restructuring visteon - turnaround management … · executive summary 3 i. introduction 5 ii. auto...
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RESTRUCTURING VISTEON
Team Members
Oren Livne
Josh Simpson
Bankruptcy & Reorganization
Professor Altman
April 10, 2012
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Table of Contents
Section Page
Executive Summary 3
I. Introduction 5
II. Auto Parts Industry Overview 6
III. Visteon's History 8
IV. The Decline in Visteon's Financial Condition 9
V. Visteon's Bankruptcy 19
A. Acquiring DIP Financing 19
B. Initial Negotiations 20
C. Relationship with Ford 22
1. Lessons on Spinoff Relationships 22
2. Busted Spinoffs 25
3. Analysis of Parent/SpinCo Relationships 29
D. Employment, Pension, and OPEB Litigation 31
E. Performance in Bankruptcy 32
F. Negotiating Visteon's Plan of Reorganization 36
VI. Post-Bankruptcy Operations 42
VII. Demonstrating the Sensitivity of Valuations in 48
Bankruptcy
VIII. Fairness of Plan Valuation to Security Holders 55
IX. Conclusion 58
Appendix 60
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Executive Summary
The auto parts industry faces substantial cost pressures, with the ability to serve multiple
markets, utilize the latest technology, and provide timely delivery being highly valued.
Visteon was spun off from Ford in 2000 in an effort by Ford to reduce legacy liability costs,
to enhance Visteon's ability to sell to other producers, and to allow Ford to obtain better
pricing on parts. As should be done, Ford executed several agreements pre-spinoff to
manage its post-spinoff relationship with Visteon. To avoid the potential for later fraudulent
conveyance claims, parents must consider a subsidiary's ability to pay debts in reasonable
downside scenarios post-spinoff, and not overly favor the parent in the asset/liability
allocation.
A sharp decline in auto sales in 2008 precipitated reduced stock prices for auto parts
manufacturers and a decline in the industry's bond equivalent ratings. Visteon's
overburdened capital structure weakened the firm while its recurring losses, which caused
declines in the firm's Z-score, led to its bankruptcy filing in Delaware on May 28, 2009.
After failing to secure DIP financing from the government and its customers, Visteon was
able to secure a $150mm loan from its term lenders. The company then entered several
agreements with its customers, providing it with additional cash for agreements to continue
providing parts.
Visteon sought to eliminate certain employee benefits in bankruptcy, but a Third Circuit
decision refused to allow Visteon to unilaterally terminate benefits in bankruptcy that it could
outside of bankruptcy. Visteon also faced pension claims in Germany and the U.K.
Ford had a special relationship with Visteon, having previously been Visteon's parent, the
purchaser of non-performing facilities in 2005, and a major customer. Ford also purchased
Visteon's ABL Credit Facility claims when the firm neared bankruptcy. To manage the risk
of a fraudulent conveyance claim and ensure continuity of supply, Ford agreed to make
several significant concessions to Visteon in bankruptcy. Ford's Z-score was a useful
predictor of Visteon's at the 99% level and, as expected, the firms' Z-scores closely followed
their Z" scores, although the relationship was substantially less strong in a joint regression.
Visteon's management was able to resist early pressures from the firm's term lenders to sell
the company in pieces so that the lenders could realize a quick profit. Visteon's first plan of
reorganization did not provide its noteholders with any recovery, feeding contentious
valuation discussions. By being unwilling to share any recovery with noteholders early,
Visteon's term lenders lost their opportunity to obtain Visteon's equity at what was later
shown to be a substantial undervaluation. Eventually, a plan was developed for Visteon's
noteholders to either take out Visteon's term loans through a rights offering or obtain a low
recovery, providing an incentive for the noteholders to agree to commit additional capital.
This sped up the bankruptcy process, minimizing the damage to Visteon's business from
operating in bankruptcy. Visteon's pre-filing shareholders also successfully negotiated a
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recovery after a bid was made for some of Visteon's businesses, but hedge funds buying
Visteon's unsecured trade claims were unsuccessful in gaining access to the rights offering.
Visteon's final plan was confirmed on August 31, 2010, and Visteon emerged from
bankruptcy on October 1.
The auto parts industry had strong performance in 2010 and 2011, with a substantial increase
in investment grade bond equivalent ratings. This helped Visteon to outperform expectations
in bankruptcy and upon emergence, leading to improvements in the firm's Z-score. Visteon's
securities have performed well in the markets, given its substantially de-leveraged capital
structure.
Valuation in bankruptcy is very sensitive to the inputs selected, and Visteon's valuation
provides a perfect example. We examined the sensitivity of Visteon's predicted value to
beta, growth rate, EBIT margin, management projections, and comparable selection.
Rothschild significantly undervalued Visteon's equity, resulting in noteholders receiving a
median estimated recovery of 192% and overcompensation of $804mm. Thus, Visteon's pre-
bankruptcy shareholders could assert that they were treated unfairly under the plan; but, as
discussed, valuation is far from a perfect science.
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I. INTRODUCTION
The bankruptcy of Visteon Corporation ("Visteon") demonstrates the complexity and
innovative solutions that are inescapable in substantial modern bankruptcies. Visteon is an auto
parts manufacturer that was spun off from Ford Motor Company ("Ford") in 2000. After several
years of losses, Visteon had to file for bankruptcy in 2009 following a substantial drop in auto
sales in 2008. Given the auto industry's disfavor, the firm had to search for a debtor-in-
possession ("DIP") loan from an interested party. Visteon was able to secure a loan from its term
lenders, after failed attempts to obtain financing from the government and its customers.
However, Visteon was able to use the threat of supply disruption to obtain valuable support from
its customers. In the courtroom, Visteon's case set precedent that a bankrupt company cannot
unilaterally terminate certain employee benefits even if it may do so out of court. The firm was
reorganized successfully under a creative toggle plan that used the threat of a switch to a
suboptimal plan for the firm's noteholders to induce a favorable outcome. Since bankruptcy, the
firm's performance has exceeded expectations.
