Looming Takata Bankruptcy Presents Risk and Uncertainty to Trade Creditors
In the latest sign of the Takata Corporation airbag fall-out, on December 26, 2016 BMW announced that it will recall nearly 200,000 of its cars in China with Takata airbags. Takata and its 19 OEM customers face potential liability related to its defective airbags in excess of $12 billion. The OEMs have liability not only related to potentially 100 million defective airbags requiring 42 million vehicle recalls, but also to the 17 wrongful deaths and more than 150 injuries caused by the airbags.
In February 2016, Takata appointed a special steering committee to advise on its options and to pursue a chosen strategy, which was originally planned to be announced in the fall of 2016 but is now planned to be announced in early 2017. Guided by Lazard Ltd. and Weil, Gotshal, Takata reportedly received at least five complete proposals from potential bidders, all of them requiring a Chapter 11 bankruptcy be filed and the assets of Takata sold through either a Section 363 sale of assets or pursuant to a plan of reorganization. The proposals also included a sharing of costs associated with the airbag defects among the acquirer of Takata and their OEM customers. As of December 2016, it was reported that there is a disagreement among the OEMs in selecting the successful bidder. The most prominent finalists are Autoliv Inc. and Key Safety Systems, who are currently refining their bids.
While there is no public information regarding any possible treatment of trade creditors, the successful bidder will likely require favorable treatment for the trade creditors to prevent supply disruptions. Similarly, while trade creditors could have exposure in a Takata bankruptcy case for any payments made to them within 90 days prior to the filing of the bankruptcy case, the successful bidder may also require that preference actions be waived against suppliers. Looking to recent precedent, in the Chassix bankruptcy case filed in late 2015 suppliers deemed critical and who signed new trade agreements with Chassix post-petition, and suppliers who had shipped goods shortly before the filing, received very close to 100% repayment of their pre-petition claims, while other creditors received as little as 88% (with a portion of that amount being paid over 2 years, in periodic installments).
Because the situation in Takata is fluid, and negotiations are expected to last for several more months before a restructuring plan is decided upon, it is impossible to predict what the terms of the restructuring plan will provide for trade creditors. Therefore, it is prudent for trade creditors to explore reducing their Takata claims, both to prevent any possible losses as a result of a possible haircut in the bankruptcy case and also to prevent temporary cash flow issues if some portion of the payment is made in installments over a long period of time. Options for trade creditors include:
- Negotiate with Takata for shortened payment terms as well as additional payments to pay down outstanding debt, attempting at a minimum to reduce payment terms down below 20 days, so that upon filing your entire claim can be covered as a 503(b)(9) claim. To successfully negotiate, trade creditors must determine what actual or potential leverage they may have.
- Request from end customers guarantees of payment, indemnification or other support.
- If the trade creditor is unsuccessful in reducing the outstanding payable, and/or chooses not to do so, the trade creditor should be mindful of the manner in which it is paid so as to attempt to maintain an ordinary course of business payment schedule in the event of a preference action, however unlikely.
Of course, every approach comes with both potential upside and downside, and each creditor must evaluate its position to decide upon a customized strategy designed to reduce risk and maximize the value of its Takata relationship.
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