May 8, 2009 5:23 pm

Hawker Beechcraft bond buyback amid cash burn sparks talk of equity injection

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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Hawker Beechcraft burned through roughly USD 140m of cash in the last five weeks and now the plane manufacturer’s lenders are bracing for a covenant breach in 2Q, several lenders and analysts told Debtwire. Most leveraged borrowers in similar straits would probably husband their cash but the company announced on 5 May plans to spend USD 100m of the USD 299m it has left to buy back bonds.

The unorthodox liability management strategy – combined with a full draw down on a USD 365m revolver – primed expectations that sponsors GS Capital and Onex Partners are preparing to pony up some more cash, the sources said.

“Goldman and Onex are following the chapter in the private equity playbook of what to do when your company gets into trouble,” said one of the lenders. They are using the banks’ money to delever the company in an effort to save it during the current down cycle, he said.

GS Capital and Hawker declined to comment, while Onex did not return requests for comment.

The USD 385m of 8.875% PIK-toggle notes due 2015 that the borrower has offered to repurchase at 30% of face traded today at 27.75, up from 15.5 on Monday, a buysider said. The Wichita-based plane maker’s USD 400m 8.5% senior cash notes due 2015 rallied roughly three points in the last day to 37.25, according to MarketAxess. Its USD 300m of 9.75% senior subordinated notes due 2017 last traded at 28.5, a 2.5 uptick from Tuesday.

Pay to play amendment

Goldman and Onex bought Hawker in March 2007, with USD 3.05bn of new debt and a relatively high equity contribution of USD 1.06bn. The PE firms have yet to recoup any of that investment and are likely looking to use all available debt before reaching into their own pockets again, three lenders said.

A new cash injection looks increasingly likely as the business jet maker heads into strengthening macroeconomic headwinds. If the company needs to ask holders of its credit facility for an amendment, they will likely require padding to their equity cushion before granting any covenant relief, said two lenders and a buyside source.

Hawker will likely fail to maintain leverage covenant compliance given its recent revolver draw, those same sources said. Hawker faces a 3.88x secured net leverage test on 30 June and a 3.63x cap on 31 December, according to SEC filings.

At the close of 1Q09, Hawker’s net leverage stood at 6.4x based on USD 322m of TTM bank EBITDA, USD 2.14bn of total long-term debt and USD 72.3m in cash. Net leverage through its secured debt stood at roughly 3.75x with outstanding secured debt as of 29 March consisting of a USD 1.28bn term loan due 2014.

While the plane maker’s tender offer is a cost-effective delevering mechanism, it targets junior debt that doesn’t count against Hawker’s maintenance covenants. The bond repurchase would not save the company any expense from a cash interest perspective, but would maximize its capacity to delever and preserve equity value, the lenders and one of the buysiders pointed out.

The buyback also indicates that the sponsors are not planning to file the company for bankruptcy, said the first lender. “If the sponsors were going to walk away from Hawker they wouldn’t have done this tender offer,” he said. “They would have drawn on their revolver and said the company needs to file for bankruptcy and restructure.” For the company to tender notes and then file for bankruptcy would result in a fraudulent transfer due to a prepayment of debt in preference to senior debt holders, two of the lenders pointed out.

Hawker is a good aircraft manufacturer that has a reason to remain in existence for the long term, a fourth lender said. “It’s just another case where you’ve over-levered the company in the midst of a horrible cycle, [but the company] would be worth saving in the big picture.”

For 1Q09, Hawker’s reported EBITDA totaled USD 30.7m, representing a 35% year-over-year decline, according to a company press release. Meanwhile, total sales for the three months fell roughly 7% from the prior year period to USD 537.6m.

After the struggling aircraft developer announced the complete draw-down of its USD 365m revolving credit facility and said it would tender USD 100m worth of its outstanding notes yesterday, the bid price on Hawker’s USD 1.28bn term loan due 2014 slumped three points to a low of 49, the second lender said. Following the market’s preliminary reaction, the bid-ask on the loan climbed to 52-54, before settling at 51.5-52.5, slightly below the prior day’s trading levels, the same source noted. Hawker’s Credit Suisse-led revolving credit was last bid at 42, according to Markit.

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