Dec. 6 (Bloomberg) -- Hawker Beechcraft Corp.'s bonds are plunging as investors anticipate that the plane maker part-owned by Goldman Sachs Group Inc. may seek to restructure its debts.
Bond dealers are offering 24 cents on the dollar for Hawker Beechcraft's $182.9 million of 8.5 percent notes due in April 2015, about the lowest since March 2009 and down from 42.5 cents in September, according to data compiled by Bloomberg. Standard & Poor's cut its credit rating to CCC on Dec. 1, saying the company may attempt a distressed debt restructuring.
Hawker Beechcraft is close to violating the terms of its loans, which require its cash flow to grow, as the weakening global economy cuts demand for its business jets and its liquidity slides. The Wichita, Kansas-based company may need to ask its lenders to loosen the covenants next year, according to Sam Goodyear, an analyst at CreditSights Inc. in New York.
"The market thinks that either an amendment or an out-of- court restructuring or a bankruptcy filing is a strong possibility," Goodyear said in a telephone interview yesterday. Goodyear, who recommended shorting the debt in November 2010, said that bondholders would likely recover nothing in a bankruptcy.
A month after Karin-Joyce Tjon, Hawker's chief financial officer, told analysts on a conference call that the jet maker had "no covenant issues for this quarter," Nicole Alexander, a spokesman for the company, wrote in an e-mail to Bloomberg News, "We have managed the business carefully to remain within our covenants and currently are in compliance."
No Advisers
Alexander said Hawker hasn't hired advisers to consider a debt restructuring. "In three years, when the debt matures, we will decide how to deal with the debt, i.e. re-finance, pay down or a combination of both," she wrote.
Hawker Beechcraft had $2.14 billion of debt outstanding as of Sept. 30, including $630.6 million of unsecured notes and $1.4 billion of term loans backed by its assets, according to its third-quarter report.
The notes due in 2015 have fallen from 79.3 cents on July 1, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The term loan due in March 2014 traded at 76.1 cents on the dollar yesterday, compared with 74.7 on Oct. 31, according to information provider Markit Group Ltd. The Standard & Poor's/LSTA U.S. Leveraged Loan 100 index rose 0.09 cent to 90.78 cents on the dollar yesterday, the highest level since Nov. 21.
'We Have Concerns'
Hawker Beechcraft may seek to restructure that loan before it comes due, according to Christopher DeNicolo, an analyst at S&P in New York. Business would have to improve for the company to refinance the debt at "reasonable rates," he said. The average floating interest rates on its current loans is 3.35 percent, according to its quarterly filing.
"As they get closer and closer to 2014, they're obviously not going to generate enough cash to repay it," DeNicolo said in a telephone interview. "We have concerns about their liquidity."
Raytheon Co., the world's largest missile maker, sold the business-jet unit to Goldman Sachs Capital Partners, the fifth- biggest U.S. bank's private-equity arm, and Onex Corp. in March 2007 for about $3.3 billion, giving the bank and Canada's largest buyout firm 49 percent equal stakes. Hawker Beechcraft's management holds the remaining 2 percent.
Debt Purchase
Goldman and Onex paid about $1 billion in cash, with Hawker Beechcraft raising the remainder in debt, according to an S&P report from 2007. Hawker Beechcraft bought back $274.5 million of that debt at market prices in 2009, paying about $96 million, S&P said in another report.
"The company had a fair amount of leverage on it from when it was bought out," DeNicolo said. "The ratios that we look at got pretty bad, pretty quick." The company's ratio of debt to earnings before interest, taxes, depreciation and amortization is 50, DeNicolo wrote in a Dec. 1 report. It was about 6.5 at the time of the acquisition, according to the 2007 report.
Shipments of civil planes fell to 1,227 in the first nine months of 2011, down 58 percent from 2,912 in the similar period of 2007, according to data on the website of the General Aviation Manufacturers Association, a Washington-based trade group. Business jet sales fell 13 percent in 2011 from a year earlier, the data show.
'Areas of Concern'
Hawker Beechcraft's assets are worth about $1.05 billion, Goodyear calculated. That means secured lenders would recover 72 percent of their loans in a bankruptcy, leaving nothing for bondholders, Goldman Sachs and Onex, Goodyear said. Gerald Schwartz, Onex's chief executive officer, said on a Nov. 18 conference call with analysts that his firm's investment in Hawker Beechcraft was at risk.
"There are, of course, areas of concern," Schwartz said. "One of them is, obviously, the tough corporate jet market facing Hawker Beechcraft."
Hawker Beechcraft's cash dropped to $147 million on Sept. 30, down from $422.8 million at the end of 2010, Bloomberg data show. The company had drawn $50 million from its revolving credit facility as of Sept. 30, it said in its third-quarter filing.
The terms of Hawker Beechcraft's loans require that the company's Ebitda increase quarterly, CreditSights's Goodyear said. The company may be able to comply with the covenant through the first half of next year, he said.
"Hawker would be just barely covenant compliant," Goodyear said. Lenders would likely agree to amend the terms, he said.
Revenue fell to $518.8 million in the three months through September, down from $594.7 million a year earlier, according to the quarterly filing. Hawker Beechcraft fired about 300 workers on Nov. 11, it said in a regulatory filing. The company said in an investor presentation on Nov. 1 that demand has for its planes has fallen "primarily as a result of uncertainty in the global economy."
"The buyout was a bet that business jet demand would stay at elevated levels," Goodyear said. "That was not realized."
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