is signaling that it expects the company to take some kind of action. A key item analysts are watching is whether the company will pay the April 1 interest, or coupon, on all its bond issues. That interest payment will total $28.3 million.

“If companies are going to file (bankruptcy) in the relatively near term, they won’t pay the interest payment,” the analyst said. “Cash is king. If their plan is that they’re going to file … they’re not going to pay that 28 million bucks. They’re going to keep it to use in the bankruptcy.”

Turnaround expert

In February, Hawker Beechcraft’s board of directors brought in turnaround expert Miller to head the company. Miller is known for his ability to work with financially troubled companies and solve hard problems.

He helped oversee the bankruptcy of Delphi Corp. and Federal-Mogul Corp., and helped in Chrysler Corp.’s return to profitability. In 2008, Miller wrote a book called “The Turnaround Kid: What I Learned Rescuing America’s Most Troubled Companies.”

“Steve’s a great addition to the team,” Mike Wall, an auto analyst with IHS Automotive, said Friday.

At Delphi, an auto parts supplier, Miller steered the company through a difficult bankruptcy during the worst of the automotive cycle.

“He took a lot of flak for the process,” Wall said. “But he did effect change going through that bankruptcy and setting the stage for them to exit as a stronger entity…. He did turn that company around.

“Anytime I see him taking over for a firm, maybe to help right the ship or taking over from a leadership perspective, you can expect a very focused strategy.”

For joining Hawker Beechcraft, Miller received a $5 million signing bonus, $1.5 million in annual base salary and annual bonuses if certain targets are reached, according to information filed with the Securities and Exchange Commission.

Along with Miller, Hawker Beechcraft also brought in financial adviser Perella Weinberg and legal firm Kirkland & Ellis.

A Debtwire report last week quoted unnamed sources saying the company also has brought on turnaround and restructuring firm Alvarez & Marshal. The company can bring expertise in financial or operational issues, analysts said.

Lenders preparing

Lenders have also hired experts to help them, the Debtwire report said.

A group of lenders who loaned Hawker Beechcraft $1.3 billion has hired financial adviser Houlihan Lokey, according to Debtwire. Other lenders have hired law firms with restructuring expertise to represent them and protect their interests, the report said.

The fact that lenders are hiring advisers is a positive sign, another analyst said. It shows that they’re getting organized to negotiate, which will help solve the company’s capital structure problem. That way Hawker Beechcraft can focus on managing its cash flow and its business.

It’s almost certain the company is working on restructuring debt with debt holders, said another analyst, who also did not want to be named because it’s against his company’s policy. But whether it will be able to do so in or out of court depends on how negotiations go with the creditors.

“I think there’s a business to be saved here,” the analyst said. “It’s just a terrible balance sheet. It’s too much debt. They (Onex and Goldman Sachs) arguably paid too much money at the peak of the market. And the balance sheet is hurting.”

For its part, Hawker Beechcraft would rather restructure without filing bankruptcy, a move that would cost it millions of dollars and hurt its reputation with customers, analysts said.

Last month, Miller said his goal was not to file for bankruptcy.

“My assignment is to figure out how to get through these financial headwinds without even having to think about Chapter 11 filing,” Miller said at the time. “Chapter 11 doesn’t do anybody any good. It’s usually not necessary.”

If it did file bankruptcy, some experts expect a “quick in and out” of restructuring so the company wouldn’t lose the confidence of existing and potential customers, similar to actions General Motors and Chrysler took during the automotive downturn.

Losing value

In 2007, Onex and Goldman Sachs each put up about $500 million to buy the planemaker, then called Raytheon Aircraft, from its parent company, Raytheon. The rest of the $3.3 billion deal was financed by loans.

With Hawker Beechcraft bonds trading so low, some analysts now value Onex and Goldman’s stake in the company at zero.

Chan, the Cannacord Genuity analyst, said he dropped the value he placed on Onex’s equity in Hawker Beechcraft from $237 million to $113 million on Feb. 24, which is at the high end of what some others are valuing the equity.

“Management probably values it lower,” Chan said. He said he may revalue it lower in the next quarter.

Onex doesn’t usually make investment mistakes, said Felix Narhi, an equity analyst with Odlum Brown Limited in Vancouver, B.C. But the acquisition of Hawker Beechcraft may have been one, he said.

“If you look at Onex’s history, they have made more than 70 platform acquisitions, and I believe only four of them have been outright failures,” Narhi said. “Maybe this is the fifth one. Nobody bats 1,000. This just looks like it isn’t going to work out.”

Onex bought the company at the wrong time in the market cycle, when the business jet market was hot. Then the downturn hit.

“The wind has been at their back for some time in that division,” Narhi said of Onex’s investment in Hawker Beechcraft.

Still, Onex has bought other companies when the timing wasn’t the best and has made money, he said. But that’s not the case this time.

Year-end results

Hawker Beechcraft plans to release its 2011 fourth-quarter and year-end financial report the last week of March, the last week it can legally report.

Earlier in the week, the bond market reacted like it expected the company to pay interest, or the coupon, on its bonds due April 1. That’s because the bonds had been trading with accrued interest included.

However, on Tuesday, the bonds began trading without the interest, a signal to analysts that the market was no longer confident of the company’s willingness to pay the April 1 interest.

“If they want to keep things moving along, and they think it will take them four to six months to have a better operational plan to implement through a bankruptcy, then they very well could pay the coupon,” one analyst said.

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