The bankruptcy filing on February 6, 2009 of Fluid Routing Solutions, Inc. demonstrates that the ability of US automotive suppliers to obtain institutional financing has reached the “lowest possible point”. By analogy, the “lowest possible temperature” is defined as that point when all atomic motion ceases. This bankruptcy filing shows that all institutional financing options have ceased for a US automotive supplier whose customer base consists of domestic automakers.
The Debtors
The four affiliated entities filing for Chapter 11 are Fluid Routing Solutions Intermediate Holding Corp., Fluid Routing Solutions, Inc., Fluid Routing Solutions Automotive, LLC (a/k/a Mark IV Automotive, LLC) and Detroit Fuel, Inc. The filing was made in US Bankruptcy Court in Delaware and to be administratively consolidated under case number 09-10384. In this post, these four debtors are collectively referred to as “Fluid Solutions”.
Fluid Solutions is in the investment portfolio of Sun Capital Partners, Inc. (“Sun Capital”), a leading private investment firm. Fluid Services is the result of an investment set up by Sun Capital in May, 2007, less than 2 years ago.
Financial Picture
For the twelve month period ending December 31, 2008, on a consolidated basis, Fluid Solutions had approximately $211 million in sales. The group’s primary business is the design and manufacture of highly-engineered fuel management systems, fluid handling systems and hose extrusion products for the automotive sector. Practically all of its sales were to domestic auto makers.
Fluid Solutions does not present the typical financial condition profile of an automotive supplier. The group had outstanding secured debt of only approximately $4.2 million. In the automotive sector, that level of secured indebtedness is astoundingly low.
Fluid Solutions’ management had moved quickly and decisively to respond to the sudden contraction in the US automotive sector. In his affidavit in support of the first day motions, Fluid Solutions CFO John Carson described efforts to “aggressively” reduce costs, including the reduction of the number of facilities from six to four. In addition to its effectiveness in the implementation of these cost reduction efforts, there is absolutely no indication of any weakness in the management team.
There also is no indication that labor costs had gotten out of control. On the date the petition was filed, the companies employed approximately 1039 active employees (the “Employees”), of whom approximately 845 are hourly Employees, and 194 are salaried Employees. This presents a very positive ratio of hourly to salaried employees. Additionally, fewer than half of its hourly employees are covered by a collective bargaining agreement.
Given the above 4 factors – part of a major investment firm’s portfolio; strong market segment position; low secured debt; experienced, responsive management team –institutional financing should have been available to bridge a period of short fall in cash flows.
But no one can predict how long the cash flow shortfalls will continue. Additionally, the potential remains in either the short or long term for bankruptcies of GM and Chrysler. In this environment of uncertainty, Fluid Solutions was unable to obtain additional institutional financing and forced into bankruptcy. The affidavit of John Carson, succinctly describes the situation:
Even with the success in reducing the fixed costs of the Company, the Debtors have not been able to generate sufficient cash flows to meet their continuing obligations. In light of continued global economic instability, including the unique financial difficulties currently faced by the “Big Three” United States automakers, the Boards of Directors, in the exercise of their reasonable business judgment (and after extensive negotiations with their lenders, customers and the creditor constituencies described above, a review of various liquidation and sale recovery scenarios, and discussions with the Debtors’ professionals), ultimately determined that the most effective way to maximize the value of the Debtors’ estates for the benefit of their creditors is to seek protection under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in order (i) to sell their viable fuel-related business in an auction conducted under the supervision of the Bankruptcy Court (the “Auction”) and (ii) to complete a prompt and orderly liquidation of substantially all of their remaining U.S-based assets. The Debtors believe that proceeding under chapter 11 will maximize the value of such assets and will reduce potential risks, contingencies and uncertainties in the proposed wind-down.
The Chapter 11 filing of a supplier with the ownership and financial profile, market position, and management team of Fluid Solutions bodes very badly for all automotive parts suppliers with heavy dependence on the domestic auto industry. Unfortunately, it gives substantial credence to those who warn of the potential collapse of the US automotive supplier base.
The First Day Motions – An Exercise in Vendor Control
In subsequent posts, we will examine 2 same day motions filed by Fluid Solutions:
- Motion for Order Pursuant to Sections 105, 363 and 506(b) of the Bankruptcy Code for an Order Authorizing the Debtors to Elevate Certain Prepetition Claims of Certain Critical Vendors to Administrative Priority
- Motion for Order Pursuant to Sections 105(a), 503(b), and 507(a) of the Bankruptcy Code Authorizing Debtors to Pay Certain Prepetition Claims of Suppliers and Vendors of Goods and Services Entitled to Administrative Priority