The Grede Foundries Official Committee of Unsecured Creditors (the “Committee”) confirmed on September 17, 2009 what only had been implied in other filings and indicated by a few of the Debtor’s maneuvers over the past several weeks – the Debtor is planning to sell all or a substantial portion its operations under Section 363 of the Bankruptcy Code. In an objection to Debtor’s motion to engage an executive headhunter, the Committee’s counsel stated:
The Committee is informed and believes that the Debtors intend to sign a stalking horse asset purchase agreement and file a motion for approval of sale procedures before the end of September, and to have the stalking horse bidder and sale procedures approved by mid-October.
The Committee went on to state that DDJ Capital Management, LLC (“DDJ”), the spoiler of Wayzata Opportunity Fund II, L.P. 363 sale plans, was one of the “the serious potential stalking horse bidders… .”
The Disaster of 363 Sales in the Automotive Sector
In 2009, most section 363 sales of automotive sector businesses to private equity investors have been supplier kill zones. These cases have generated clear camps of “have” suppliers and “have not” suppliers. The executory supply contracts of “have” suppliers’ are assumed by the buyer resulting in full payment of pre-petition claims and no bankruptcy preference exposure. The “have not” suppliers are left behind among the other unsecured creditors with no hope of recovery of any pre-petition claims, high risk of impairment of administrative claims and a substantial risk of being subjected to a bankruptcy preference claims. (After an automotive supplier 363 sale there are only two alternatives for a Debtor – a conversion to chapter 7 or adoption of a plan of liquidation. What option is chosen primarily depends on whether there is going to be enough money to pay administrative expenses.)
A “perfect storm” now exists that makes 363 sales very attractive for private equity investors, and especially distressed opportunity investors, and unattractive for strategic investors. The participation of strategic investors is important in any bidding process in order to keep sale prices up. There are 3 main factors creating this “perfect storm”.
- The automotive sector remains very depressed and there is a high degree of uncertainty as to when a recovery will come. Strategic investors are unwilling to take on additional horizontal or vertical capacity only to have it sit idle.
- Strategic investors can not accept the compressed, wild and woolly 363 sale process that has become the hallmark of the automotive sector. The potential for automotive customers to resource has caused 363 sales to take place in a frenzied atmosphere — “If the sale does not happen quickly, the customers will resource and the value of the debtor’s estate will evaporate.” This pressurized sale environment means that 363 sales are consummated within 45 to 60 days from filing of the bidding procedures motion. This inability to conduct the customary level of due diligence is coupled with the lack of the typical buyer protections strategic investors expect – broad representations and warranties, conditions on closing and recourse provisions.
- Institutional DIP financing is practically non-existent in the automotive sector. This has allowed integrated DIP financing, 363 sales tactics. By virtue of being both DIP financing provider and stalking horse bidder, an investor can substantially increase the financial and logistical burdens for another competing buyer to jump in.
(Automotive customers also have reason to dislike 363 sales. The supply contract assumption procedures in most 363 sales do not afford automakers or tier 1 customers any assurance of continued supply. Click on this link to read about the horror story of the automakers in the Fluid Routing Solutions 363 sale.)
Would a 363 Sale for Grede Foundries be Different?
There are several factors that have the potential of making a Grede Foundries 363 sale different than those of other automotive suppliers.
- The attorneys for the Committee are strong and have made the Committee a force to be reckoned with. Their responses and objections to various positions taken by the Debtor have been well reasoned, insightful and effectively presented. We have no doubt that Committee’s counsel presents a major concern for DDJ and the Debtor in terms of trying to replicate recent automotive supplier 363 sales.
- It is going to be hard for the Debtor and DDJ to create the type of frenzy necessary to push through a 363 sale like a bullet train. The Debtor has cash. The customers are subject to accommodation agreements with “no resourcing” provisions. The longer the sale process remains open, the more likely a competing bidder will come forward.
- The Bankruptcy Judge has shown a consistent, measured and considered approach in dealing with the matters brought before him. In various other courts, strong challenges were raised to various aspects of 363 sale transactions. In one recent automotive supplier bankruptcy, a sale procedures motion was made as part of the first day motions. Within the succeeding 7 days, the US Trustee, the PBGC and the largest unsecured creditor all raised objections. The US Trustee had moved with remarkable speed in getting creditors committee counsel in place within one week of the bankruptcy filing. The creditors committee requested a 3 day extension of the hearing date to allow it to assess the motion since it had only been just constituted. The interim sale procedures motion was granted without extension of the hearing date.
How Does it End?
The Debtor and DDJ have determined that some of the Grede’s problems just can not be redressed in a reorganization. For this reason, in all probability, a 363 sale ultimately will occur. The Bankruptcy Court only will need to be convinced that the Debtor has gotten the highest and best terms and that the decision to sell is within the Debtor’s reasonable business judgment. The Debtor and DDJ would have been spending the last several weeks laying the groundwork for both these findings.
The more important question: What will be the sales price?” Will there be enough to pay off the pre-petition secured lender, the DIP financing and the administrative expenses with enough left over to pay something to the unsecured creditors? The Committee likely is going to focus its efforts on getting the price up rather than blocking a 363 sale altogether.
What are suppliers to do?
Suppliers must get their 503(b)(9) claims filed by 5:00 p.m. (pacific time) on September 25, 2009. Those who miss this deadline will be barred from asserting an administrative expense claim for goods delivered within the 20 days prior to the bankruptcy filing.
Suppliers may wish to assess and reassess their post petition exposure.
Suppliers may wish to go ahead and determine if they are providing goods or services under a supply contract that a buyer might wish to assume. If there is an executory contract to be assumed, determination of the cure cost for assumption should be started since that can take some time.
Suppliers should pay close attention to developments in the case, especially over the next few weeks.