Financially troubled Hawker Beechcraft filed for Chapter 11 bankruptcy protection Thursday, saying it would emerge from the financial restructuring “a stronger company.”
The struggling plane maker filed the pre-arranged restructuring agreement with the U.S. Bankruptcy Court in the Southern District of New York.
Its goal is to use the filing to reorganize, and to eliminate about $2.5 billion in debt and about $125 million of annual cash interest expense, according to a company statement, which also said the plan is supported by the majority of its senior secured lenders and senior bondholders.
Operations will continue, and Hawker Beechcraft will continue to pay employees, suppliers, vendors and others in the normal course of business. To fund its operations through the process, Hawker Beechcraft has obtained a commitment for $400 million in “Debtor in Possession” financing
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Officials stressed that employment will not be directly affected, and that they will continue to fill orders and serve customers.
The pre-arranged restructuring agreement will take effect when the company’s reorganization plan is approved by the Court and the Chapter 11 case is concluded.
“We are pleased to have reached an agreement with our largest lenders and bondholders on a solution to stabilize our capital structure,” Steve Miller, Hawker Beechcraft CEO, said in a statement. “In the last three years, the company has made aggressive transformational changes in all operational functions, and today’s announcement represents the next step forward.”
Miller, a turnaround and restructuring expert, joined the company in February.
Restructuring the balance sheet and recapitalizing the company will dramatically improve the company’s ability to compete in a rapidly changing environment, Miller said.
Its largest creditor is the Pension Benefit Guarantee Corp., followed by Deutsche Bank National Trust Co., which holds $663.6 million in unsecured notes.
Other large creditors include Export Development Canada, Rockwell Collins and Honeywell International. Many of the creditors are customers with deposits on airplanes.
“Hawker Beechcraft has a long and significant history in Wichita and is a critical part of our state’s aerospace cluster,” Gov. Sam Brownback said in a statement. “Preserving jobs in Wichita and safeguarding the state’s investment are our priorities. We will be working closely with the company’s leaders during this restructuring process.”
Hawker Beechcraft was formed in 2007 after Goldman Sachs and Onex Corp. bought Raytheon Aircraft, from Raytheon for $3.3 billion at time when the market for business jets was strong.
The company employs about 6,000 worldwide, including 4,700 in Wichita.
Hawker Beechcraft officials are scheduled to make their first appearance before the bankruptcy court in a hearing today.
A company spokeswoman said the company had no further comment beyond its statement and information on its website.
A Goldman Sachs spokeswoman also declined comment.
The Chapter 11 filing had been anticipated.
"Everybody in the community, I think, is a little bit disappointed on the one hand, but since everyone here’s been aware for awhile of the challenges they faced with their debt load, we’re all thinking it’s time for them to take action to pull themselves out of this dilemma,” said Sedgwick County Commissioner Dave Unruh. “In that respect, I’m somewhat relieved today.”
It’s a difficult day for Hawker Beechcraft employees and the Wichita community, said Rep. Mike Pompeo. “While I expect that Beechcraft will emerge from bankruptcy stronger than ever, this process will no doubt be challenging for Hawker’s suppliers, employees and their families.”
Walter and Olive Ann Beech founded Beech Aircraft Co. 80 years ago, and the company has been an essential part of Wichita ever since.
Company officials stressed that they intend to survive – using Chapter 11 bankruptcy to continue to operate while they work to shed debt and reorganize financially.
“Hawker Beechcraft expects to emerge from this process as a stronger company,” it said.
Once the court approves the company’s restructuring plan and it emerges from bankruptcy, the company’s current equity will be canceled. Equity ownership will go to the holders of the company’s secured debt, bond debt and other unsecured creditors.
Hawker Beechcraft told customers that the filing will not affect its commitments to them.
“Upon receiving expected court approval in the day or two of certain motions, deposits and progress payments will be secure, and all customer orders for available products will be fulfilled,” a letter to customers said. “We expect to receive court approval to honor warranty claims. Our commitment to providing the best products and service in the industry remains unchanged.”
The company also said it expects to “normalize relationships with suppliers who may have temporarily changed the manner in which they do business with us.”
The filing will have no impact on Hawker Beechcraft’s agreements with the city, county and state regarding financial incentives, the company said.
In 2010, Hawker Beechcraft received $45 million in incentives in exchange for keeping the company in Wichita and employing at least 3,600 people.
The city and county each pledged $2.5 million over a five-year period.
The state of Kansas committed $10 million for tuition reimbursement and training and $5 million a year for four years that can be used for a variety of expenses.
At a late afternoon press conference at city hall, city and county officials pledged to enforce their incentives contracts with Hawker Beechcraft, with the next payments due a year from now.
“We know this is a tough time for Hawker Beechcraft and a time of great uncertainty for employees, for our community as a whole," Wichita Mayor Carl Brewer said. "We’re here to stand along with Hawker Beechcraft and its employees as the company works through the next steps.
“We were there for the company when we were needed,” Brewer said. “We will continue to do so to better understand the situation and outcomes as they unfold.”
Since Hawker remains above the 3,600-employee threshold to qualify for the local and state incentives, Brewer and Sedgwick County Commission Chairman Tim Norton said there are no issues with the contracts.
The next city payment due is $500,000 or $138 per Hawker employee, a risk council member Pete Meitzner said he’d “take every day.”
“The future of our contract with Hawker Beechcraft will be dependent on what happens to the company and those requirements,” Brewer said.
Shedding debt will definitely aid Hawker Beechcraft, said Cai von Rumohr, an aviation analyst with Cowen and Co. And it will give customers more confidence that the company can survive.
Still, Hawker Beechcraft has work to do to reassure its customers, he said.
And atop marketing issues and some operational and material problems, the company has to deal with the overall weak demand for business jets.
“Unless business picks up, they still have a problem,” von Rumohr said.
As the company moves through bankruptcy, employees’ compensation, health benefits and 401(k) benefits will continue, but court restrictions will delay the company’s matching contributions for about 25 days.
The company also may be required to terminate the pension plan; if so, it would be taken over by the Pension Benefit Guaranty Corp, a government agency that pays the monthly benefits, up to a limit.
The company recorded a net loss of more than $630 million last year and said in a filing with the Securities and Exchange Commission in April that it had doubts about its ability to continue as a going concern.
The filing warned that if the company wasn’t able to make payments, refinance debt or obtain new financing, it would likely consider other options, such as sales of assets, sales of equity, negotiations with its lenders or filing for Chapter 11 bankruptcy.
Last week, the company handed out 60-day layoff notices to 350 workers, most of them hourly employees.
It also filed with the SEC to de-register its bonds. That means that the company will no longer be required to disclose its financial results with the SEC on a regular basis.
Hawker Beechcraft delivered 291 airplanes last year, compared to 318 the year before. Its backlog of orders totaled $1.13 billion on Dec. 31, down from $1.4 billion at the end of 2010.
Contributing: Bill Wilson of The Eagle