We examined a few interesting issues surrounding Visteon's reorganization. First,
Visteon had a special relationship with Ford that provides useful insight into how spinoffs should
be structured to avoid the risk of a busted spinoff. We analyzed the relationship between Ford
and Visteon's Z-scores in this context. Second, we considered the sensitivity of valuation in
bankruptcy given Visteon's example. Finally, we provided an ex post analysis of the valuation
assumed in Visteon's plan of reorganization and the resulting treatment of Visteon's pre-
bankruptcy security holders.
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II. AUTO PARTS INDUSTRY OVERVIEW
Automotive parts suppliers provide a variety of systems, modules, and components for
use by vehicle manufacturers and after-market parts suppliers.1 Initially, vehicle manufacturers
operated their own internal parts divisions to produce a wide range of components.2 Parts
manufacturing is very capital and labor intensive, and is sensitive to overall economic
conditions.3 Thus, in an effort to reduce costs, the automotive industry shifted to competitive
sourcing of parts from independent suppliers.4 Car manufacturers began to spinoff their internal
parts divisions, creating Delphi, which spun out of General Motors ("GM"), and Visteon, which
spun out of Ford. Other independent players in the industry include Clarion, Continental AG,
Delphi, DENSO, Faurecia Group, Hyundai Mobis, Johnson Controls, Koito Manufacturing,
Magna International, Nippon Seiki, Panasonic, Robert Bosch GmbH, and Valéo S.A.5
Vehicle manufacturers have globalized their operations and supply chains in an effort to
further reduce costs and access new markets.6 Component manufacturers that can “serve
multiple markets, support a global vehicle platform and maintain a local presence” are therefore
more desirable.7 Vehicle manufacturers based outside of the United States have continued to
increase their market share, creating difficulty for domestic parts suppliers.8 Domestic suppliers
also face significant legacy liabilities and high unionized labor costs, providing foreign
1 Visteon Corp., FORM 10-K at 9 (Mar. 31, 2009).
2 Id. at 3.
3 Id.
4 Id.
5 Id. at 9; Rothschild, VISTEON PRELIMINARY VALUATION ANALYSIS 18 (2010).
6 Visteon Corp., FORM 10-K at 3 (Mar. 31, 2009).
7 Id.
8 Id. at 4.
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producers with an advantage.9 As a result, domestic suppliers generally focus on technologically
intensive components.10
Parts suppliers work in close conjunction with customer auto manufacturers, at times
using joint development teams.11
Supply contracts are often long-term, particularly for
specialized parts.12
Contracts with vehicle manufacturers are dominated by larger parts suppliers
who can provide high-volume, low-cost products that are delivered in a very timely fashion.13
Thus, smaller parts producers may compete to supply products to the larger parts producers.14
In 2011, U.S. auto parts makers generated $47.8bn in revenue, with a compounded
annual growth rate ("CAGR") of -0.3% over the previous five years.15
As shown in the chart
below, nearly 20% of revenues were from General Motors, 17% from Toyota, and 16% from
Ford.16
The largest parts suppliers were Magna International (15.2% market share), Delphi
(10.4%), and DENSO (9.1%).17
9 Antonio Danova, IBISWORLD INDUSTRY REPORT 33639: AUTO PARTS MANUFACTURING IN THE US 20–21 (Dec.
2011). 10
Id. at 22. 11
Id. 12
See id. 13
Id. 14
Id. 15
Id. at 4. 16
Id. at 15. 17
Id. at 24.
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III. VISTEON'S HISTORY
Visteon is a global supplier of systems and components to vehicle manufacturers.18
Visteon was incorporated in January 2000 to house Ford’s automotive systems and components
businesses.19
In June of 2000, Visteon’s common stock was distributed to Ford’s shareholders in
a spinoff, making Visteon a stand-alone company.20
The year prior to the spinoff, 88% of
Visteon’s $19.4bn in revenue came from Ford.21
Visteon was spun off in an attempt by Ford to
reduce its legacy liability costs and working capital requirements, to increase shareholder value
by allowing Visteon to sell to other producers, and to allow Ford to obtain better pricing on its
supplies.22
This latter element made Visteon's transition to independence more difficult, as the
significance of Ford's purchases allowed Ford to extract price concessions.23
This encouraged
Visteon to diversify its customer base.24
In 2005, in the face of high labor costs and five years of losses, Visteon transferred 23 of
its worst performing North American facilities to Ford in exchange for $300mm and the
forgiveness of certain post-retirement obligations to employees.25
As a result, Visteon was able
to dramatically reduce its labor costs, cutting the average hourly wage from $38 to $18.26
From
January 2006 to August 2008, an additional 30 non-core and underperforming facilities and
businesses were restructured, resulting in 14 closures and 7 divestitures.27
In addition, Visteon
18
Visteon Corp., FORM 10-K at 1 (Mar. 31, 2009). 19
Id. 20
Id. 21
Mark Clothier, Visteon Exits Bankruptcy Protection After 16 Months, BLOOMBERG, Oct. 1, 2010, available at
http://www.bloomberg.com/news/2010-10-01/visteon-exits-federal-bankruptcy-court-s-protection-16-months-after-
filing.html. 22
Interview with Todd Snyder & Mark Keiselstein, Co-Head of North America Debt Advisory and Restructuring,
Rothschild, Partner, Kirkland & Ellis, in New York, N.Y. (Mar. 19, 2012). 23
Id. 24
Id. 25
Clothier, supra note 21. 26
Id. 27
Id.
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was able to achieve substantial administrative and engineering cost reductions and reduced its
headcount by over 15,000 employees.28
By 2007, Visteon had significantly reduced its reliance on Ford. As shown below, sales
to Ford declined from 84% of its revenue in 2000 to 38% of its $11.3bn in revenue in 2007.29
By
2007, Visteon had also diversified in its product offerings and geographically, with North
America, Europe, and Asia each contributing over a quarter of sales.
IV. THE DECLINE IN VISTEON'S FINANCIAL CONDITION
Over a long time horizon, auto sales, as shown by the Seasonally Adjusted Annual Rate
("SAAR") of auto sales in the chart below, had exhibited an upward trend.30
28
Decl. of William G. Quigley, III, Chief Financial Officer and Executive Vice President of Visteon Corp., In
Support of First Day Pleadings ¶ 5, 2009. 29
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 11 (2010). 30
Id. at 5.
