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A series of new developments in the area of corporate restructuring — most notably the speed with which the automaker was able to emerge from bankruptcy — may change the face of a 100-year-old transaction.
Marie Leone, CFO.com | US
August 7, 2009
In a scenario that didn't seem possible three months ago, bankrupt auto-parts supplier Metaldyne Corp. found a buyer for its four businesses Friday. MD Investment Corp., a joint venture of Metaldyne creditors Carlyle Group and Solus Alternative Asset Management, reportedly won the right to purchase the company's chassis, power train, tubular, and balance shaft module businesses in an auction that ended Thursday night. At press time, the company is seeking approval from the U.S. bankruptcy court for the Southern District of New York to complete the transaction, according to a report by The Deal.
Three months ago, selling off assets from auto-parts manufacturers seemed like a Herculean task because the financial prospects for the auto industry were so dim. Chrysler and General Motors, two key customers, had accepted government bailout money, sending both American car companies into Chapter 11 bankruptcy protection. Further, two other big auto-parts suppliers, Delphi Corp. and Visteon, had to file for bankruptcy.
But a series of new developments in the area of corporate restructuring, most notably the speed with which Chrysler was able to emerge from bankruptcy and the fact that the company's outside attorneys put several executives on the witness stand, may change the face of a 100-year-old bankruptcy transaction: the Section 363 sale.
A 363 sale, named for the bankruptcy-code provision under which it falls, is used when a company sells its assets while under the protection of Chapter 11. "It's the cleanest way to buy a company," says Jonathan Carson, managing director and co-founder of Kurtzman Carson Consultants, which specializes in bankruptcy and corporate restructuring.
The transaction is considered clean because a buyer is able to buy only the "good" assets and leave the rest — as well as the liabilities — behind. Carson says Section 363 sales are on the rise, counting about 25 publicly traded companies that went that route so far this year. They include Chrysler, GM, Nortel, and now Metaldyne.
In a classic bankruptcy filing, a troubled company submits a plan of reorganization to a bankruptcy court for approval. The court then generally solicits input from creditors and lenders, so that divvying up the company's available assets is a negotiated process. While prepackaged bankruptcies follow the same process, the company in such cases gets the necessary approvals before submitting the plan to a judge, speeding up the time frame.
By contrast, in a 363 sale, a company does not need to submit a plan to the court, but rather sells assets to a buyer in an expedited process that does not require buy-in from any of its debtors.
While 363 sales date back to 1913, the Chrysler transaction gave the structure a 21st century makeover, which culminated in a court of appeals decision filed on Wednesday that cleared the way for the carmaker to move forward with its plan to emerge from bankruptcy. In June, the U.S. Supreme Court rejected appeals by opponents of the Chrysler bankruptcy plan — notably the state of Indiana which has pension plans invested in Chrysler — to delay the bankruptcy proceedings.
Chrysler moved through court at lightning speed, convincing judges to allow it to skip district court and finishing in just 42 days from the time it filed its Chapter 11 petition.
By June 10, Chrysler had sold its assets to an alliance headed by Italy's Fiat, which now holds a 20% stake and management control of the carmaker. The United Auto Workers union, through a voluntary employee benefits association (VEBA), currently owns 55% of the new Chrysler, while the U.S. and Canadian governments together have a 10% stake. The U.S. Treasury is providing $6.6 billion in exist financing, and Fiat is expected to increase its holdings when U.S. coffers are repaid.
Chrysler's speedy exit from bankruptcy is attributable to two efforts: the groundwork done by its management to negotiate with the unions, suppliers, dealers, and Congress before filing for Chapter 11 protection, and the legal strategy of putting eight executives, including then–chairman and CEO Robert Nardelli and CFO Ronald Kulka, on the witness stand.
"We let the business tell the story rather than the lawyers," says Corinne Ball of Jones Day, the lead attorney for the Chrysler rescue. It was management's deep understanding of the business that allowed the bankruptcy court, appellate court, and Supreme Court to understand the urgency of expediting the process, according to Ball.
"Delay was our greatest fear," recalls the attorney, who says the time line for exiting bankruptcy was dictated by the ability of Chrysler and its dealers and suppliers to operate as going concerns. Without an accelerated process, Chrysler, as well as some of its dealers and suppliers, was headed for extinction, she believes.
The marketplace consensus was that no automaker could survive the typical lengthy Chapter 11 proceedings. As the executives explained on the stand, cost-cutting measures lead to plant shutdowns, which in turn lead to idle production lines. That automotive supply chain can absorb such operations halts for only about six to eight weeks. After that, dealers run out of inventory and financing, and suppliers run out of receivables.
Meanwhile, Fiat put pressure on the process by saying that June 15 was its "drop-dead date" to sign a deal, and the U.S. Treasury Department calculated that it could only prop up the carmaker in bankruptcy for about the same six-to-eight weeks that dealers and suppliers could afford. Following that, Chrysler would be stranded.
Emergence from bankruptcy was also delayed by creditor and hedge-fund investors, who balked at the government bailout package, especially the idea that the autoworkers union would wind up owning more than half the company. By their lights, the government was providing financing in a way that would benefit the union workers at the expense of lenders.
Nevertheless, Chrysler sped through the process, and so far bondholders, which are owed $6.9 billion by the carmaker, will collect 29 cents on the dollar under the Chapter 11 agreement.