Hawker Beechcraft’s secured lenders and senior bondholders are agreeing to a restructuring plan that will eliminate nearly all of the company’s $2.5 billion in debt and $125 million in interest expenses. The company today filed for Chapter 11 bankruptcy protection in a move that Hawker Beechcraft says is designed “to implement the terms of the prearranged restructuring expeditiously.”

The restructuring agreement was signed by financial institutions representing more than two-thirds of the company’s bank and senior debt and will take effect once the plan is confirmed by the bankruptcy court. Hawker Beechcraft filed voluntary petitions under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York.

Once confirmed, ownership of the company will be transferred to its creditors.

As part of the plan, Hawker Beechcraft has secured $400 million in debtor-in-possession (DIP) financing that will enable the company to continue to pay employees, suppliers, vendors and others.

Goldman Sachs and Onex paid $3.2 billion to buy Hawker Beechcraft from Raytheon in 2007. Two-thirds of the purchase price, however, was borrowed.

The prolonged economic downturn hampered Hawker Beechcraft’s ability to move out from under its debt, and the company began to drown in interest and other payments. Recently, Hawker Beechcraft has repeatedly warned that without a comprehensive restructuring, the company may not continue to operate.

“The protections provided by the U.S. Bankruptcy Code and the financing commitment we have obtained put Hawker Beechcraft in a great position to continue to do so throughout the restructuring process,” says CEO Robert Miller, a corporate turnaround specialist who was brought in earlier this year. “Restructuring our balance sheet and recapitalizing the company in partnership with our debt holders will dramatically improve Hawker Beechcraft’s ability to compete in a rapidly changing environment.”

Hawker Beechcraft says the $400 million in DIP financing will be sufficient to meet its obligations to suppliers and employees, a key assurance since the company’s suppliers already have indicated that they were ready to cut off supplies if their payments were at risk.

Supply chain problems have slowed production on some of the company’s major aircraft lines, forcing rolling furloughs. The company in April also issued layoff notices to 350 workers, citing market conditions.

Analysts and competitors also have begun to question whether Hawker Beechcraft is at risk of losing market share given the uncertainty. Executives at rivals Embraer and Cessna have stated that they would be interested in acquiring parts of Hawker Beechcraft should it come on the market. The company’s support network has been viewed as a particular possibility.

As a result of today’s announcement, Pension Benefit Guaranty Corporation (PBGC) noted that Hawker Beechcraft’s three pension plans are 56% funded and, should Hawker Beechcraft end its plans, PBGC would cover $533 million of the $611 million shortfall.