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However, a confluence of factors caused a collapse in U.S. auto sales of approximately 40% in
2008. This was a global phenomenon, with double-digit declines in year-over-year sales in the
fourth quarter of 2008 in North America, Europe, China, South Korea, and South America.31
The global recession caused a spike in unemployment that reduced consumers' incomes and
willingness to purchase durable goods, as these purchases can be postponed.32
In addition, the
credit crunch led to a decrease in the availability of consumer auto financing.33
The subprime
crisis compounded matters by decreasing borrowers' net worth, creditworthiness, and willingness
31
Visteon Corp., FORM 10-K at 1 (Mar. 31, 2009). 32
See David P Bianco, Durable Goods, ENCYCLOPEDIA FOR BUSINESS (2d ed., last visited Apr. 3, 2012),
http://www.referenceforbusiness.com/encyclopedia/Dev-Eco/Durable-Goods.html. 33
GMAC Financial Services limited financing to those with credit scores below 700, required higher down
payments, and increased the rate it charged dealers for providing "non-incentivized consumer auto financing." Press
Release, GMAC Financial Services, GMAC Financial Services Statement on Automotive Finance Purchase Policy
(Oct. 13, 2008), available at http://media.gmacfs.com/index.php?s=43&item=280.
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to spend.34
Finally, gas prices quickly rebounded in 2009, decreasing the prices that consumers
were willing to pay for automobiles.35
The decrease in auto sales quickly made its impact felt on auto parts manufacturers.
Reduced auto production, contemplated in the restructurings of the "Big 3" U.S. producers, led to
expectations of declining revenues at auto parts manufacturers, as shown below.36
The reduction in parts manufacturer revenues led the market to anticipate significant
restructurings, liquidations, and consolidations. In large part, these expectations were caused by
the substantial levels of operating leverage built into parts manufacturers, with high fixed costs.37
Parts manufacturers' plants could not be easily abandoned or sold once revenues declined, and it
was difficult to escape union contracts. Thus, substantial levels of price competition could be
expected. These factors led market participants to question the valuation of parts manufacturers,
leading to significant declines in stock prices, as shown by the chart below.38
34
See Timothy R. Homan, U.S. Household Net Worth Had Record Decline in Fourth Quarter, BLOOMBERG, Mar.
13, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaRlfL4VyFwU&refer=news. 35
Historical Price Charts, GASBUDDY.COM (last visited Apr. 3, 2012), available at
http://gasbuddy.com/gb_retail_price_chart.aspx; see Reuters, April Auto Sales Hurt by Higher Gas Prices,
FOXNEWS.COM, May 02, 2006, http://www.foxnews.com/story/0%2C2933%2C194036%2C00.html. 36
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 6 (2010). 37
Snyder & Keiselstein, supra note 22. 38
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 7 (2010).
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The bond rating equivalents in the auto parts industry also demonstrated the general
decline in the industry's financial state. As shown in the chart below, 56.5% of auto parts
manufacturers had investment grade ratings in 2007, compared to 30.8% of firms in 2008.39
Note that the D category may be more substantial than indicated, as no rating can be calculated
for bankrupt firms that stop trading.
39
Data on 29 auto parts manufacturers operating in the U.S. with market capitalizations greater than $100mm from
S&P Capital IQ.
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006 2007 2008
Percen
tag
e o
f F
irm
s
Year
Bond Rating Equivalents in Auto
Parts Industry
AAA AA A BBB BB B CCC/CC D
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Given this environment, Visteon faced a daunting challenge in trying to keep itself afloat.
However, undermining the company's efforts was its debt laden capital structure, shown below.
Still, the company maintained sizeable cash balances.
As illustrated by the chart below,40
Visteon’s many efforts to restructure did not yield long-term
improvements in share price and were unable to combat the economic crisis.
40
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 10 (2010).
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
($m
m)
Year
Visteon's Pre-Bankruptcy Capital
Structure
MVE
Book debt
Cash and
equivalents
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Between 2007 and 2009, Visteon saw its revenues decline 40.1%. In response,
management sought to reduce the firm's operating costs but was unable to keep up with the
massive declines in sales.41
With declining share prices and levels of earnings before interest,
taxes, depreciation, and amortization ("EBITDA"), Visteon saw its credit quality deteriorate
under the financial metrics shown below. Thus, when it completed a borrowing in June of 2008,
it had to agree to pay an interest rate of 12.25%.42
41
Visteon Corp., FORM 10-K at 1 (Mar. 31, 2009); see Quigley, supra note 28, at ¶ 5–6. 42
Visteon Corp., FORM 10-K at 94 (Mar. 31, 2009).
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The Z-score is an appropriate tool for analyzing Visteon as it is a manufacturing firm
with its primary operations in the U.S. Below, we have decomposed Visteon's Z-score into its
component parts. Visteon's declining Z-score resulted primarily from recurring losses reducing
retained earnings, but was also impacted by smaller effects from the other Z-score components.
Based on Visteon's Z-score, we computed the firm's bond equivalent rating. While the Z-
score led the rating agencies in placing Visteon with B and D ratings, the rating agencies first
placed Visteon with B- and CCC+ ratings during the firm's slide towards default. As Visteon
0%
20%
40%
60%
80%
100%
(2.5)
0.0
2.5
5.0
7.5
10.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Year
Pre-Bankruptcy Financial Metrics
Interest
coverage ratio
Book debt to
EBITDA
Market debt
ratio
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2001 2002 2003 2004 2005 2006 2007 2008
Z-S
co
re
Year
Visteon's Z-Score Pre-Bankruptcy
WC / TA
RE / TA
EBIT /
TAMVE /
BV Liab.Sales /
TAZ-Score
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had both senior secured term loans and senior unsecured notes (including all three note issuances
for which there are ratings), we provided loss given default rates for both categories.43
Visteon's increasing levels of distress are shown by the heightened expectation for its default and
investor losses, as determined using Visteon's bond equivalent ratings. These increasingly poor
expectations for the company caused a spike in the firm's CDS spreads.44
43
Loss given default is derived from Edward I. Altman & Edith Hotchkiss, CORPORATE FINANCIAL DISTRESS AND
BANKRUPTCY 323 (3rd ed. 2006). 44
Chart from Bloomberg.
