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Next Covenant Tripper Could Be GS Capital’s Hawker Beechcraft

As the deleveraging process continues, yet another over-levered buyout-backed company faces a covenant breech. GS Capital and Onex Partners-backed aircraft maker Hawker Beechcraft is expected to inject more cash into the company, according to Debtwire.

The company has “burned through” $140 million in the past five weeks and is expected to fully draw down its revolver to buy back bonds before GS Capital or Onex infuse any more cash, the news service reported. An injection of cash, above the firms’ $1 billion equity check in 2007, is expected in exchange for covenant relief. This indicates the company’s backers aren’t planning to push it into Chapter 11.

Last month S&P lowered the company’s corporate credit rating to ‘B-’ from ‘B+’. The ratings agency cited the potential for distressed redemption offers for the company’s debt as one reason for the downgrade.

Amendments and exchange offers are becoming more common as buyout-backed companies seek to avoid costly bankruptcy proceedings. The trend could very well strengthen after the U.S. government managed to turn the entire Chapter 11 bankruptcy process on its head this week.

Today reports surfaced of the President’s hardball negotiating tactics in the bankruptcy of Chrysler LLC. Unlike almost any other bankruptcy proceeding, Chrysler’s senior secured lenders will not be paid in full before any other creditors get paid. The Wall Street Journal summarized the financial sector’s reaction:

The White House’s role in restructuring Chrysler has sent a shudder through the community of lawyers and lenders in the field of bankruptcy and corporate workouts. Critics complain that the administration has violated a bedrock principle of American capitalism and unfairly demonized financial firms that are vital to the functioning of the economy and its eventual recovery.

The banks eventually agreed to take 29 cents on the dollar for their Chrysler exposure. But unfair payouts in bankruptcy court doesn’t mean lenders come out on top in their out-of-court agreements, either. I’m reminded of fears some lenders expressed to me a few months ago, when distressed debt exchanges and credit swaps started popping up more often. Our weekly downgrade wrap-ups indicate that the amount of “SD,” or selective default ratings thanks to distressed debt exchanges only continues to climb.

As I wrote then, distressed debt exchanges often work out that the private equity owners remain in place while bondholders take a loss. The entire situation “doesn’t sit well” with the lenders, they said. Senior lenders of Freescale Semiconductors went to far as to sue the company over their exchange. Unfortunately, activism from debtholders won’t do much to stop the trillion dollars worth of junk bonds and loans that will come due between 2011 and 2014.