Visteon, a former parts unit of Ford Motor Company, used to be the world’s second largest auto parts supplier. Then in 2000, Visteon separated from Ford. In 2005, the company took a downhill turn due to the decline in automotive production and other factors. In May 2009, Visteon filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of Delaware. It’s recorded as in re Visteon Corp., No. 09-11786. On October 1, 2010, just 16 months later, Visteon has emerged from bankruptcy protection.
Reasons Visteon entered bankruptcy
Visteon decided to enter bankruptcy protection due to several reasons. For one, it had a consolidated debt of $2.7 billion. For another, the decline in automotive production, especially by Ford Motor Company, caused a major loss of profits. Visteon also had a $310 million liability due to employees’ benefits and pensions. By May 2009, Visteon claimed it was struggling for its very survival.
Trend in filing for bankruptcy protection
Visteon followed a trend when it filed for Chapter 11 bankruptcy protection. In the past ten years, 87 other automotive industry companies have filed for bankruptcy. Some of the largest companies, like GM Chrysler, General Motors, Delphi Corp., and Lear Corp., have filed for bankruptcy in order to alleviate crushing debts. They have also used bankruptcy to compel changes in labor union standards and rid themselves of onerous obligations to their employees.
These companies have used the benefits of bankruptcy protection to reorganize and restructure themselves. During the reorganizing and restructuring process, the companies usually close down any under-utilized plants, and sell off any unnecessary assets. Companies under Chapter 11 bankruptcy have the options of renegotiating all their debts and legal contracts. However, they must settle with their lenders, creditors, stockholders, and bondholders. If they choose not to be liquidated, they must also find new financing for business operations. In many cases, theses bankrupted companies terminate or reduce employment, employees’ benefits, and employees’ pensions, either temporarily or permanently. The company may stay under bankruptcy protection for years, or emerge after just a few weeks.
How Visteon managed to survive bankruptcy
Visteon started closing down under-utilized facilities way before filing for bankruptcy. Visteon, while still maintaining facilities in 26 countries, closed 50 facilities worldwide from 2005 to present. It reduced its global labor force from 80,000 employees to 26,000. However, to reduce its $310 million liability due to employee benefits, Visteon permanently terminated or reduced employees’ benefits and pensions, whenever it was allowable.
Although the bankruptcy judge, Christopher Sontchi, had originally let Visteon terminate the health benefits and life insurance for 6,500 American employees, he later reversed the decision. Visteon took a $201 million loss despite making $1.9 billion in the 2010 second quarter. They claimed $75 million of the $201 million was due to charges connected to retiree benefit plans. Visteon has previously stated that it will again terminate these employee benefits and pensions once they are out of bankruptcy procedures.
More ways Visteon reduced its $2.7 billion debt
Visteon reduced its $2.7 billion debt in several ways during the reorganization and restructuring bankruptcy process. Visteon has eliminated some of its product line. Although the company sold numerous assets, it maintained its 70% ownership of Halle. Halle is a South Korean company that produces automotive heating and cooling systems for Hyundai-Kia. By maintaining this ownership, Visteon was able to reduce its dependency on orders from the Ford Motor Company and to increase its presence in the Asian market.
Visteon also renegotiated with Ford, its former parent company. Now instead of Visteon paying Ford for $268 million in pension and retiree claims, Ford is going to pay Visteon $29 million. Plus, Ford is committing to providing Visteon with $600 million in contracts to supply parts until 2013. Additionally, instead of paying $1.5 billion to stockholders and bondholders, Visteon convinced a group of 40 bondholders to pay $1.25 billion in exchange for 95% control of the company. These bondholders included Goldman Sachs, and hedge funds Oak Hill Advisors and Silver Point Capital. The group agreed to buy back $300 million of old stocks and raise another $950 million to back a stock rights offering. Moreover, Visteon has to replace its 9-member board of directors. Five new members are to be appointed on the day of exit, October 1, 2010.
In order to obtain approval for the bankruptcy exit, Visteon reached a settlement with a group of objecting shareholders. The agreement calls for Visteon to provide $4.25 million to cover the shareholders’ costs and expenses, and offering them the right to take part in the direct purchase commitment for 144,156 shares. The agreement was to be carried out on the date of Visteon’s bankruptcy exit. Visteon also borrowed an additional $700 million to pay off other debts and to fund its post bankruptcy operations.
Affects of reorganization, restructuring, and bankruptcy
Some people think Visteon’s exit is a milestone for the entire automotive industry, proving the global economy and industry is improving. According to Donald Stebbins, Visteon’s chairman, CEO, and president, the emergence marks a new beginning for Visteon. Mr. Stebbins stated that the bankruptcy emergence gives Visteon the opportunity to truly capitalize on the numerous operational and financial improvements the company has made. This includes focusing on its production and engineering presence in the fast-growing markets in Asia, Eastern Europe and Brazil. Visteon maintains corporate offices in Van Buren TWP, Michigan; Shanghai, China; and Chelmsford, United Kingdom in order to better serve these markets.
Visteon now has a much healthier balance sheet. Its production capacity is much more in line with demand, as they will only be producing climate control, electronic, lighting, and interior products now. The company is far less reliant on Ford Motor Company, due to Hyundai-Kia contracts. Visteon can now be very competitive in the Tier 1 automotive supplier industry since it has been relieved of its major financial burdens and employee obligations. Although the company is much smaller, it is considered to be much stronger.
Apparently, the Chapter 11 rules that apply to consumers don’t apply to businesses. It doesn’t take businesses 7-10 years to restore their credit ratings after declaring bankruptcy like it does consumers. Numerous people expect Visteon will now become a very profitable business.
References:
ABC News
Bankruptcy Home
Fox Business
Freep.com
Real Clear Market
Market Watch
Visteon Corporation
Wall Street Journal
YouTube, Visteon Debate Part 1
YouTube, Visteon Debate Part 2
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