Onex Corp. doesn't make many money-losing mistakes, but the bond market is saying that it made a big one by sinking $500-million (U.S.) into a 2006 buyout of corporate jet maker Hawker Beechcraft.
Hawker debt is trading at levels that suggest investors fear a restructuring. According to Bloomberg News, Hawker Beechcraft bonds maturing in April, 2015, are on offer at 24 cents on the dollar.
That level signals serious concerns about the company's future.
The issue is that Hawker has a lot of money owed to banks that has to be repaid in 2014, and doesn't have the cash to do it. That comes after Standard & Poor's last week cut Hawker's credit rating to triple-C, and warned the company may need a restructuring. Moody's said in September that the company's current balance sheet is "unsustainable."
Onex bought Hawker using cash from its Onex Partners II buyout fund, a $3.45-billion fund. Onex is the biggest investor in OP II, which also includes money from outside partners such as pension funds.
Onex didn't fly solo on the original purchase. It put up about $500-million and Goldman Sachs Group Inc. put up $500-million. The rest of the $3.3-billion deal was financed by debt.
Onex and Goldman bet on a strong market for corporate jets and the potential of new models. However, with the economy in trouble, that hasn't played out. Revenue has been in decline and Hawker is burning cash.
Covering the interest payments on its debt should be no problem. However, if Hawker runs afoul of its debt covenants, the banks could force the issue before 2014. On the other side, Onex and Goldman have long track records with lenders and would expect to get some forebearance.
Bloomberg quotes an analyst as saying that the company's assets are worth about $1.05-billion, which means that bondholders would get some money back in a full-on restructuring, but Onex and co-owner Goldman wouldn't get any.
One option in such situations is for the original buyers to ante up more cash -- what some call an equity cure -- to fix the balance sheet. Another option is asset sales.
Onex has in the past shown great patience with tough investments, riding out down cycles. Sitel, a call centre operator that Onex owns, has been a good example of that.
However, Onex's partnership with Goldman in Hawker Beechcraft may affect that ability to sit tight in this case -- if Goldman wants to get out, that changes the dynamic.