Ahead of its hearing on the adequacy of its disclosure statement scheduled for tomorrow, Chassix confirmed that it “remains on pace to emerge from Chapter 11 on the same time frame as when [it] commenced these cases,” despite the filing of objections last week to its disclosure statement from the official unsecured creditors’ committee in the case and the U.S. Trustee for the bankruptcy court in Manhattan.
That time frame would see the company emerge from Chapter 11 by the end of July.
In that regard, it is worth noting that according to an amended disclosure statement filed yesterday, the company is seeking to schedule a confirmation hearing on June 30, and set a deadline for an effective plan date of July 31. That schedule represents only a slight delay from the company’s initial time frame, which sought a confirmation hearing on June 18 and set an emergence deadline of July 17.
As reported, Chassix filed for Chapter 11 on March 12, saying that it had reached agreement on a “comprehensive restructuring and recapitalization of the company” supported by 71.5% of its senior secured bondholders, 80% of its unsecured bondholders, its existing equity sponsor Platinum Equity, and all of its largest customers (including Ford, GM, FCA f/k/a Chrysler, Nissan, and BMW).
The proposed restructuring would convert roughly $375 million of the company’s senior secured notes into 97.5% of the reorganized company’s equity (subject to dilution), while holders of $158 million of the company’s unsecured notes would receive 2.5% of the new equity (subject to dilution) and warrants to purchase an additional 5%. The company’s customers, meanwhile, would provide, among other things, a “long-term accommodation” that includes about $45 million in annual price increases, and new business and programs, as well as waiving certain reorganization plan distributions, agreements that the company said were “central to the plan.”
Last week, however, the unsecured creditors’ panel filed an objection to the proposed disclosure statement, saying it had “significant concerns regarding the plan’s potentially inadequate allocation of value to unsecured creditors.”
Rather that filing a full-throated objection to the disclosure statement, however, the committee asked the company to include a letter with the disclosure statement setting out its concerns, adding that it “cannot, at this time, recommend that creditors vote in favor of, or against, the plan,” and recommending that “prior to voting on the plan, each unsecured creditor carefully review the materials provided to them, including, and especially,” the committee’s letter.
The company agreed to include the letter in the disclosure statement.
More specifically, the panel’s concerns are with the company’s enterprise and distributable valuations ($450-550 million, with a midpoint of $500 million, and range of $280-380 million, respectively), which are below the amount of secured claims and therefore, as a liquidation matter, would leave no recovery for unsecured creditors. That said, the reorganization plan does allocate 2.5% of the reorganized equity to unsecured noteholders, and $1 million in cash for general unsecured claims, with the potential for an additional $6 million for certain trade claims.
Among other things, the committee said it had concerns with the company’s valuation methodologies, financial projections, valuations of potential avoidance actions, and the claims placed in the unsecured claims pool.
The committee said it was currently investigating potential causes of action against the company’s equity sponsor, Platinum Equity, for fraudulent conveyance, breach of fiduciary duty, intentional fraud, gross negligence, and willful misconduct relating to the issuance of the company’s unsecured notes and the use of the proceeds of those notes to fund a $100 million special dividend to Platinum.
“The committee believes that at the time that the special dividend was paid, the debtors’ directors were aware, or should have been aware, of the debtors’ contractual commitments (some of which had been entered into many years prior) that would ultimately contribute to the debtors’ operational and financial difficulties in 2014.”
According to the first-day declaration filed in the case by Chassix president and CEO, J. Mark Allen, the company’s financial difficulties were precipitated by a “severe liquidity crisis” in November, 2014, arising from a “perfect storm of events,” which he described as “underpriced contracts and programs, compounded by a marked spike in the demand for automobile production in North America at a time when there was limited capacity in the machining and casting sectors.” Those circumstances, Allen said, “overwhelmed the debtors’ manufacturing facilities and capabilities,” and eventually “resulted in an onslaught of quality issues and missed release dates that significantly increased the debtors’ costs of manufacturing.”
Allen’s declaration further said, “[b]y the fourth quarter of 2014, these operational issues – which had snowballed at a rate that neither the debtors, their customers, nor any of their other constituents had anticipated – had severely impacted the debtors’ cash flows and erased any operating profit they had hoped to achieve due to the increase in production demand.”
The company has argued that any potential recoveries from claims against Platinum would not be “meaningful,” and while the proposed plan does include a purported “global settlement” of potential claims against Platinum under which the equity sponsor agreed, in exchange for full releases, “to take, or not to take, certain actions that could impact the tax attributes” of the reorganized company, the creditors’ committee called this contribution “negligible,” saying it needed to independently investigate the potential claims.
In addition, the committee also raised concerns about the procedure for creditors to consent to third party releases contained in the plan, saying the process set a death trap for creditors under which they are forced to consent to the third party releases in order to accept the plan. A subsequent objection from the U.S. Trustee for the Manhattan bankruptcy court raised a similar issue.
The company, however, responded that its process was consistent with the law. – Alan Zimmerman