Two Defense Contractors Get a Grace Period

The Pentagon gave two huge defense contractors two years grace to pay a $1.35-billion debt because it feared that they could go bankrupt in the middle of the Gulf War, a defense official said Tuesday.

Eleanor Spector, director of defense procurement, said the Defense Department gave McDonnell Douglas Corp. and General Dynamics Corp. two years to pay the debt stemming from their contracts to develop the scrapped A-12 Stealth attack plane for the Navy.

“We possibly would have precipitated Chapter 11 for one or both of the companies had we insisted on that repayment,” she told a House panel.

“This was in the middle of Desert Storm, and we were moving equipment from them,” she said. “They are our two largest contractors and conceivably they would not have performed in Chapter 11.”

The Chapter 11 provision of U.S. bankruptcy law allows companies to operate under protection from creditors while they work out a plan to reorganize and pay off their debts.

Spector said the $1.35-billion debt is for overpayments made to the two contractors before the A-12 was canceled.

“It’s not clear to me that either could have repaid it,” she said. “I would say that probably neither could have.”

Defense Secretary Dick Cheney canceled the radar-evading A-12 on Jan. 7. It was to replace the current A-6 attack jets, which are launched off aircraft carriers to bomb targets inland.

McDonnell Douglas, the nation’s top defense firm with $8.2 billion in contracts last year, makes the F-15 fighter planes and Apache helicopters used in the Gulf War.

General Dynamics is the second largest with $6.3 billion in contracts last year.

It makes M-1 tanks and F-16 fighter planes in addition to submarines.

The contractors have disputed the amount of the debt and filed claims totaling $1.4 billion, which the Navy rejected, Spector said.

Company spokesmen were unavailable for comment.