Restructuring Visteon
Total Page：16
File Type：pdf, Size：1020Kb
RESTRUCTURING VISTEON Team Members Oren Livne Josh Simpson Bankruptcy & Reorganization Professor Altman April 10, 2012 Table of Contents Section Page Executive Summary 3 I. Introduction 5 II. Auto Parts Industry Overview 6 III. Visteon's History 8 IV. The Decline in Visteon's Financial Condition 9 V. Visteon's Bankruptcy 19 A. Acquiring DIP Financing 19 B. Initial Negotiations 20 C. Relationship with Ford 22 1. Lessons on Spinoff Relationships 22 2. Busted Spinoffs 25 3. Analysis of Parent/SpinCo Relationships 29 D. Employment, Pension, and OPEB Litigation 31 E. Performance in Bankruptcy 32 F. Negotiating Visteon's Plan of Reorganization 36 VI. Post-Bankruptcy Operations 42 VII. Demonstrating the Sensitivity of Valuations in 48 Bankruptcy VIII. Fairness of Plan Valuation to Security Holders 55 IX. Conclusion 58 Appendix 60 April 10, 2012 Restructuring Visteon Page 2 of 62 Executive Summary The auto parts industry faces substantial cost pressures, with the ability to serve multiple markets, utilize the latest technology, and provide timely delivery being highly valued. Visteon was spun off from Ford in 2000 in an effort by Ford to reduce legacy liability costs, to enhance Visteon's ability to sell to other producers, and to allow Ford to obtain better pricing on parts. As should be done, Ford executed several agreements pre-spinoff to manage its post-spinoff relationship with Visteon. To avoid the potential for later fraudulent conveyance claims, parents must consider a subsidiary's ability to pay debts in reasonable downside scenarios post-spinoff, and not overly favor the parent in the asset/liability allocation. A sharp decline in auto sales in 2008 precipitated reduced stock prices for auto parts manufacturers and a decline in the industry's bond equivalent ratings. Visteon's overburdened capital structure weakened the firm while its recurring losses, which caused declines in the firm's Z-score, led to its bankruptcy filing in Delaware on May 28, 2009. After failing to secure DIP financing from the government and its customers, Visteon was able to secure a $150mm loan from its term lenders. The company then entered several agreements with its customers, providing it with additional cash for agreements to continue providing parts. Visteon sought to eliminate certain employee benefits in bankruptcy, but a Third Circuit decision refused to allow Visteon to unilaterally terminate benefits in bankruptcy that it could outside of bankruptcy. Visteon also faced pension claims in Germany and the U.K. Ford had a special relationship with Visteon, having previously been Visteon's parent, the purchaser of non-performing facilities in 2005, and a major customer. Ford also purchased Visteon's ABL Credit Facility claims when the firm neared bankruptcy. To manage the risk of a fraudulent conveyance claim and ensure continuity of supply, Ford agreed to make several significant concessions to Visteon in bankruptcy. Ford's Z-score was a useful predictor of Visteon's at the 99% level and, as expected, the firms' Z-scores closely followed their Z" scores, although the relationship was substantially less strong in a joint regression. Visteon's management was able to resist early pressures from the firm's term lenders to sell the company in pieces so that the lenders could realize a quick profit. Visteon's first plan of reorganization did not provide its noteholders with any recovery, feeding contentious valuation discussions. By being unwilling to share any recovery with noteholders early, Visteon's term lenders lost their opportunity to obtain Visteon's equity at what was later shown to be a substantial undervaluation. Eventually, a plan was developed for Visteon's noteholders to either take out Visteon's term loans through a rights offering or obtain a low recovery, providing an incentive for the noteholders to agree to commit additional capital. This sped up the bankruptcy process, minimizing the damage to Visteon's business from operating in bankruptcy. Visteon's pre-filing shareholders also successfully negotiated a April 10, 2012 Restructuring Visteon Page 3 of 62 recovery after a bid was made for some of Visteon's businesses, but hedge funds buying Visteon's unsecured trade claims were unsuccessful in gaining access to the rights offering. Visteon's final plan was confirmed on August 31, 2010, and Visteon emerged from bankruptcy on October 1. The auto parts industry had strong performance in 2010 and 2011, with a substantial increase in investment grade bond equivalent ratings. This helped Visteon to outperform expectations in bankruptcy and upon emergence, leading to improvements in the firm's Z-score. Visteon's securities have performed well in the markets, given its substantially de-leveraged capital structure. Valuation in bankruptcy is very sensitive to the inputs selected, and Visteon's valuation provides a perfect example. We examined the sensitivity of Visteon's predicted value to beta, growth rate, EBIT margin, management