Chapter 11 could be opportunity for Hawker Beechcraft

It may sound odd but Chapter 11 could be a good thing for Hawker Beechcraft. Bankruptcy protection would give the company a chance to lose two owners – Goldman Sachs Capital Partners and Onex – that have left it with large debts. It would allow the manufacturer to renegotiate all of its contracts – including obligations with suppliers to the Hawker manufacturing line – and most of all it would remove the shadow hanging over the company.

However, whilst some feel that Chapter 11 is almost inevitable – the company appears to be planning to enter with most negotiations with lenders agreed – it is a worrying time for employees who have already had several tough and unsettling years since Goldman Sachs and Onex bought the company.  The company’s turnover has halved in the last three years and the number of employees has fallen by a similar amount.

Chapter 11 will also give the debt holders, who would become Hawker Beechcraft’s new owners, a chance to evaluate the four parts of the company: Hawker, Beechcraft, Military aircraft and Hawker Beechcraft Services. Three of these divisions are profitable and all would be attractive to buyers.

It may sound odd but Chapter 11 could be a good thing to happen to Hawker Beechcraft. Bankruptcy protection would give the company a chance to lose two owners – Goldman Sachs Capital Partners and Onex – that have left it with large debts. It would allow the manufacturer to renegotiate all of its contracts – including obligations with suppliers to the Hawker manufacturing line – and most of all it would remove the shadow hanging over the company.

However, whilst some feel that Chapter 11 is almost inevitable – the company appears to be planning to enter with most negotiations with lenders agreed – it is a worrying time for employees who have already had several tough and unsettling years since Goldman Sachs and Onex bought the company. In three years, the company’s turnover has halved, whilst the number of employees has fallen by a similar amount.

Chapter 11 will give the debt holders, who would become Hawker Beechcraft’s new owners, a chance to evaluate the four parts of the company: Hawker, Beechcraft, Military aircraft and Hawker Beechcraft Services. Three of these parts are profitable and all would be attractive to buyers.

What will happen under Chapter 11?

Hawker Beechcraft is sensibly not rushing into bankruptcy protection. The company says that lenders responsible for 70% of its bank debt have agreed to defer interest and renegotiated covenants.

Centerbridge Partners, Angelo Gordon & Company, and Capital Research & Management have together lent Hawker Beechcraft $120 million and are likely to provide a debtor-in-possession loan when Hawker Beechcraft files. Centrebridge is likely to be the new majority owner according to one source. It looks likely that most of Onex and Goldman Sach’s equity will be wiped out with loan and bondholders swapping debt for equity.

If it files, the company’s new shareholders will, of course, look at selling some businesses and Hawker Beechcraft has been approached by a number of buyers throughout the last few years. Several have called in the last week.

The big decision will be what will happen to the Hawker business jet line. The company does not split Hawker and Beechcraft when it reports its finances but Beechcraft is clearly profitable, making over $100 million according to one analyst. The T-6B military trainer is also profitable, as is Hawker Beechcraft Services which would also be an attractive acquisition opportunity for a maintenance company.

The company’s commitments to suppliers to its Hawker production line are considerable and Chapter 11 would allow it to renegotiate these making this division more profitable.

“This is a great opportunity for a Chinese or Indian buyer that wants to get into aerospace,” says one private equity specialist.

Can Boisture do it again?

Individuals at Hawker Beechcraft say that Boisture’s relationship with Goldman and Onex had become strained and this was one reason that they hired Steve Miller as CEO. However, Hawker executives say the two will work together with Boisture planning to stay.

Although Miller has run manufacturing companies, such as audio equipment maker Delphi Corp and automative parts firm Federal-Mogul Corp, his focus will very much be on restructuring.

“Steve has a track record of turning companies around and will handle all of the negotiations. Bill is strategic genius but has been spending two to three hours a day dealing with the board, banks, bondholders and all that BS.,” says one senior Hawker Beechcraft manager. “Now Bill is is charge of the aviation business with Shawn Vick [executive vice president] managing the tactical and day to day stuff.”

A former Hawker Beechcraft employee adds: “Bill is the most impressive executive I have ever worked with.”

Boisture’s mistakes

Although he is very highly regarded, like everyone, Boisture is not perfect. His biggest mistake with Hawker Beechcraft is perhaps moving too fast. Knowing that the company needed to transform in order to meet its debt commitments, he started four ambitious projects at the same time: the Block-Point Upgrade of the Hawker 4000, outsourcing much of the King Air supply line; moving some Hawker operations to Mexico; and implementing a new SAP company-wide information system, dubbed Project Wildfire.

All of these no doubt made sense, but overstretched the management team – particularly when projects ran into problems. There were delays with both the King Air and Hawker deliveries and problems with Project Wildfire meant that there were two months when the company was unable to bill customers or order new materials.  These problems helped contribute to the company announcing a loss of $42 million for the third quarter of 2011.

(Not all of these projects are finished. In April 2012 Hawker Beechcraft was looking to hire a director for its SAP centre of excellence saying: “There is some heavy lifting to do, but this opportunity offers the best candidate an opportunity to leave their thumbprint on this company, and to be professionally and financially rewarded for their efforts. If this sounds like something you can handle we would love to hear from you!”)

Boisture was also overworked. He was without a permanent CFO for much of 2011 and was acting CFO for almost two months, after Sid Anderson left the company in January 2011. The company then hired an interim CFO, Patrick Kelly (he was apparently favoured by Goldman Sachs).

Hawker Beechcraft only got a permanent CFO in September when Karin-Joyce Tjon joined from Alvarez & Marsal, a company that specialises in company turnaround management and restructuring.

Tjon is a restructuring specialist has impressed people who have worked with her. She has also led much of the negotiations with banks. “She is very smart and very good,” says one former colleague.

Onex and Goldman – not the smartest guys in the room

With hindsight, Onex and Goldman clearly overpaid significantly for Hawker Beechcraft. However, they also choose to leverage the company highly and have not been proactive.

“Goldman sat on every strategic alternative they were given,” says one person familiar with the company. “They just kept waiting for the upturn to come, they thought it would come in 2010 and it did not. Hope is not a strategy.”

Goldman and Onex are rumoured to have rejected a bid for the T-6B military trainer business which would have allowed them to pay off over half of all the debt.

Do not write-off Hawker Beechcraft

Hawker Beechcraft makes good aircraft and employs good people. Like all manufacturers it has found it hard to adapt to the sudden downturn and its debt burden is simply too great.

It is worth remembering that nearly all business jet manufacturers – including LearJet, Canadair (which built Challenger aircraft) and Gulfstream have all recovered from financial problems and there is no reason why Hawker Beechcraft (or Hawker and Beechcraft if they split) will not come back.

“I can’t believe that Beechcraft, the maker of such iconic aircraft could really go into Chapter 11,” says one European broker. He is wrong to be worried. There is no shame in entering Chapter 11 – every major US airline has sought bankruptcy protection since 2001 – and the company should emerge stronger and with a better future.

Hawker Beechcraft celebrates the 50th anniversary of its Hawker 125 and there is no reason why the company will not be going strong in another 50 years.