Jones Day Charts Dana Corporation's Path to Successful Emergence From Chapter 11
As primary debtors' counsel, Jones Day was a key contributor to Dana's remarkable achievement. Even prior to the filing of Dana's bankruptcy petitions, Jones Day’s restructuring professionals understood the necessity of conceiving, implementing, and executing a comprehensive strategy for the sprawling, global restructuring ahead - a strategy designed to be achieved in discrete segments, yet consistently focused on the reorganization of the whole enterprise and the ultimate endgame of confirmation and fully funded emergence from chapter 11.
The foundation of this strategy was the identification of parties that had a vested interest in Dana's continued survival and success. Core constituencies such as Dana's customers (who require a viable tier-one supplier of automotive drivetrains), its suppliers (many of which depended on the business they transacted with Dana for survival) and, especially, its largely unionized workforce immediately presented themselves as potential negotiating counterparties and, ultimately, sources of savings for Dana. Jones Day and Dana defined what concessions would be necessary to emerge from chapter 11 as a healthy competitor in the automotive parts industry and then set about achieving that goal—developing a staged plan to approach, in turn, Dana's suppliers, its customers and, finally, its unions, emphasizing the shared sacrifice necessary to produce the long-term benefits desired by all parties. After obtaining such concessions and establishing a viable business profile, Dana would be able to approach its financial constituencies, as well as potential new investors, in order to craft and fully fund a plan of reorganization premised upon the already committed contributions of its customers, vendors, and workforce.
Thus, emphasizing collaboration with Dana's primary stakeholder constituencies and exhibiting a willingness to pursue and embrace innovative solutions to Dana's problems, Jones Day was able to help chart and navigate a strategic course for Dana's reorganization. This course included:
• Identifying those domestic Dana entities that would file petitions in bankruptcy and those that could be profitably restructured out of court and achieving a "soft landing" in chapter 11 for those entities that filed;
• Stabilizing and maintaining Dana's existing vendor and customer relationships, with no interruption of the business activities of either Dana or its customers;
• Implementing an integrated global business strategy, including the development of a business plan for Dana's domestic operations, the rationalization of Dana's cost structure, and the protection and realignment of Dana's profitable offshore operations;
• Altering the nature of Dana's ongoing pension obligations;
• Having obtained as much savings from other sources as possible, working consensually with Dana's unions and employees to renegotiate and restructure the parties' existing relationships and legacy obligations;
• Building consensus with Dana's bondholder constituency and potential investors to obtain fully committed equity and debt financing; and
• Proceeding to confirmation of a plan of reorganization that enjoyed the support of all major constituencies.
The presentation of this well-developed strategy to each of Dana's major constituencies - and showing them what concessions/forbearance/investment Dana needed and why - promoted consensus at all steps of the company’s reorganization. The ultimate results of this strategy - achieved within the abbreviated time frames and uncharted legal territory of the substantially revised Bankruptcy Code - speak for themselves. To date, Dana is the only major manufacturing company to have successfully negotiated the revised Bankruptcy Code and emerged from chapter 11 with a fully committed exit facility. As lenders in troubled credit markets either abandon their lending commitments to other chapter 11 debtors (as is happening in the Delphi bankruptcy) or reduce their initial funding (as happened in the Calpine bankruptcy), Dana's unassailed funding commitments, negotiated by Jones Day, stand alone. The game plan that produced these results should serve as the template for the successful restructuring of large global businesses in chapter 11 going forward.
Implementing a Strategy: The First Days of Bankruptcy
In February of 2006, Dana's circumstances were less than enviable. A 100-year history of ad hoc acquisition and divestiture activity left Dana with a decentralized and labyrinthine corporate structure that did not necessarily correspond to the manner in which the businesses were operated. Lack of integration between business units had left the company with little room for operational error and little ability to react quickly to business downturns. In 2005, these vulnerabilities met the perfect storm: Rapidly increasing commodity costs, increasing pricing pressure from both vendors and customers, and an inability to repatriate cash from profitable overseas operations led to massive and unexpected domestic losses and a crushing liquidity shortfall.
In response to this crisis, Dana turned to Jones Day's restructuring team. Within three weeks of receiving the green light to prepare a chapter 11 filing in mid-February 2006, Jones Day had helped Dana achieve the quintessential "soft landing" in the United States Bankruptcy Court for the Southern District of New York. In addition to obtaining the full panoply of standard "first day" relief (including approval of a $1.45 billion debtor-in-possession financing facility), Jones Day further advised Dana on the implementation of the first steps of its comprehensive plan for emergence from chapter 11.