2001 2002 2003 2004 2005 2006 2007 2008
Z-Score Bond Rating Equivalent
Rating B B B B B B CCC D
Cumulative 5yr
Mortality Rate28.7% 28.7% 28.7% 28.7% 28.7% 28.7% 47.9% 100.0%
Cumulative 5yr Loss 20.2% 20.2% 20.2% 20.2% 20.2% 20.2% 36.3%
Sr. Secured Loans 32.5%
Sr. Unsecured Bonds 64.2%
Bond Ratings
8.25% Notes BBB BBB BB+ BB+ B- CCC+ CCC+ CCC+
7.00% Notes BB+ B- CCC+ CCC+ CCC+
12.25% Notes CCC+
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Similarly, the firm's debt and equity prices dropped sharply, with the firm's stock eventually
trading at less than $1 and its notes being traded below 5% of face value.45
45
Chart from Bloomberg.
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In response to its decreased note prices, Visteon attempted to restructure by issuing
12.25% notes and repurchasing its 8.25% notes during June of 2008. Unfortunately, these
actions were inadequate, causing Visteon’s 2008 annual report to include a statement by the
company’s accounting firm that there were substantial doubts about Visteon’s ability to continue
as a going concern.46
This going concern opinion triggered a default under Visteon’s debt
covenants.47
The company was able to negotiate waivers from its creditors,48
buying the firm
some time to try to avoid a bankruptcy filing, but faced an impending liquidity crisis, as shown
below.49
At the end of 2008, Visteon retained legal and financial advisors to assist the company with its
liquidity issues.50
Discussions with lenders and major customers were commenced in an effort to
46
Quigley, supra note 28, at ¶ 7. 47
Id. 48
Id. 49
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 13 (2010). 50
Visteon Corp., FORM 10-K at 2 (Mar. 31, 2009). Unlike many bankruptcies, Visteon's advisors felt like they were
brought in at the appropriate time, not too late in the process. Snyder & Keiselstein, supra note 22.
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avoid the need to seek protection under Chapter 11;51
however, there were simply too many
constituents and too few people to talk to in order to effectuate an out of court restructuring.52
Visteon filed for bankruptcy protection on May 28, 2009.
V. VISTEON'S BANKRUPTCY
Visteon filed for bankruptcy in Delaware for several reasons. First, the firm was
incorporated in Delaware (like most other large, publicly traded companies), so it was legally
permitted to file in Delaware.53
Second, Delaware offered a sophisticated judiciary capable of
dealing with complex issues.54
Third, Delaware generally offers judges and substantive laws that
are friendly to corporate needs.55
However, the judge that heard the Visteon case was not as
friendly as most Delaware judges.56
Finally, a Delaware filing, away from Visteon's primary
operations in Michigan, reduced the chance that employees and other disaffected locals would
show up to court to air their grievances with the company.57
A. Acquiring DIP Financing
After Visteon's bankruptcy filing, the firm directed its efforts to finding DIP financing.58
This was a difficult period to obtain DIP financing, as hedge funds were already overexposed to
the auto industry and it was in disfavor among traditional lenders.59
Visteon first tried to obtain a
DIP loan from the government, in the wake of other auto bailouts, with its efforts being
unsuccessful.60
The company then targeted its large North American customers (Ford, GM,
51
See Visteon Corp., FORM 10-K at 2 (Mar. 31, 2009). 52
Snyder & Keiselstein, supra note 22. 53
Id. 54
Id. 55
Id. 56
Id. 57
Id. 58
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 17 (2010). 59
Snyder & Keiselstein, supra note 22. 60
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 17 (2010).
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Chrysler, and Nissan), but those efforts also failed.61
Visteon then turned to its term lenders and,
in November 2009, a $150mm DIP financing from the term lenders was approved.62
Under the
terms of the DIP credit agreement, Visteon borrowed $75mm during 2009 and was able to
borrow the remainder under certain conditions if needed (but ultimately Visteon did not do so).63
The DIP loan was “issued at a 2.75% discount . . . with interest at variable rates equal to
(i) 6.50% (or 8.50% in the event a default), plus (ii) a Eurodollar rate (subject to a floor of 3.00%
per annum)."64
Visteon also paid monthly a 1% annual fee on the unused portion of the
$150mm.65
The DIP credit agreement was set to expire at the earliest of May 18, 2010, on the
effective date of Visteon’s plan of reorganization, or upon the sale of all or substantially all of
Visteon’s assets.66
B. Initial Negotiations
Following Visteon’s bankruptcy filing, the company had a series of negotiations with its
stakeholders. Accommodation and support agreements were entered into with customers to
generate added liquidity by accelerating payment terms, arranging for certain asset sales,
providing payments for research and engineering, and generating cash surcharge payments.67
In
exchange for the benefits underlying the accommodation agreements, Visteon agreed to continue
producing and delivering products, to assist with shifting certain production to other suppliers, to
allow customers to purchase tooling specific to their parts, and to gave security interests in assets
needed for producing specific parts.68
61
Id. Visteon went so far as filing an emergency motion to shut down its plants making parts for Nissan to
encourage Nissan to participate in the DIP facility. Snyder & Keiselstein, supra note 22. 62
Visteon Corp., FORM 10-K at 42 (Feb. 26, 2010). 63
Id. 64
Id. 65
Id. 66
Id. 67
Id. at 27. 68
Id. at 29.
