Wednesday, December 26, 2012

Pension Benefit Guaranty Corporation Will Take Over Hawker Pensions

Updated December 26, 2012, 8:51 p.m. ET

The Wall Street Journal


Hawker Beechcraft Inc., which plans to exit bankruptcy protection under the control of a group of hedge funds that includes Bain Capital's Sankaty Advisors, is jettisoning two underfunded pension plans covering thousands of nonunion workers and retirees.

The Kansas-based aircraft manufacturer, which hopes to exit bankruptcy protection in the first quarter of next year, also said it struck a deal with the government's pension insurer to retain a third "hourly" plan covering more than 8,200 current and former union workers.

In bankruptcy court papers filed minutes before midnight late Friday evening, Hawker said it was terminating its so-called salaried and base pension plans covering nearly 9,500 employees and retirees as part of a comprehensive deal with the government's pension insurer, the Pension Benefit Guaranty Corp., and the International Association of Machinist and Aerospace Workers, the union representing its hourly workers.

The settlement calls for the PBGC to take over the two scrapped plans, which are underfunded by hundreds of millions of dollars, and in return the agency will get a $419.5 million unsecured claim against the company. Under Hawker's proposed Chapter 11 plan, that means the PBGC will recover less than seven cents on the dollar.

"Bankruptcy forces tough choices, but termination of pension plans doesn't have to be an automatic option," said J. Jioni Palmer, PBGC communications chief, in a Wednesday statement. To that end, the aircraft maker will continue to maintain the union pension plan, and the union has agreed to amend its collective bargaining pact so that the plan can be frozen.

While the hedge funds are requiring that Hawker dump the two plans as part of the debt-for-equity swap that will allow the company to exit bankruptcy, they had originally demanded that Hawker terminate all three.

However, "in a spirit of compromise," according to Hawker's lawyers, and in bid to avoid costly, protracted litigation, they moved away from their original position.

"After our talks with Hawker, the company decided to keep its hourly plan," said Mr. Palmer. "While PBGC is the nation's pension safety net, we only want to step in as a last resort."

The PBGC, created under the Employee Retirement Income Security Act of 1974, takes over a private-sector pension plan after determining an employer is unable to keep paying benefits. The PBGC will pay guaranteed benefits of up to $56,000 a year for a 65-year-old retiree.

Bankruptcy Judge Stuart M. Bernstein will consider approval of the deal at a hearing slated for Jan. 17, 2013.

For Hawker, the deal clears the way for the company's exit from bankruptcy early next year following the collapse of an earlier deal to sell its business to a Chinese aircraft manufacturer.

Instead, the hedge funds—which also include the distressed-debt-focused Angelo Gordon & Co., Capital Research & Management Co. and Centerbridge Partners—will swap $921.6 million in secured debt for an 81.1% stake in the reorganized company. All four funds specialize in buying debt at discount to profit from a troubled company's upside when it restructures under bankruptcy protection.

Senior bondholders, unsecured creditors and the government's pension insurer will divvy up the remaining 18.9% in the restructured Hawker. In all, the restructuring plan slashes some $2.5 billion in debt off Hawker's books.

Representatives for the Wichita-based company, which plans to change its name to Beechcraft Corp. upon emergence from Chapter 11, couldn't be reached for comment.

Hawker was created in 1994 as Raytheon Aircraft Co., after Raytheon Co. combined its Beech Aircraft and Raytheon Corporate Jets units. But many of its difficulties can be traced to an ill-timed 2007 buyout by Goldman Sachs's private-equity unit and Onex Partners, which purchased the company for $3.3 billion.

Superior Aviation Beijing Co. had agreed to buy Hawker's corporate jet and propeller plane operations out of bankruptcy for $1.79 billion, but the deal collapsed when the companies couldn't overcome U.S. government concerns that some sensitive technology tied to Hawker's defense business could wind up overseas.

The company, one of the world's largest makers of business jets, has also suffered from a prolonged slump in the corporate jet market. Hawker lost $630 million in 2011, and aircraft deliveries have fallen by a third over the past two years.


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