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As Automotive Industry Financial Situation Worsens, Bankruptcy Filings May Increase

June 10, 2005

As you may know, the automotive industry is suffering from a deepening financial crisis that shows no signs of slowing down. In recent months, several “tier 1” automotive suppliers have sought bankruptcy protection (e.g., Tower Automotive and Meridian). Collins and Aikman, one of the nation’s largest auto parts makers filed its chapter 11 case on May 17, 2005 in Detroit. Other similarly situated companies reportedly may follow suit. (Delphi, Visteon and others, for example, are reporting huge losses to their CEOs and CFOs on a daily basis and seeking the assistance of turnaround or restructuring consultants). Increasing costs of steel and other raw materials and the financial problems at GM and Ford—whose own restructuring is not out of the question—may cause further “domino effect” problems for more tier 1, tier 2 and tier 3 suppliers. Indeed, GM and Ford bonds were recently rated “junk” as further evidence that all size levels of the industry are affected by the deepening financial crisis. With the example of United Airlines aggressively shedding pension and health care liability in its bankruptcy, financially distressed auto industry participants—both large and small—may employ this same approach.

In addition, with tighter Chapter 11 timelines becoming effective in October as a result of the recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, companies may seek bankruptcy protection before that date to take advantage of the more flexible current deadlines to file reorganization plans and reject leases.

We are aware that a number of firm clients, either directly or indirectly, support the auto industry. If these issues concern you, you should carefully monitor the situation. Both national and international media outlets (Wall Street Journal, Canadian Press, Financial Times (UK)) are covering these daily unfolding stories. Many of the affected businesses have plants, factories or assets located worldwide. Thus, we are monitoring activity and insolvency proceedings not only domestically, but internationally as well. Cross border insolvencies are likely given the global nature of the business.

We will continue to monitor this developing situation closely so that we can provide you, if you desire, with advice and guidance. You ought to, if you have not already, think about your customer and vendor relationships. Whatever your involvement in this industry, Godfrey & Kahn can provide counsel on these issues on both a pre- and post-bankruptcy basis.

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