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The accommodation agreement with Ford, with whom Visteon had a special relationship
as discussed further below, included an exit fee of $8mm and the purchase of inventory
associated with the transition of certain production lines to new locations.69
In addition to the
accommodation agreement, Ford purchased all of Visteon's outstanding loans under its ABL
Credit Agreement, with a balance of $127mm owed to Ford at the end of 2009.70
This was an
important tactical move, as it allowed Ford to block other stakeholders from dictating the course
of the restructuring through the ABL facility.71
In May of 2009, the court allowed Visteon to
provide Ford, as the secured lender under the ABL Credit Agreement, certain protections in
exchange for the use of Ford’s cash collateral.72
The customer accommodation agreement with
GM provided $8mm in cash surcharge payments above the initial order price, reimbursement of
$10mm for consolidating certain facilities, reimbursement of $4mm in engineering and related
costs, accelerated payments, and reimbursement of certain other costs.73
The accommodation
agreement with Chrysler included surcharge payments of $13mm, $5mm for the purchase of
certain Chrysler-specific tooling used at Visteon facilities, reimbursement of certain costs for
winding down Chrysler production lines, accelerated payments, and payment of certain other
costs.74
A similar agreement was entered into with Nissan.75
These customer accommodation
agreements, with Visteon's DIP, shored up the firm's liquidity position.
Retirees were another important stakeholder that Visteon needed to address. In
December 2009, Visteon announced that it planned to eliminate certain other post-retirement
69
Id. 70
Id. at 63. 71
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 16 (2010). 72
Visteon Corp., FORM 10-K at 42 (Feb. 26, 2010). 73
Id. at 28. 74
Id. 75
Id.
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employee benefits (“OPEB”).76
These included health and life insurance benefits for current and
future retirees. 77
Visteon’s plans were heavily contested and the company was ultimately forced
to negotiate the issue due to a legal decision discussed further in Part V(D).
At the outset of Visteon's bankruptcy, some of Visteon's secured term lenders advocated
that Visteon should be split up and sold piecemeal so that they could realize a 30% recovery
when Visteon's debt was trading well below 20% of face value.78
They argued that trading
prices demonstrated that Visteon's senior securities were in fact the fulcrum security, and that
senior management had a fiduciary duty to act in their best interests.79
However, management
resisted these pressures and took the time to perform a proper valuation, which showed Visteon's
debt to be substantially undervalued.80
With a favorable valuation and the initial exclusivity
period for filing a plan of reorganization, Visteon's management was able to avoid a quick move
into a liquidation or sale process.
C. Relationship with Ford
1. Lessons on Spinoff Relationships.81
Visteon had a complicated relationship with Ford during its bankruptcy process, in large
part because it was previously spun off from Ford. A spinoff involves a publicly traded
corporate parent distributing shares in its subsidiary ("SpinCo") to its shareholders, often in the
form of a pro rata dividend, creating a new and separate public company. Spun off entities
commonly do not long precede the spinoff. Often, prior to a spinoff, business units, assets, and
liabilities are moved between the corporate parent and SpinCo to meet the parent's goals for the
76
Id. at 29. 77
Id. 78
Snyder & Keiselstein, supra note 22. 79
Id. 80
Id. 81
Substantial portions of this section are derived from Todd R Snyder & Vik Jindal, THE BUSTED SPINOFF: LESSONS
FOR DIRECTORS, available at www.rothschild.com/WorkArea/DownloadAsset.aspx?id=2147485043.
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spinoff. Corporate goals with these transactions include creating pure play securities, corporate
refocusing, complying with adverse regulatory rulings, separating businesses from unrelated
risks, enhancing shareholder value, and providing investors with liquidity. As discussed in Part
III, Ford had several of these goals in mind when it spun off Visteon. The process of allocating
assets and liabilities between the parent and SpinCo can involve significant internal politics, as
those officers and directors who will work for SpinCo begin to be treated as outsiders within the
parent.
Before a spinoff occurs, a rigorous analysis of operational, governance, and corporate
finance objectives should be conducted. Constraints must be considered in this process, such as
the likely negotiating position of key constituents like unions, and post-spinoff relations between
the parent and SpinCo should be analyzed and defined. For instance, the negotiating leverage
between the parent and SpinCo post-spinoff should be scrutinized when the firms will have
ongoing business interactions. Both Ford and GM remained highly dependent on their spun off
parts manufacturers, Visteon and Delphi, and vice versa. This dependence benefitted Ford and
GM post-spinoff, as they could use their purchasing power to extract price discounts,
encouraging the parts suppliers to diversify customers. However, once the parts manufacturers
became distressed the balance of power reversed, as Ford and GM faced the risk of substantial
business disruption.82
Monsanto's spinoff of Solutia offers a counter-example. When Solutia
became distressed after its 1997 spinoff, its prior parent Monsanto was Solutia's supplier in key
markets, providing Monsanto with substantial leverage.83
However, pre-bankruptcy Monsanto
did make an advance payment for future deliveries and provided support to Solutia for
82
The parts manufacturers could shut down their lines servicing Ford or GM products, providing them with
substantial negotiating leverage. Ford Motor Co., FORM 10-K at 25 (Feb. 26, 2009); see Visteon Corp., FORM 10-K
at 1 (Mar. 16, 2006). This would typically be a unforgivable sin for an auto parts supplier, although this happened
multiple times to Chrysler. Snyder & Keiselstein, supra note 22. 83
Monsanto eventually provided some capital to support a successful restructuring.
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contingent liabilities. Thus, comprehensive planning for ongoing business interactions post-
bankruptcy is key. This can be done by establishing pre-spinoff long-term governing principles
and operating procedures for the relationship, taking care to consider how these will work in
cases of financial distress.
Ford entered into several agreements with Visteon pre-spinoff to manage the companies'
relationship post-spinoff.84
The companies had sought to transfer all assets and liabilities
relevant to Visteon's businesses to it pre-spinoff, but those assets and liabilities that could not be
timely transferred were to be transferred as soon as possible with Visteon bearing the economic
costs and benefits of these assets and liabilities in the interim. Ford assumed any product
warranty or recall liabilities for Visteon parts made for model year 1996 or earlier Ford vehicles.
