Automotive Supplier Liquidity: Challenges & Strategies February 27, 2009 Presented By: Daljit Doogal, Foley & Lardner LLP Chris Fowler, GE Commercial Finance Steve Hilfinger, Foley & Lardner LLP Judy O’Neill, Foley & Lardner LLP Dave Woodward, FTI Consulting ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 1 3 Foley & Lardner Overview Q More than 1,000 attorneys in U.S. and foreign offices (Brussels, Shanghai and Tokyo) Q Nearly 400 attorneys have been awarded Martindale-Hubbell’s highest rating Q 15 practice groups recognized by Chambers USA: America’s Leading Business Lawyers 4 Foley’s Automotive Industry Team Q Foley’s Automotive Industry Team (AIT) represents companies throughout the automotive supply chain, with an emphasis on representing Tier 1 suppliers Q More than 50 attorneys practice in Foley’s Business Reorganizations Practice Group, including in New York, Delaware, Michigan and other jurisdictions Q Foley is the only national law firm with a Detroit office and dedicated Automotive Industry Team, with deep knowledge of dealing with financially troubled customers and suppliers Q We regularly represent suppliers in contract matters with each of the Detroit 3 OEMs ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 2 5 GE Commercial Finance Overview Q Smarter Capital for Your Business – With more than $16 billion in assets and 40 locations across North America, GE Commercial Finance - Corporate Lending is a leading provider of asset based, cash flow, and structured financial solutions – Backed by GE's AAA credit rating, our Detroit team combines deep financial expertise and a research-based approach to build innovative solutions tailored to the automotive industry 6 GE Commercial Finance Overview (cont’d) Q Typical Customer Profile – Public and private companies located in North America with: Q Financing needs of $20 million to $2 billion or more Q Annual revenue in excess of $50 million Q EBITDA of $10 million or more Q Strong balance sheet and cash flow Q Asset-intensive industries ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 3 7 FTI Consulting Overview Q Who We Are: The Company Behind the Headlines – Founded in 1982 – NYSE listed with $3 billion plus market value – 300+ Senior Managing Directors – 3000+ employees worldwide – 44 offices in 21 countries 8 FTI Consulting Overview (cont’d) Q Automotive Capabilities – Cash Management and Projections – Capital Structure and Liquidity – Analysis of Product Portfolio/OEM Relationships – Vendor, Customer and Other Constituent Relationship Management – Cost Realignment – Asset Redeployment – Strategic Assessment and Business Planning – Bankruptcy Pre-Planning/Administration Q Dedicated team based in Detroit with significant automotive operational and financial experience. Broad, deep and relevant automotive experience located throughout U.S. and Europe ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 4 9 Topics for Discussion Q Government Funding Update Q Capital Markets Overview Q Defaults and Forbearance – Market Trends and Drafting Strategies Q Managing and Using Cash Before and After a Bankruptcy Filing Q DIP Issues in Bankruptcy Government Funding Update ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 5 11 Government Funding of Suppliers Q TARP (Troubled Asset Relief Program) Q DOE Section 136 Loan Program Q MEMA/OESA Supplier Funding Proposals to U.S. Treasury 12 TARP (Troubled Asset Relief Program) Q Established by the Emergency Economic Stabilization Act of 2008 (EESA), the “TARP” covers “financial institutions” but also “any other institution” that – Has “significant US operations”; – Has a US (federal, state or territorial) charter; and – Is neither a foreign central bank nor owned by a foreign government Q What can the U.S. Treasury buy from such an institution? – Mortgages and mortgage backed securities – “Any other financial instrument” deemed necessary for financial stability Q To date, the U.S. Treasury has made aggregate TARP loans to GM and Chrysler of $17.4 billion, with another $21.6 billion of funding requests from GM and Chrysler pending ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 6 13 TARP (cont’d) Q Guidelines for “Automotive Industry Financing Program,” which would include suppliers, issued in late December 2008 – Institution