The first step towards the rehabilitation of Dana's business was the stabilization of Dana's vendor and customer relationships. Although Dana would not shy away from litigation where necessary (e.g., litigating with recalcitrant vendors to enforce compliance with existing executory contracts), Dana's plan called for a methodical, fact-intensive, and collaborative approach to the maintenance and readjustment of the supply and revenue sides of its business.
On the supplier side, Jones Day took care to ensure that Dana received the first-day relief necessary to maintain its vendor relationships with no interruption of supply. Among other things, Dana obtained the authority to make payments to vendors entitled to priority of payment pursuant to recently enacted section 503(b)(9) of the Bankruptcy Code. This relief proved the first of many chapter 11 innovations effected by Dana and Jones Day. Prior to Dana’s chapter 11 cases, section 503(b)(9) of the Bankruptcy Code had been a blank slate. Subsequently, a debtor’s ability to make payments to vendors of goods in its sole discretion - i.e., the approach approved in Dana's case - has become standard operating procedure for chapter 11 debtors. Armed with the ability to relieve pressure from vendors with, among other things, the judicious application of such "503(b)(9)" payments, Dana successfully prevented any interruption in its supply of goods.
The ability to preserve the continuity of Dana's vendor relationships produced the added benefit of helping maintain Dana's customer relationships as well. That is, Dana's ability to maintain a continuous supply of goods from vendors ensured that Dana could prevent an interruption of its own supply of parts to its original equipment manufacturing customers. Avoiding such an interruption was crucial to Dana's overall strategy, as Dana and Jones Day were contemporaneously attempting to persuade those very customers that doing business with a healthy Dana going forward, and working consensually to negotiate revised business terms that would make that possible, were in their common interest. Requiring pricing support from its customers in order to improve liquidity, Dana ultimately was able to negotiate price increases and, in some circumstances, the rollback of certain price reductions with the famously hard-bargaining large automobile manufacturers. In so doing, Dana became the first automotive parts supplier to effect and implement new pricing with the original equipment manufacturers on a consensual basis (standing in stark contrast to other parts suppliers that remained mired in customer squabbles throughout their chapter 11 cases).
Just as notable as this initial success enjoyed by those entities that filed for chapter 11 protection is the success arising from the decision regarding which Dana entities would not file. Rather than simply drop every domestic Dana subsidiary into the chapter 11 process, Jones Day assisted Dana Credit Corporation, a domestic financial subsidiary carrying in excess of $500 million in publicly traded debt, in effecting an out-of-court restructuring of its liabilities and assets (which assets included more than $480 million in claims against the Dana debtors’ estates). This decision to reorganize Dana Credit Corporation outside the chapter 11 context ultimately bore substantial dividends. Because of this out-of-court restructuring, Dana Credit Corporation was able to narrow an anticipated loss of nearly $200 million to less than $45 million, which resulted in a reduction of more than $435 million in claims against the Dana debtors’ estates.
Executing the Strategy: The Groundwork for Reorganization
Having successfully filed for bankruptcy protection with a minimum of disruption to its day-to-day operations, Dana began to lay the groundwork for its ultimate reorganization. Traditionally, companies comparable in size and scope to Dana would remain in bankruptcy for years, with bankruptcy courts generally approving extensions of the debtor’s exclusive period within which to file a plan of reorganization. In amending the Bankruptcy Code, however, Congress had severely circumscribed this open-ended period of exclusivity, requiring a debtor to file its plan of reorganization within 18 months of its petition date. Accordingly, Dana’s reorganization needed to be effected in far less time than that used by many debtors.
This abbreviated time period further emphasized the need to adopt and execute a highly coordinated strategy for successful emergence, and Dana hit the ground running by attacking a host of discrete yet interrelated problems on parallel tracks. Dana immediately undertook a comprehensive realignment of its business structure. To this end, Dana exhaustively reviewed its manufacturing "footprint," ultimately adopting an acquisition and divestiture strategy designed to move its sourcing to lower-cost countries and shed its noncore businesses and joint ventures. Dana further reviewed and reduced selling, general, and administrative costs at all levels of its organization, which resulted in anticipated annual savings of $40 to $50 million. Finally, Dana and Jones Day began crafting what would become the corporate structure of the reorganized debtors, with an eye towards creating the most investment-friendly structure possible in the service of promoting maximum optionality and a fully funded emergence from chapter 11.