Visteon would accept all environmental claims for properties transferred to it, while Ford would
accept any intellectual property claims for parts sold to Ford before July 31, 1999. Ford and
Visteon also entered into a pricing agreement that would largely treat Visteon like other Tier 1
suppliers, entitling Visteon to a right of last refusal to meet competitors' quotes for parts. Ford
would provide Visteon with transitional services through December 31, 2001 at Ford's fully
accounted cost, plus a reasonable overhead allocation. Visteon would be allowed to use tooling
owned by Ford to produce components to sell to other parties in return for a fee. One of the
more interesting areas of structuring was regarding employee assignment. The United Auto
Workers ("UAW") negotiated for Visteon's 23,580 hourly employees to indefinitely remain
employees of Ford, with the costs being passed through to Visteon, including bonuses based on
Ford's performance and postretirement benefits. Ford did agree to assume pre-existing pension
obligations for some Visteon workers who had already retired or were close to being eligible for
84
This paragraph is derived from Visteon Corp., FORM S-1A at 74–83 (Jun. 6, 2000).
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retirement. Regarding intellectual property, the parties agreed to a cross-license at no charge for
technologies developed prior to August 1, 1999.
Once the spinoff occurs, SpinCo operates on a standalone basis run by its own board and
officers, who owe duties to SpinCo's shareholders. At this time, SpinCo's new managers will
have to confront the new challenges of running a public company, managing creditor and other
investor relationships, and operating in a competitive marketplace as an independent company.
As the parent had likely selected SpinCo's initial board and officers from its own workforce, and
those individuals can be expected to maintain communication with others at the parent, the
separation of the two companies is often gradual. Of Visteon's top six post-spinoff managers,
only one had not previously worked at Ford, and of Visteon's seven directors after the spinoff,
only three had no prior experience with Ford.85
Thus, independent directors should be
particularly vigilant post-spinoff regarding proposed transactions with the parent. Today, none
of Visteon's top nine executives and fifteen board members have prior work experience at Ford.86
2. Busted Spinoffs.87
During the spinoff asset and liability allocation process, spun off entities may become
overburdened as the parent company decides to shed problematic liabilities without losing
valuable assets and businesses. The asset/liability allocation may be negotiated with branded
SpinCo officers and directors, but these agreements are far from arms-length as these individuals
have reporting lines and responsibilities to the parent, will likely not have independent legal and
financial advisors, and face professional and social pressures to accede to the parent's desires
85
Id. at 84–86. 86
Visteon Corp., SCHEDULE 14A at 4–5 (Apr. 30, 2009); Visteon Corp., SCHEDULE 14A at 4–6 (Apr. 27, 2011). 87
Substantial portions of this section are derived from Snyder & Jindal, supra note 81.
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until the spinoff occurs.88
As a result of such structuring in conjunction with market conditions,
SpinCos may later find that it is necessary to restructure (a "busted spinoff"), possibly through
the use of the bankruptcy process. During SpinCo restructurings, parent/SpinCo relationships
can be strained by SpinCo's failure to perform under contracts with the parent, and by lawsuits
by SpinCo or its investors against the parent seeking remuneration. After Delphi filed for
bankruptcy, it and GM sought to maintain a positive relationship due to their ongoing business
and shared histories despite negotiations where GM eventually agreed to terms valued by Delphi
at $10.6bn.89
However, after Tronox, a 2005 Kerr-McGee spinoff, became distressed, the
Tronox/Kerr-McGee relationship was very tense as the companies had no ongoing business
relationship.
Parents must be concerned with the possibility that during a SpinCo restructuring, a claim
may be made under 11 U.S.C. §544(b) or § 548 that the parent committed fraudulent conveyance
by seeking to improperly benefit to the detriment of SpinCo.90
On these grounds, Kerr-McGee
was sued for $15.5bn for dumping substantial environmental liabilities in Tronox to facilitate a
sale of Kerr-McGee to Anadarko Petroleum. This litigation is still ongoing.91
Similarly,
Monsanto agreed to cover hundreds of millions of Solutia's liabilities after it was spun off and
subsequently filed for bankruptcy.92
To avoid the potential for successful litigation following a
busted spinoff, the parent's board must satisfy its fiduciary duties of "good faith, loyalty and due
88
It may also be hard for an employee of the parent to ask for more after being told that they will become the Chief
Executive Officer of a new public company. 89
Press Release, Delphi Corp., Delphi and General Motors Enter Into Modified Settlement and Restructuring
Agreements; GM to Provide Additional Support (Sept. 12, 2008), available at
http://www.reuters.com/article/2008/09/12/idUS219840+12-Sep-2008+MW20080912. 90
For instance, 11 U.S.C. § 548(a)(1)(A) allows a bankruptcy trustee to avoid transfers made within two years
before filing for bankruptcy "with actual intent to hinder, delay, or defraud any entity to which the debtor was or
became." Section 544(b) allows transfers to be avoided by trustees using powers provided under state law. 91
See Tronox Inc. v. Anadarko Petroleum Corp., 464 B.R. 606 (Bankr. S.D.N.Y. 2012). 92
See Thaddeus Herrick & Scott Kilman, Solutia, Monsanto Agree to Pay $600 Million to Settle PCB Claims, WALL
ST. J., Aug. 21, 2003, available at http://www.mindfully.org/Industry/2003/Monsanto-Solutia-Pay-%24600M-
21aug03.htm.