must be “important” – Test: “Whether a major disruption of the institution’s operations would likely have a materially adverse effect on employment and thereby produce negative spillover effects on overall economic performance” (high bar) Q To date, no TARP loans have been made to automotive suppliers 14 TARP Funding of OEMs – Timeline th Q Initial term sheets signed December 19 Q Initial $4 billion loans to GM/Chrysler made last week of December/first week of January Q Additional $9.4 billion of loans made in January and February to GM, for a total of $13.4 billion th Q Viability Plans filed with U.S. Treasury February 17 – GM requested additional $16.6 billion; Chrysler $5 billion – These amounts are in addition to substantial DOE requests ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 7 15 TARP Funding of OEMs – Timeline (cont’d) Q Government Task Force reviewing GM/Chrysler submissions Q GM/Chrysler continue to negotiate with UAW, bondholders and others to achieve Loan Agreement restructuring targets Q Viability determinations to be made by March 31st Q Bankruptcy path/DIP funding being planned in parallel 16 DOE Section 136 Loan Program Q “Advanced Technology Vehicles Manufacturing Incentive Program” – Enacted in 2007 – $25 billion of funding in October 2008 – Purpose is to upgrade tooling for better fuel economy – Program covers both OEMs and suppliers Q Requirements – Parts in question must be designed to improve fuel economy – Borrower must be “financially viable”; i.e., “reasonably likely” to make scheduled payments of principal and interest Q Status of Funding – First round of applications submitted by December 31, 2008 – Approximately 75 applications filed, totaling a reported $38 billion – Most applications rejected or additional information requested – Some applications have been approved, and loans made – Substantial DOE funding requests of Detroit 3 are pending – Recently enacted Stimulus Plan also includes alternative energy funding ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 8 17 MEMA/OESA Supplier Funding Proposals to U.S. Treasury Q Quick Pay – reduce to 10 day payment terms to provide liquidity Q Government Guaranty of Supplier Receivables – provide a guaranty of OEM receivables to support bank loans Q Government Guaranty of Supplier Loans – provide guaranty of loans from commercial lenders 18 Status of MEMA/OESA Proposals Q Initial submission to U.S. Treasury on February 2nd; formal request submitted on February 13th Q Working group formed by MEMA/OESA Q Ongoing dialog with U.S. Treasury Q To date, no action on these requests has been taken by U.S. Treasury; unclear whether and to what extent these will result in enhanced liquidity for suppliers ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 9 Capital Markets Overview 20 2008: An Economic Year to Forget…as Loan Issuance Plummets Q 2008/2009 Economic Lowlights: E Retail Holiday Sales – weakest in GDP – down 3.8% in Q4 2008 C four decades Unemployment –7.5%, rising O Vehicle Sales –down 37% in N Consumer Confidence –record Jan/09 O low in Jan/09 M Housing Starts, Permits –record Y low in Jan/09 Q New issue volume down dramatically in full year 2008 and dries up completely in the fourth quarter Secondary Loan Prices, DJIA New Issue Volume 12,000 100 New Total $200B The equity and loan markets declined in 2007 $535.16 $535.16 unison in 2008. However, they have begun to 2008 $126.89 $153.17 11,000 diverge in 2009 as the loan markets stage a 90 Change -76% -71% modest recovery and the equity markets plummet further $150B 10,000 Vintage 2008 '07 Block Sales 78.58 80 9,000 SMi $100B 71.93 70 8,000 DJIA $50B 7365 7,000 60 8-Jan-09 6-Feb-09 $0B 9-Dec-08 13-Oct-08 27-Oct-08 23-Jan-09 12-Sep-08 26-Sep-08 10-Nov-08 24-Nov-08 23-Dec-08 Dow SMi100 Vintage 2008 1Q07 1Q08 2Q07 2Q08 3Q07 3Q08 4Q07 4Q08 Source: Yahoo Finance, SMi Source: Standard & Poors LCD ©2009 Foley & Lardner LLP • Attorney Advertisement • Prior results do not guarantee a similar outcome • 321 North Clark Street, Chicago, IL 60654 • 312.832.4500 10 21 Loan Defaults Trending Higher, Likely Leading to Future Losses Q With the U.S. economy in a severe recession, rating agencies forecast defaults to be 10-13% by year end, with possibility of 15% – The forecasted default rate is expected to increase