projections, and comparable selection. Rothschild significantly undervalued Visteon's equity, resulting in noteholders receiving a median estimated recovery of 192% and overcompensation of $804mm. Thus, Visteon's pre- bankruptcy shareholders could assert that they were treated unfairly under the plan; but, as discussed, valuation is far from a perfect science. April 10, 2012 Restructuring Visteon Page 4 of 62 I. INTRODUCTION The bankruptcy of Visteon Corporation ("Visteon") demonstrates the complexity and innovative solutions that are inescapable in substantial modern bankruptcies. Visteon is an auto parts manufacturer that was spun off from Ford Motor Company ("Ford") in 2000. After several years of losses, Visteon had to file for bankruptcy in 2009 following a substantial drop in auto sales in 2008. Given the auto industry's disfavor, the firm had to search for a debtor-in- possession ("DIP") loan from an interested party. Visteon was able to secure a loan from its term lenders, after failed attempts to obtain financing from the government and its customers. However, Visteon was able to use the threat of supply disruption to obtain valuable support from its customers. In the courtroom, Visteon's case set precedent that a bankrupt company cannot unilaterally terminate certain employee benefits even if it may do so out of court. The firm was reorganized successfully under a creative toggle plan that used the threat of a switch to a suboptimal plan for the firm's noteholders to induce a favorable outcome. Since bankruptcy, the firm's performance has exceeded expectations. We examined a few interesting issues surrounding Visteon's reorganization. First, Visteon had a special relationship with Ford that provides useful insight into how spinoffs should be structured to avoid the risk of a busted spinoff. We analyzed the relationship between Ford and Visteon's Z-scores in this context. Second, we considered the sensitivity of valuation in bankruptcy given Visteon's example. Finally, we provided an ex post analysis of the valuation assumed in Visteon's plan of reorganization and the resulting treatment of Visteon's pre- bankruptcy security holders. April 10, 2012 Restructuring Visteon Page 5 of 62 II. AUTO PARTS INDUSTRY OVERVIEW Automotive parts suppliers provide a variety of systems, modules, and components for use by vehicle manufacturers and after-market parts suppliers.1 Initially, vehicle manufacturers operated their own internal parts divisions to produce a wide range of components.2 Parts manufacturing is very capital and labor intensive, and is sensitive to overall economic conditions.3 Thus, in an effort to reduce costs, the automotive industry shifted to competitive sourcing of parts from independent suppliers.4 Car manufacturers began to spinoff their internal parts divisions, creating Delphi, which spun out of General Motors ("GM"), and Visteon, which spun out of Ford. Other independent players in the industry include Clarion, Continental AG, Delphi, DENSO, Faurecia Group, Hyundai Mobis, Johnson Controls, Koito Manufacturing, Magna International, Nippon Seiki, Panasonic, Robert Bosch GmbH, and Valéo S.A.5 Vehicle manufacturers have globalized their operations and supply chains in an effort to further reduce costs and access new markets.6 Component manufacturers that can “serve multiple markets, support a global vehicle platform and maintain a local presence” are therefore more desirable.7 Vehicle manufacturers based outside of the United States have continued to increase their market share, creating difficulty for domestic parts suppliers.8 Domestic suppliers also face significant legacy liabilities and high unionized labor costs, providing foreign 1 Visteon Corp., FORM 10-K at 9 (Mar. 31, 2009). 2 Id. at 3. 3 Id. 4 Id. 5 Id. at 9; Rothschild, VISTEON PRELIMINARY VALUATION ANALYSIS 18 (2010). 6 Visteon Corp., FORM 10-K at 3 (Mar. 31, 2009). 7 Id. 8 Id. at 4. April 10, 2012 Restructuring Visteon Page 6 of 62 producers with an advantage.9 As a result, domestic suppliers generally focus on technologically intensive components.10 Parts suppliers work in close conjunction with customer auto manufacturers, at times using joint development teams.11 Supply contracts are often long-term, particularly for specialized parts.12 Contracts with vehicle manufacturers are dominated by larger parts suppliers who can provide high-volume, low-cost products that are delivered in a very timely fashion.13 Thus, smaller parts producers may compete to supply products to the larger parts producers.14 In 2011, U.S. auto parts makers generated $47.8bn in revenue, with a compounded annual growth rate ("CAGR") of -0.3% over the previous five years.15 As shown in the chart below, nearly 20% of revenues were from General Motors, 17% from Toyota, and 16% from Ford.16 The largest parts suppliers were Magna International (15.2% market share), Delphi (10.4%), and DENSO (9.1%).17 9 Antonio Danova, IBISWORLD INDUSTRY REPORT 33639: AUTO PARTS MANUFACTURING IN THE US 20–21 (Dec. 2011). 10 Id. at 22. 11 Id. 12 See id.