December 22, 2009 Update:  On December 21, 2009, Grede Foundries filed the affidavit of Eric W. Ek  in support of the  of the Debtor’s motion to authorize the sale of assets.  The affidavit provides both additional background and updated information regarding the proposed Section 363 Sale to Wazata Opportunity Fund II, LLC, through its subsidiary, Iron Operating, LLC.  The affidavit reveals that there was an alternative bidder at the auction. The affidavit states: “The Alternative Bidder qualified itself as a Qualified Bidder, but chose not to make a topping bid, based on the price and terms being offered by Wayzata through its subsidiary, Iron Operating, LLC.”

The affidavit concludes:

Additional time to sell or market the assets of Grede would not be helpful to the Sale process. CDG believes it has exhausted all practical avenues to discover a buyer that may be willing to purchase the assets of Grede on higher and better terms than the terms than the price and terms offered by Wayzata through its subsidiary, Iron Operating, LLC.

It is the conclusion of CDG as the financial advisor to Grede that the Sale is in the best interests of the Grede Chapter 11 Estate and that failure to proceed is likely to be harmful to the interests of the Estate

Click this link to view the affidavit.

Original Post November 17, 2009 Post Starts Here: On November 12 and 13, 2009, Grede Foundries filed 94 adversary proceedings to recover in excess of $19 million in bankruptcy preference claims.  At the same time, Grede Foundries filed oppositions to 99% of the $5 million plus in Section 503(b)(9) administrative expense claims filed by suppliers.  Astoundingly, these filings were made scarcely three weeks before an initial hearing on a motion to authorize 363 sale procedures to a DIP lender/stalking horse bidder.  While 363 sales in the automotive sector mostly have proven to be supplier kill zones, this may be the first case where a supply base was blown up before the asset purchaser had left with the business.

The developments in the Grede Foundries bankruptcy during the first 2 weeks of November present so many supplier issues that no single post could even start to address them.  This initial post seeks to provide context for future posts.

The Proposed 363 Sale to the DIP Lender/Stalking Horse Bidder

In so many of the automotive supplier bankruptcies over the past year, the pathetic proceeds generated by 363 sales could be forgiven because there were no options.  In the Grede Foundries case, there was an apparent option – a competing stalking horse bid that would actually have put money in the pot of the unsecured creditors.  That option was rejected by the Debtor.

The Grede Foundries bankruptcy started with an interesting twist.  On the filing date, June 30, 2009, Wayzata Opportunities Fund II, L.P. (“Wayzata”) was the pre-ordained debtor-in-possession lender and putative stalking horse bidder in a pre-planned 363 sale.  In the days immediately after Petition Date, DDJ Capital Management, LLC (“DDJ”) objected to Wayzata’s plans and offered its own DIP financing.  This resulted in Wayzata’s withdrawal as DIP lender and stalking horse bidder.

A reorganization of Grede Foundries may never have been seriously considered by DDJ.  By August , 2009 the search for a new stalking horse bidder was back.  Four stalking horse bids were ultimately obtained.  Recent bankruptcy filings provide details of two of these bids – (i) one submitted by Casting Acquisition Co. (“Casting”), an affiliate of DDJ (the “DDJ Bid”); and (ii) one submitted by a subsidiary of Atlas Holdings LLC (the “Atlas Bid”).

Both bids provided for the satisfaction of the pre-petition secured loans and DIP financing.  The Atlas Bid offered an additional $5 million of unencumbered cash for the Grede Foundries bankruptcy estate.

Grede Foundries decided to go with the DDJ Bid.  Although the Atlas Bid was higher, the Debtor explained that the “Atlas Bid was conditioned upon Atlas completing extensive due diligence and obtaining financing to complete the purchase.”  However, before the Debtor reached agreement with DDJ, DDJ entered into negotiations with Wayzata to sell the DDJ secured and DIP loan positions to Wayzata.  That sale was completed on October 26, 2009.

On November 4, 2009, Grede Foundries filed a motion seeking approval of sale procedures and Wayzata as the stalking horse bidder.  The Wayzata bid provides for payment of the pre-petition first priority secured loan, a “credit bid” of the pre-petition second priority secured loan and the DIP loan, plus “assumption by the Wayzata Purchaser of liabilities in the estimated amount of $29,241,982.”  The assumed obligations are not identifiable in the filings made to date.  While the assumed obligations include cure amounts under assumed executory contracts, those contracts are not identified in the filings.  The assumed obligations also include administrative expenses, including 503(b)(9) claims, that fall within certain unidentified “categories.”

What happened to the Atlas Bid.