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care in designing and effectuating the transaction."93
Pre-spinoff consideration must be given to
SpinCo's ability to pay its debts post-spinoff under reasonable downside scenarios, and to
ensuring that the asset/liability allocation does not unduly favor the parent over SpinCo. This
requires careful thought, as a parent guarantee to pay for unexpected contingent losses can
backfire, putting the parent in jeopardy. This happened when XL Capital spun off Security
Capital Assurance, making guarantees that would eventually cost it $2bn. On the other hand, a
pre-spinoff agreement to provide SpinCo below market pricing may be terminable if SpinCo
defaults, providing the parent with negotiating leverage. After a spinoff is completed, "case law
suggests that [a parent] . . . generally do[es] not owe any fiduciary duties to the prospective
shareholders of SpinCo."94
While Visteon was under distress, its relationship with Ford came under pressure. As
discussed above in Part III, Visteon was already under financial pressure in 2005, and had begun
a restructuring process. Given fears of fraudulent conveyance litigation in bankruptcy, Ford
agreed to pay $300mm, forgive $2.4bn in employee related liabilities, and assume other
liabilities for the worst businesses transferred to Visteon during the spinoff.95
As part of the
transaction, Visteon provided Ford with warrants to purchase 25mm shares at an exercise price
of $6.90 per share, and Ford provided $400mm for Visteon to use in its restructuring.96
Regarding these transactions, Ford incurred a pre-tax loss of $468mm.97
As Visteon neared its bankruptcy filing on May 28, 2009, Ford was worried about a
fraudulent conveyance claim98
and its production being shut down by Visteon's actions.99
93
Snyder & Jindal, supra note 81, at 7. 94
Id. at 6–7. 95
Snyder & Keiselstein, supra note 22; Visteon Corp., FORM 10-K at 40 (Mar. 16, 2006). 96
Visteon Corp., FORM 10-K at 1–2 (Mar. 16, 2006). 97
Ford Motor Co., FORM 10-K at 25 (Feb. 26, 2009). 98
A creditor committee motion "requested the release of documents relating to Ford’s 2000 spin-off of [Visteon],
and financial transactions between the two firms since then . . . . hoping to show that Ford forced losses onto the
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Visteon made approximately $3.1bn in sales to Ford during FY2008. Thus, as discussed in Part
V(B), pre-bankruptcy Ford "assumed and took an assignment of all of the outstanding loans,
obligations and other interests" under Visteon's revolver.100
As of December 31, 2009, Visteon
owed Ford $127mm under this facility.101
Post-filing, in return for a release from any potential
liability and an agreement to ensure Ford continuity of supply, Visteon got Ford to reimburse it
for up to $29mm in restructuring costs, release certain employee related obligations, release
$163mm in bankruptcy claims, and agree to place $600mm of new and replacement business
with Visteon through 2013.102
This latter concession by Ford was particularly important, as auto
manufacturers are very hesitant to contract with overleveraged parts manufacturers on new
models, as a supplier bankruptcy could delay the new model or substantially increase costs.103
Thus, Ford regularly assessed its suppliers creditworthiness and had been keeping Visteon out of
its future plans.104
In addition, Ford had previously agreed to release Visteon from certain OPEB
obligations, resulting in a $9mm gain.105
Ultimately, Ford's experience with Visteon's spinoff demonstrates the risk that a parent
runs of a busted spinoff, opening the gateway for legal liability, the renegotiation of contracts,
supplier, possibly securing better claims for creditors." Edward Niedermeyer, Visteon Creditors Blame Ford For
Bankruptcy, THE TRUTH ABOUT CARS (Dec. 17, 2009), http://www.thetruthaboutcars.com/2009/12/visteon-
creditors-blame-ford-for-bankruptcy/. 99
Visteon actually saw maintaining timely delivery with Ford as critical to its survival, as Ford provided Visteon
with many benefits. Snyder & Keiselstein, supra note 22. Thus, Visteon felt that it needed to continue delivering
on money losing contracts in some countries to maintain business in other countries, even though it could reject
these contracts in bankruptcy court. Id. 100
Visteon Corp., FORM 10-K at 63 (Feb. 26, 2010). 101
Id. 102
Visteon Corp., FORM 10-K at 69 (Mar. 9, 2011). According to Visteon's advisors, these negotiations were
actually quite amicable, as Visteon's advisors were sure that Ford would not be found liable for fraudulent
conveyance and viewed Ford's relationship as critical. Snyder & Keiselstein, supra note 22. Thus, at one point,
Visteon's lead counsel spent days walking Ford's General Counsel through its legal analysis that Ford faced no legal
liability. Id. 103
Id. Ford was also working with Visteon on parts for 8 new models, and it would be costly to bring in another
supplier. Id. 104
Id. 105
Visteon Corp., FORM 10-K at 69 (Mar. 9, 2011).
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and the operational risk from losing a key supplier. It also demonstrates the necessity of good
pre-spinoff planning, and that planning may not be enough to avoid the risk of a busted spinoff.
3. Analysis of Parent/SpinCo Relationships.
One would expect the Z-scores of parent companies to have a high correlation to those of
SpinCos. As expected, Ford's Z-Score is a useful predictor of Visteon's. The relationship is
significant at the 99% level, with the variation in Ford's Z-score explaining 72.5% of the
variation in Visteon's Z-score. As Visteon is smaller and underwent a restructuring, its Z-score
was much more volatile than Ford's, with the regression equation being Visteon = - 1.86 + 3.29
Ford. The Z-scores for Ford and Visteon are shown below.106
Unexpectedly, Ford's Z-score is
not consistently higher than that of Visteon, which one would expect if Ford was overburdening
Visteon with liabilities prior to the spinoff.
In the other busted spinoff for which we have several observations, Monsanto's spinoff of
Solutia, we also see a positive relationship in Z'' scores between the parent and SpinCo. This
relationship is significant at the 95% confidence level, explaining 42.4% of the variation in
106
Ford data from S&P Capital IQ.
0.55
0.70
0.85
1.00
1.15
1.30
1.45
1.60
1.75
(0.50)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Fo
rd
Z-S
co
re
Vis
teo
n Z
-Sco
re
Year
Z-Scores of Ford and Visteon
Visteon
Ford
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Solutia's Z'' scores. The equation is Solutia = - 6.63 + 1.70 Monsanto. The Z'' scores are shown
in the chart below.107
As one might expect, Solutia's Z-score is consistently below Monsanto's.
Using data from Ford and Visteon, both manufacturers, it was possible to consider how
close the relationship was between the Z- and Z'' scores. We would expect a strong relationship,
given that the two scores share a majority of components. As expected, we observed statistically
significant correlations at the 99% level between the Z- and Z'' scores for both Ford and Visteon.
With Ford, the Z-score explained 67.4% of the variation in the Z" score, and the Z-score
explained 80.7% of the variation in the Z" score for Visteon. We would also expect the
relationship between Z- and Z'' scores to be consistent among firms, as both scores are matched
up to bond ratings. However, this is not the case, as the relationship in Ford's case is Z" = 0.415
+ 1.22 Z while the relationship in Visteon's case is Z" = - 3.77 + 2.33 Z. When a joint regression
is run, the relationship between Z- and Z'' scores is not significant at the 99% level, with an R-
squared of only 27.2%. We hypothesize that this may be due to nonlinearity in the scaling of Z-
107
Data from S&P Capital IQ.