At the same time, Dana worked with Jones Day's New York, Cleveland, and European lawyers to restructure its profitable overseas operations to provide for sustainable financing and cash management independent of Dana’s domestic entities, while permitting the tax-efficient repatriation of profits to the parent company. This parallel out-of-court restructuring of a debtor’s international business - replete with major offshore financing and the contemporaneous resolution of group pension legacies through a company voluntary arrangement - is a notable achievement in chapter 11. Jones Day’s international experience proved indispensable to these efforts.
Dana’s efforts to maintain its current management throughout the chapter 11 process - through the implementation of incentive-based compensation plans - were similarly successful. Traditionally, debtors had kept management in place primarily through the payment of simple retention bonuses. The revised Bankruptcy Code, however, imposed significant restrictions on a debtor’s ability to make such retention payments. Despite the lack of clear precedent on the issue, Jones Day successfully guided Dana toward an incentive-based executive compensation system that (i) implemented "best practices" on executive compensation
under the revised law, and (ii) was ultimately approved by the bankruptcy court over significant opposition.
Perhaps most important, Dana embarked upon the comprehensive restructuring of its employee-related obligations. At the outset of its chapter 11 proceedings, Dana was saddled with massive legacy costs (paying approximately $10 million per month for medical benefits owing to union retirees) and a byzantine pension structure comprising more than 35 different pension plans (some of which were holdovers from divested operations). Once again drawing upon Jones Day’s nonbankruptcy experience, Dana, in constant consultation and collaboration with the Pension Benefit Guaranty Corporation, was able to freeze and consolidate its existing pension plans and effect the shift of its pension obligations from such "defined benefit" plans to "defined contribution" plans, while ensuring the full funding of its previous pension liabilities. The complementary restructuring of Dana's nonpension retiree benefits, however, ultimately would require the cooperation of Dana’s varied labor constituencies and form the cornerstone of Dana’s plan of reorganization.
Selling the Strategy: Structuring and Closing the Deal
To compete in the automotive supply industry following emergence from bankruptcy, it was essential for Dana, in addition to adopting the restructuring initiatives described above, to remove itself from the business of supplying retiree medical care. At the same time, Dana was committed to proceeding to confirmation of its plan of reorganization with overwhelming support from its major constituencies, including its unions - the United Auto Workers and the United Steelworkers. These competing objectives necessitated that Dana reach some form of agreement with organized labor and with its Official Committee of Non-Union Retirees (the creation of which Jones Day had actively sought in order to provide Dana with a much-needed negotiating counterparty), a task complicated by the further necessity of the agreement’s being palatable to Dana’s Official Committee of Unsecured Creditors and Ad Hoc Committee of Bondholders.
Committed to a consensual resolution of its labor problems, and to the pursuit of that consensus through collaboration with various constituencies on common goals, Dana achieved its goals by way of a global settlement, implemented through three discrete agreements. First, Dana entered into comprehensive settlement agreements with both the UAW and the USW. Among other things, those agreements (i) established a two-tier structure for employee wages, (ii) provided for certain buyouts of union employees and the shutdown of certain unionized facilities, and (iii) eliminated Dana’s obligations to provide nonpension retiree benefits to union employees in exchange for a contribution of approximately $764 million to voluntary employee benefit associations (or VEBAs) established by the unions. Dana also eliminated its nonunion retiree welfare benefits from its balance sheet by instituting a VEBA for its nonunion retirees.
The importance of these labor settlements to Dana’s ultimate reorganization and the innovations they represented in the chapter 11 context cannot be overstated. Seldom has a large chapter 11 debtor’s strategy for emergence been so firmly embraced by its unions. Indeed, these settlements represented not only the first major coordinated settlement with both the UAW and the USW in the chapter 11 context, but the first agreement by the UAW in any context to provide for retiree benefits through a union-specific VEBA. Dana and Jones Day understood the necessity of earning the unions’ goodwill and the benefits to be derived from adopting a strategy that produced the best outcomes for all parties in pursuit of a common goal. In executing that strategy, Dana and Jones Day provided a road map for future labor-intensive reorganizations.
