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Visteon: The Road to Recovery

The outlook for the automotive industry was bleak in 2008 and 2009. The housing and credit markets had collapsed, consumer confidence was weak, and purchases of new vehicles were plummeting. North America auto production dropped from 14.8 million to 6.5 million units by May 2009. This set of conditions put incredible pressure on the U.S. automobile manufacturers’ original equipment manufacturers (“OEMs”).

Chrysler filed for bankruptcy. GM soon followed. Ford survived, but cut its production drastically. The sharp decline in production had a trickle-down effect on U.S. automotive suppliers caught in the perfect storm of weakened consumer demand, the broad restructuring of automakers and the absence of liquidity. Operational and financial restructuring was the only chance at survival for many of the players in the space. Visteon Corporation was one of those suppliers.

Visteon was spun off from Ford in June 2000. Although it had been through restructurings before shutting down unprofitable plants, by diversifying its customer base and bringing in new business, it was struggling to become profitable in certain markets and product lines. The falloff in OEM demand created incredible overcapacity at many of Visteon’s plants and unfortunately, Visteon had to continue to supply parts or risk being re-sourced by the OEMs. As Visteon’s cash position quickly worsened, management knew it could no longer meet its crushing debt payments. Debt holders were weathering the financial crisis and had no appetite for Visteon’s issues. Visteon’s secured term debt traded down a staggering 79 percent from $64.50 at the end of September 2008 to $13.63 by the end of March 2009. Debt holders began to clamor for liquidation and, ultimately, Visteon sought Chapter 11 bankruptcy protection in May 2009.

Alvarez & Marsal was hired to assess and manage the cash crisis, evaluate Visteon’s business plan, identify, determine and negotiate strategic options and help manage the company through its Chapter 11.

Hands-On Problem Solving

With operations in 26 countries, more than $6 billion in revenue and cash draining quickly, it was immediately clear that more visibility was needed into Visteon’s global liquidity position. A&M took a bottom-up approach to the cash forecast process by working with management to develop forecasts and tools for each of the operating locations. A&M immediately established rigorous cash controls, forecasting procedures and implemented initiatives to minimize the cash burn, contain the problem and conserve cash on a local and consolidated level. Next, A&M worked to solve the foreign “cash pool,” a cash sharing arrangement in which European entities borrowed and lent money to one another. As the automotive industry faltered, some of the entities in the pool began hoarding cash as directors began to protect themselves against potential personal liabilities. Effectively, the pool was broken and would require significant amounts of funding from the U.S. parent if immediate action was not taken.

A&M and Visteon worked quickly to stabilize the pool by removing entities with large cash needs and funding them directly through U.S. equity infusions or entering into accommodation agreements with major customers. With help from A&M, the U.S. parent was also successful in receiving Chapter 11 court approval to utilize a $100 million facility to reinforce and guarantee the pool. Through these actions, the pool was stabilized, allowing customers and pool participants to fund the European operations with minimal U.S. parent help. In addition, the foreign entities were saved from any local insolvency proceedings in their domiciled countries, preserving value for Visteon and it creditors.

A&M then turned its attention to the operational restructuring of Visteon’s U.S. plants. The company set out to close its unprofitable plants, consolidate volume and generate liquidity. A&M developed a consolidating “wind-down” model of plants, which was used to facilitate negotiations with Visteon’s largest customers. The model identified costs associated with each plant closing, the value of the assets to be sold and determined an appropriate surcharge to be charged to customers exiting the businesses. Using the model, A&M and the company began negotiations with customers. Over several months, Visteon was able to cover its restructuring costs, monetize plant assets and produce sizeable premiums from its customers that ultimately generated large sums of cash to help fund Visteon’s Chapter 11 restructuring.

In addition to liquidating unprofitable business lines and generating liquidity, the closure of the U.S. plants turned the fortunes of Visteon from a profitability perspective. As automobile demand rebounded slowly, Visteon was able to operate at much higher capacity and with a more profitable mix of business. It began generating cash and that, in turn, made the business plan more appealing to the once sour debt holders. These three key actions created a “war chest” of cash that would help Visteon effectuate its Plan of Reorganization, while cash on hand would cover administrative expenses and a certain tranche of senior debt.

The Result

A&M, together with Visteon, its counsel and investment bank, drafted and negotiated the framework of Visteon’s Plan of Reorganization with the company’s largest creditors and equity holders. The plan funded the Chapter 11 emergence by raising $2 billion in new equity and debt. Specifically, Visteon raised $1.25 billion in new equity capital from investors (led by a group of the bondholders) through a rights offering, $500 million in secured debt and $200 million in an undrawn asset-based revolver. As a result, the Plan provided par-plus accrued recovery to the secured term lenders, 50 percent recovery to general unsecured claims and allowed for equity holders to participate in the rights offering.

Visteon emerged from Chapter 11 bankruptcy on October 1, 2010, deleveraging its balance sheet by more than $2 billion. Today, its outlook is bright, with a profitable product mix and growth opportunities for the foreseeable future.