The Creditors Committee reports that:

Even during the several weeks between the time Wayzata first indicated its intentions and the time Wayzata actually purchased DDJ’s loans, the Debtors ceased pursuing the dual stalking horse structure, shifted their efforts primarily to consummating the deal with the Wayzata, and refused to engage in a meaningful way with Atlas …, despite agreeing that Atlas’s bid was significantly higher.

If the Atlas Bid still has life, the proposed bidding procedures likely will put an end to it.  Several requirements for a competing bid will kill the Atlas Bid for good.

What will the Wayzata sale mean to suppliers?

Unfortunately, a hallmark of these types of 363 sales is the inability to know for certain what the transaction will mean for any particular supplier until after the closing.  Even the best and the biggest have been stung by last minute changes to “the list” of supply contracts to be assumed.

For the unsecured creditor body as a whole, the Wayzata sale will provide no direct payment.  The expenses of winding down Grede Foundries and the administrative claims will have to be paid from the sale of the Vassar, Michigan and Greenwood, South Carolina locations, which are the only assets to be left behind by the purchaser.  Vassar looks to have some environmental baggage.  There is no way to predict if and when Vassar can be sold.  A motion is pending to authorize the sale of the Greenwood property at an auction.

Is there a Connection Between the Pending Sale Motion, the 503(b)(9) Oppositions and the Preference Claims?

The original motion for establishment of procedures for assertion of 503(b)(9) claims was filed as a first day motion on June 30, 2009.  The original motion provided that 503(b)(9) claims were to be filed by the general claims bar date.  After several hearings on the motion, the proposed order was amended to provide for a filing deadline of September 25, 2009 with a requirement that Grede object to a claim by November 13, 2009 or the claim would be allowed.

We do not believe that any debtor would intentionally time its objections to 503(b)(9) claims and the bringing of preference actions so as to alienate a substantial portion of its supply base shortly prior to a 363 sale.  The timing of the objections and the preference actions more likely is side effect of the delay in the timing of the 363 sale as anticipated in late July and early August.

Had the 363 sale been completed by late September, as was anticipated in early August, the objections to the 503(b)(9) claims would have been made and the preference actions would have been brought after the 363 sale.  This timing would have allowed the purchaser to disavow any influence on or responsibility for the actions of the debtor in denying the 503(b)(9) claims and in bringing preference actions.

Grede’s timing also makes no sense in terms of the 363 sales process.  To the extent a supplier’s supply contract is assumed by the Debtor and assigned to the purchaser, the 503(b)(9) claims and the preference claims are rendered meaningless.  As a prerequisite to assuming a supply contract, Grede would have to cure all defaults under the contract.  This “cure” would include payment of all pre-petition amounts due, which would include payment of amounts included in the 503(b)(9) claims.  The preference claims may also be extinguished.  It is well established that a preference claim can not be brought to recover payments made under a contract that has been assumed under Section 365 of the Bankruptcy Code.

Finally, it is not unusual in 363 sales for the purchaser to insist on acquiring the avoidance actions (which include preference claims) in order to preserve the good will of the supply base.  Grede’s preference claims, in fact, are part of the assets being sold to Wayzata under the Asset Purchase Agreement the Debtor filed with the court 8 days before bringing the preference actions.  Why is the Debtor expending its resources to collect preference claims that in all probability are being sold in a 363 sale?

For the Cynics

In automotive supplier bankruptcies, Section 503(b)(9) claims have presented huge problems for debtors and their counsel in winding down debtors’ estates following 363 sales.  Due to the “just in time” nature of the automotive supply chain, the size of these claims typically is substantial, and 363 sales generally have not generated enough proceeds to allow for payment of these administrative priority claims.  This has resulted in instances of administrative insolvency – the inability of the debtors to pay administrative expenses – following 363 sales.

Cynics undoubtedly will note that the loss of the $5 million cash kicker from the Atlas Bid coincides with the $5 million in administrative expense claims the Debtor is opposing.  However, the Debtor would have predicted long ago that several millions of dollars in 503(b)(9) claims were not going to be covered out of 363 sale proceeds regardless of the stalking horse bidder.  The decision to aggressively oppose supplier administrative priority claims likely would have been made in the pre-petition bankruptcy planning process.

Whether part of a grand scheme or simply a matter of bad timing, 3 weeks before the initial hearing on the 363 sale procedures, the supply base will be hit with opposition to their administrative expense claims in a case where those claims are likely to be the only source of distributions to suppliers.  Even worse, however, are the adversary proceeding to recover bankruptcy preference claims under Section 547 – many of these preference claims are so large as to pain even the best healed supplier and put out of business a supplier with already limited liquidity.

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The following are additional articles about the Grede Foundries bankruptcy: