A bleak picture emerges for bankruptcy creditors in this bankruptcy of a top 50 Tier 1 automotive supplier. Metaldyne Corporation and 30 subsidiaries (collectively referred to as "Metaldyne") entered bankruptcy with between $60 million and $65 million in outstanding trade payables. A total of $36 million is due to suppliers on the 50 largest unsecured list. That means that smaller suppliers are going to take almost half of the potential loss.
First Day Motions Offer Little Supplier Relief
Against this backdrop, the first day motions facially seemed to offer some relief. First, there was a motion to pay certain pre-petition claims of "essential suppliers." However, the potential payments are capped at $7.1 million, which Metaldyne acknowledges only is approximately 10% of the Debtors' estimated outstanding trade payables. Presumably, a few suppliers will be fully paid their pre-petition claims. The vast majority will see no benefit.
Another first day motion, sought an order establishing procedures for assertion of Section 503(b)(9) claims for payment for goods received within twenty days prior to the petition date. Metaldyne estimated that within the twenty day period prior to the bankruptcy filing it had received approximately $12 million in goods from suppliers for which the suppliers have not yet been paid. In recent automotive sector bankruptcies, these motions routinely either incorporate or are accompanied by a request for permission to go ahead and pay these claims per standard payment terms.
No early payment relief was requested by Metaldyne. The motion only sought to have the 503(b)(9) claims asserted at the same time as the general unsecured claims. As regards timing of payment, the motion sought no acceleration. Instead, the motion only said that the claim would be "paid pursuant to a further order of the Court or as provided for in any plan confirmed by the Court."
Flag of Bad Times Ahead - the Position of the Secured Lenders
A big, big flag that this bankruptcy is looking bad for suppliers is the opposition of the senior secured lenders to the meager "essential supplier" motion. The senior secured lenders are owed an aggregate of $427,718,055 pre-petition. These lenders opposed the motion because of a concern that whatever was paid to the "essential suppliers" was going to reduce their recovery. In other words, these lenders, who have had extensive access to Metaldyne financials, asset appraisals, projections, etc. are concerned that there are insufficient assets to pay back the secured indebtedness they are owed.
This concern was articulated by the senior secured lenders in their objection to the "essential supplier" motion as follows:
Given that the Debtors may be administratively insolvent as of the termination of the DIP Financing, the Debtors' request for authority to pay prepetition unsecured claims now is premature.
Our own analysis of the limited financial data provided to date indicates that this concern may be valid.
Hopes Rest on a Going Concern Sale and Supply Contract Assumption and Assignment
Since both no substantial "essential supplier" relief is available and no relief will be afforded under the 503(b)(9) motion for months (if ever), the only hope for many Metaldyne suppliers is an assumption and assignment under Section 365 of the Bankruptcy Code. If a supply contract is assumed and assigned pursuant to a sale of Metaldyne assets, all defaults under the contract must be cured. At a minimum this means payment of all pre-petition sums due.
Metaldyne has entered into two non-binding letters of intent for the sale of its two primary business divisions. The terms of this sale have not been filed. Suppliers only can hope that the purchasers are willing to assume the existing supply contracts. However, even if that relief does come, it is likely to come to only of few suppliers and it is unlikely to come soon.
What about Reclamation Claims?
Given this situation, suppliers may wish to carefully consider the potential for a reclamation claim. Under the Bankruptcy Code Section 546(c)(1) and state law, suppliers have a right to demand return of goods delivered to an "insolvent" customer within 45 days before to the bankruptcy filing (commonly known as a "reclamation claim").
The time frame for assertion of a reclamation claim is very tight. Reclamation claims must be asserted within 20 days after the bankruptcy filing. Even within this 20 day period, every day of delay lessens the chances of a successful reclamation claim.
Reclamation claims have several limitations and sometimes have questionable value. However, given the otherwise dismal picture, no opportunity for recovery should go unexamined.
The following are additional articles about the Metaldyne bankruptcy: