Hayes Lemmerz International Inc. (HAYZ) could be in for a fight with some of its lenders over a "loan-to-own" bankruptcy financing deal that trumps some of the troubled manufacturers' existing bank debt, new court documents say.
The world's largest maker of wheels filed for Chapter 11 protection Monday with an offer of $80 million in new bankruptcy loans from a lending group led by General Electric Capital Corp. and Deutsche Bank AG (DB), according to a draft of the loan deal filed Tuesday with the U.S. Bankruptcy Court in Wilmington, Del.
More than 50% by number and more than two-thirds by dollar amount of Hayes Lemmerz's pre-bankruptcy lenders have said they'll back the Chapter 11 financing, the company says.
Loan terms require the company to expose itself to an auction but provide that the lenders that have agreed to finance the bankruptcy will get control of the company if no acceptable buyer comes forward.
In essence, Hayes Lemmerz's bankruptcy financing is structured as a "loan-to-own" transaction. Some of the company's existing lenders have agreed to make new loans, which position them to take over the company in a reorganization if there are no better offers.
Hayes Lemmerz says its proposed Chapter 11 loan is "one of the few viable mechanisms for lenders to allow major U.S. businesses, particularly those in the depressed automotive sector, to survive the current world-wide crisis."
Both the sale and the reorganization routes to get out of bankruptcy are built into terms of the Chapter 11 loan, which comes up for review Wednesday at the first court hearing in Hayes Lemmerz's case.
"A few" of the roughly 30 banks and hedge funds in Hayes Lemmerz's pre-bankruptcy lending group oppose the loan, the company said in court documents. Additionally, an ad hoc committee of holders of Hayes Lemmerz's euro notes has concerns about the financing.
Lenders could attack the Chapter 11 loan on the grounds that it primes existing secured debt, meaning that it adds a layer of new debt on top of Hayes Lemmerz's senior loans, court documents say. Secured lenders who don't consent to having their loans pushed into the second position can force a priming fight.
Troubled companies avoid such battles because they'll be pressed to prove in court that they can take on new bankruptcy debt without denting the chances that existing secured debt will be paid.
For a company like Hayes Lemmerz, which has suffered along with its car-making customers, a priming fight could be risky. The Northville, Mich., manufacturer has been pummeled by declining demand for its products and has been slammed by "extremely challenging conditions in the capital markets."
Additionally, Hayes Lemmerz fears it will lose customers and suppliers if it gets bogged down in a contentious bankruptcy proceeding, court documents say.
Bankruptcy financing means survival for Hayes Lemmerz, which suffered a series of ratings agency downgrades in the months before its Chapter 11 filing and is out of borrowing room on its working capital loans.
The Chapter 11 loan deal could mean as much as $100 million in new cash because of an option that allows backers to throw an additional $20 million in new loans onto the table in the bankruptcy case.
In all, Hayes Lemmerz's bankruptcy financing could expand to a $200 million arrangement, half of it new money and half of it existing loans, according to court documents. For every dollar of new loans, a dollar of the existing loans is elevated to the special status given to loans made to troubled companies.
In the absence of a last-minute deal with its holdout lenders, however, Hayes Lemmerz could be in for a priming fight in order to get the fresh cash it needs to stay alive.
Hayes Lemmerz's holdout lenders already have turned down an offer of a 7% fee for making the fresh Chapter 11 loans available. Lenders who are not joining in the bankruptcy financing but who have agreed not to get in the way of the deal are also in line for a reward, court documents say. The consent fee takes the form of a share of 8.5% of the reorganized Hayes Lemmerz, a stake allotted to those who won't put up new money but who won't try to block the bankruptcy financing.
Hayes Lemmerz is counting on all its secured lenders being willing to come to terms on a restructuring in order to avoid a liquidation, according to the filing. Court documents say Hayes Lemmerz had $670 million in debt, including $495 million in senior loans, as of the end of January.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-By Peg Brickley, Dow Jones Daily Bankruptcy Review; 302-521-2266; peg.brickley@dowjones.com
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