Both Dana and Jones Day understood, however, that addressing the cost side of Dana’s business would have been of little utility without simultaneously tending to the funding of that business. To this end, Dana entered into an investment agreement with Centerbridge Partners, L.P., and certain of its affiliates. Pursuant to this investment agreement—and after Dana and Jones Day implemented and navigated a complex alternative investment process during which various investors were granted similar opportunities to offer Dana equity financing on better terms - Centerbridge and holders of $1.3 billion of Dana’s $1.6 billion in unsecured bond debt agreed to purchase and/or backstop up to $790 million in new preferred stock issued by a new Dana entity.
Of crucial importance—which looms ever larger as the current credit market hamstrings other chapter 11 debtors trying to emerge - was the commitment behind this investment. Dana could not risk a failure to obtain the cash necessary to fund the VEBAs central to the union settlement agreements. Accordingly, Dana forswore a traditional, but inherently uncertain, rights offering in favor of an innovative hybridized private placement offered only to certain qualified investors and backstopped by Dana's bondholders. This novel investment mechanism, navigated with Jones Day's assistance, not only guaranteed the funds necessary to implement Dana’s union settlements but also served as the means through which Dana could garner and marshal the support of its bondholder constituency. Again, Jones Day and Dana successfully employed careful planning, imaginative problem solving, and an emphasis upon consensus and certainty to further the cause of Dana's restructuring.
Finally, Dana cemented the global settlement through entry into a "plan support agreement" with the unions, Centerbridge, and those bondholders participating in the preferred stock offering. This plan support agreement - which generally bound Dana to propose a plan of reorganization consistent with the union settlement agreements and the investment agreement and bound the other parties to support any such plan - is emblematic of the approach adopted by Dana and Jones Day throughout Dana’s chapter 11 case to ensure careful documentation of agreements and leave counterparties with little ability to back out of their commitments. This careful documentation by Jones Day would serve the company in good stead, not only in connection with its plan of reorganization, but in connection with its ultimate exit financing as well.
This global settlement exemplified Dana’s commitment to work with its various stakeholder constituencies to achieve mutually satisfactory outcomes in an environment of certainty and virtually no conditionality. At the time of the filing of Dana’s chapter 11 cases, Dana had worked hard to develop lines of communication with and among its management, employees, unions, and creditors and was loath to sacrifice them. Instead, Dana adopted a "velvet glove" strategy, litigating only where absolutely necessary. This proved a success and allowed Dana to proceed to confirmation with the support of all major constituencies and nearly $800 million in committed equity financing.
Confirmation and Emergence
With agreements with its unions, new equity investor, exit lenders, and the overwhelming majority of its bondholders in hand, Dana moved toward confirmation of its plan of reorganization with the support of its Official Committee of Unsecured Creditors; only a smattering of opposition; and minimal, if any, conditions upon confirmation. Dana received only 11 objections to its plan (a small number, considering the scope of Dana’s restructuring), all but two of which were resolved consensually prior to confirmation (each of the remaining objectors, eventually overruled, were asbestos personal-injury claimants). Moreover, Dana’s success in securing nearly $800 million in committed equity financing from fewer than 25 investors prior to confirmation enhanced its ability to secure exit financing. Indeed, prior to confirmation, Dana received solid commitments for up to $2 billion in secured exit financing—an achievement that only becomes more notable as the turmoil in the credit markets grows (and claims victims in chapter 11). The order confirming Dana’s plan of reorganization was entered on December 26, 2007, and the plan became effective on January 31, 2008.
Given the troubles experienced by other tier-one automotive suppliers in chapter 11 (e.g., the collapses of Collins & Aikman, Amcast, and Tower Automotive and the continuing troubles besetting Delphi Corporation and DURA Automotive), Dana’s simply emerging from chapter 11 likely would have been considered a success. Emerging from bankruptcy with $2 billion in committed financing, a successfully rationalized corporate structure, a deleveraged cost structure, and new union agreements in place—all achieved within the new and substantially abbreviated deadlines imposed by the revised Bankruptcy Code—is nothing short of remarkable. Yet to call Dana’s success remarkable is not to say that it was a surprise. Rather, it was the intended result and culmination of a carefully designed and assiduously pursued reorganization strategy. Jones Day's contribution to this success required the marshalling of all of the Firm’s diverse and international experience and two years’ worth of exceedingly hard work.