Takata, the company linked to 11 deaths in the U.S. resulting from exploding airbags, has filed for bankruptcy and civil rehabilitation, and will sell substantially all of its global assets to Michigan-based Key Safety Systems for $1.588 Billion, subject to certain adjustments at closing.
Takata intends to use the Civil Rehabilitation and Chapter 11 processes to address the costs and liabilities related to airbag inflator recalls, including to fund its remaining obligations under the terms of the plea agreement with the U.S. Department of Justice that was announced on January 13, 2017 and Consent Orders entered into by Takata with the National Highway Traffic Safety Administration (NHTSA).
Pursuant to the DOJ Plea Agreement, Takata paid $25 million as a fine to the DOJ and was required to fund two restitution funds: (1) a fund of $125 million to meet liabilities to current or future personal injury claimants and (2) a fund of $850 million to satisfy a portion of the claims of OEM customers who purchased airbags containing PSAN inflators. Each of the restitution funds will be administered by a special master in accordance with the DOJ Plea Agreement. The $125 million fund for personal injury claimants was funded on March 29, 2017. Consistent with the DOJ Plea Agreement, the agreements in principle with the Customer Group and the proposed restructuring terms provide for the proceeds of the sale to KSS to be used to fund the $850 million OEM restitution fund.
After setting aside sufficient funds to capitalize RTK following completion of the Chapter 11 process, any remaining sale proceeds after satisfaction of the foregoing obligations and the payment of other claims entitled to priority or payment in full would be used to fund recoveries to holders of general unsecured claims.
“We believe taking these actions in Japan and the U.S. is the best way to address the ongoing costs and liabilities of the airbag inflator issues with certainty and in an organized manner while ensuring that Takata’s operations worldwide continue in the ordinary course and without interruption," said Shigehisa Takada, Chairman & CEO of Takata. "During the Civil Rehabilitation proceedings and Chapter 11 process and beyond, Takata remains fully committed to supporting all actions that advance vehicle safety. We deeply regret the circumstances that have led to this situation, but we are grateful to have reached a resolution that will allow us to continue to promote the safety of the driving public.”
The company has obtained a commitment for up to a $227 million revolving credit facility debtor-in-possession (DIP) financing to be provided by Sumitomo Mitsui Banking Corporation.
Additionally, the Japanese OEMs have committed to provide Takata with valuable accommodations and liquidity enhancements during the Civil Rehabilitation and the Company is working with the Customer Group on an agreement to do so on a global basis. Upon approval by the supervisor appointed by the Tokyo Court and approval by the Delaware Court, the DIP financing in Japan and the accommodations and additional liquidity support from the Customer Group in both Japan and the U.S., along with Takata’s cash flow from operations, are expected to provide Takata with sufficient liquidity to continue to operate its business and serve automotive customers globally in the ordinary course and without any significant disruptions.
The Company has requested Court approval in the U.S. to continue to pay its employees without interruption and in the same manner as before the filing and expects the request to be granted as part of the Court's "first day" orders. Also, under the Civil Rehabilitation Act, the salaries of the Company’s employees will be statutorily protected. As a result, the Company’s salaried and hourly employees should continue to be paid on the normal schedule. Additionally, there are expected to be no changes to various employee benefit programs.
With the additional liquidity to be provided by the DIP financing in Japan and the accommodations and other liquidity enhancements to be provided globally by the Customer Group, the Company’s suppliers can be assured that Takata has the ability to pay its post-petition obligations on a timely basis and intends to do so as required under the Civil Rehabilitation Act and the U.S. Bankruptcy Code, which grants priority status to goods and services received after the Civil Rehabilitation and Chapter 11 filing date.
Under the sale agreement, Key Safety Systems will acquire substantially all of Takata's assets, except for certain assets and operations that relate to Takata's manufacturing and sale of phase-stabilized ammonium nitrate (PSAN) airbag inflators. It is expected that Takata's PSAN-related operations will be run by reorganized Takata following the transaction closing and eventually will be wound down.
By combining substantially all of Takata with KSS, the transaction would form a leading global safety supplier with approximately 60,000 employees in 23 countries focused on serving customers and providing superior products and innovation in the rapidly evolving auto safety industry.
Jason Luo, President & CEO of KSS, said: "Takata has deep management talent, a dedicated work force and a long history of exceptional customer service. Although Takata has been impacted by the global airbag recall, the underlying strength of its skilled employee base, geographic reach, and exceptional steering wheels, seat belts and other safety products have not diminished. We look forward to finalizing definitive agreements with Takata in the coming weeks, completing the transaction and serving both our new and long-standing customers while investing in the next phase of growth for the new KSS."
Shigehisa Takada, Chairman & CEO of Takata, said: "KSS is the ideal sponsor as we address the costs related to airbag inflator recalls, and an optimal partner to the company's customers, suppliers and employees. The combined business would be well positioned for long-term success in the global automotive industry. Throughout this process, our top priorities have been providing a steady supply of products to our valued customers, including replacement parts for recalls, and a stable home for our exceptional employees. This agreement would allow that to continue."
The proposed structure for the potential transaction is intended to minimize transaction risk and supply chain disruption concerns for Takata's OEM customers. The companies anticipate a quick and seamless integration, utilizing the combined strengths of their respective management teams to implement a smooth transition.
KSS plans to continue to support and utilize Takata's presence in Japan, and does not intend to shut down any of Takata's manufacturing facilities there. Furthermore, KSS intends to establish an Asia regional headquarters in Tokyo, which should create new jobs in Japan, and plans to retain Takata's existing non-PSAN supplier contracts to maintain an uninterrupted supply chain. KSS also intends to invest in many of Takata's other worldwide manufacturing facilities and technology and R&D centers.
KSS has substantially completed its due diligence, and Takata and KSS are working toward finalizing a definitive agreement in the coming weeks. Takata has determined that it is in the best interests of the company and its stakeholders to address the recall-related issues in conjunction with the proposed sale. Accordingly, with KSS as plan sponsor, proceedings have commenced under the Civil Rehabilitation Act in Japan and in the United States of America under Chapter 11 of its bankruptcy code. Subject to successful completion of the in court proceedings and other closing conditions, including certain regulatory approvals, KSS expects transaction closure can occur in the first quarter of 2018.
Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal counsel, KPMG is serving as financial advisor, Jefferies LLC is acting as lead financial advisor while UBS Investment Bank also provides financial advice to KSS.
Nagashima Ohno & Tsunematsu and Weil, Gotshal & Manges LLP are serving as legal counsel to Takata. PricewaterhouseCoopers is serving as financial advisor, and Lazard is serving as investment banker to Takata.