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0 2
00
1
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
So
luti
a Z
'' S
co
re
Mo
nsa
nto
Z''
Sco
re
Year
Z'' Score of Monsanto and Solutia
Monsanto
Solutia
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and Z'' scores to bond ratings, and to companies operating at different bond rating equivalents.
The Z- and Z'' scores of Ford and Visteon are shown below.108
D. Employment, Pension, and OPEB Litigation
In December 2009, Visteon was granted the right to terminate certain post-retirement
health and life insurance benefits of employees by the bankruptcy court.109
This decision was
appealed by multiple unions and affirmed by the district court.110
On July 13, 2010, the Third
Circuit reversed, issuing an unexpected ruling that Visteon could not unilaterally terminate
health and life insurance benefits for its retirees during Chapter 11 even if it could have done so
outside of bankruptcy.111
The court held that once Visteon had initiated the bankruptcy process,
Visteon was obligated to follow the specific requirements of the bankruptcy code.112
Retiree
benefits could only be terminated if “the debtor negotiates in good faith with the retiree
representative, the representative fails to consensually agree to the needed modifications and the
108
Ford data from S&P Capital IQ. 109
Visteon Corp., FORM 10-K at 130 (Mar. 9, 2011). 110
Id. 111
Douglas S. Mintz & Jonathan D. Canfield, Third Circuit Prohibits Visteon from Terminating Benefits Plan in
Bankruptcy, RESTRUCTURING REVIEW (Oct. 25, 2010), available at
http://www.cadwalader.com/list_newsletters.php?newsletter_type_id=7&newsletter_id=47. 112
Id.
(6.0)
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
4.0 2
00
1
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Sco
re
Year
Z and Z'' Scores of Ford and
Visteon
Ford Z
Ford Z''
Visteon Z
Visteon Z''
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April 10, 2012 Restructuring Visteon Page 32 of 62
debtor demonstrates that the termination during the bankruptcy is necessary for the debtors'
reorganization and treats all parties fairly.”113
On remand, the district court required Visteon to
restore benefits to both its appealing and non-appealing retirees.114
Visteon appealed and
subsequently reached a settlement where it would not have to extend benefits to non-appealing
retirees.115
However, the UAW sued Visteon to stop it from terminating benefits for its members
and hearings will not be held until May 2012.116
Visteon also faced retirement-related issues in other jurisdictions. In April 2010, a
German court ruled in favor of employees seeking additional pension benefits, leading more than
600 employees to seek additional benefits.117
Visteon reserved $8 million for additional
claims.118
In addition, in June 2009 a U.K. regulator indicated that it was considering
intervening in the bankruptcy of Visteon's U.K. subsidiary over potential pension plan funding
deficiencies.119
On May 11, 2010, the pension trustees, creditors’ committee, and debtors
entered into an agreement and the claims were withdrawn.120
The U.K. regulator indicated that it
would not seek financial support from any related entities outside of the U.K.121
E. Performance in Bankruptcy
Visteon was not the only casualty of the poor auto industry conditions during 2008 and
2009. Appendix Exhibit 1 demonstrates how a wave of restructurings hit the auto industry
following the subprime crisis and ensuing recession. The need for restructuring did not stop with
parts manufacturers, but also struck car manufacturers and auto finance companies. However, as
113
Id. 114
Visteon Corp., FORM 10-K at 14 (Feb. 27, 2012). 115
Id. 116
Id. 117
Id. at 15. 118
Id. 119
Id. at 14–15. 120
Id. at 15. 121
Id.
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time passed during Visteon's bankruptcy, industry conditions improved. The fate of Visteon's
customers became clearer with Ford surviving; GM exiting bankruptcy on July 10, 2009;122
and
Chrysler being sold to Fiat on June 10, 2010.123
In addition, the decline in U.S. light vehicle
sales stopped around the time of Visteon's bankruptcy filing and subsequently began to reverse,
as shown by the chart below.124
In part, sales may have been stimulated by the "Cash for
Clunkers" program, which ran from July 1, 2009 to August 24, 2009.125
Ford accounted for
14.4% of sales under the program.126
However, some have argued that "Cash for Clunkers"
simply resulted in some consumers moving forward anticipated car purchases, resulting in little
economic impact.127
122
Gary Hoffman, GM's Exit From Bankruptcy 101, AOL AUTOS (Jul. 10, 2009), http://autos.aol.com/article/gm-
bankruptcy-questions/. 123
Chrysler Chapter 11 Reorganization, WIKIPEDIA (last visited Apr. 3, 2012),
http://en.wikipedia.org/wiki/Chrysler_bankruptcy#Sale_to_.22New_Chrysler.22. 124
CALCULATED RISK: FINANCE & ECONOMICS (last visited Apr. 3, 2012), http://www.calculatedriskblog.com/. 125
Car Allowance Rebate System, WIKIPEDIA (last visited Apr. 3, 2012),
http://en.wikipedia.org/wiki/Cash_for_Clunkers#Program_results. 126
Id. 127
Atif R. Mian & Amir Sufi, The Effects of Fiscal Stimulus: Evidence from the 2009 ‘Cash for Clunkers’ Program,
SSRN (Sept. 1, 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1670759.
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In response to the improved industry conditions, Visteon's Z-score improved in 2009.
This was the result of beneficial changes in the firm's working capital and earnings before
interest and taxes ("EBIT") to total assets. The firm's improved EBIT was attributed to "cost
reduction and restructuring programs," as Visteon realized a $290mm (or 30%) decrease in fixed
costs from 2008 levels during its restructuring.128
In part, these fixed cost reductions were from
Visteon's efforts to negotiate with customers to exit unprofitable operations, allowing the firm to
address 12 underperforming facilities.129
However, Visteon's increase in working capital was
primarily from reclassifying its defaulted debt from current liabilities to long-term liabilities.130
128
Visteon Corp., FORM 10-K at 32 (Feb. 26, 2010); Rothschild, OVERVIEW OF THE VISTEON CORPORATION
RESTRUCTURING 34 (2010). 129
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 34 (2010). 130
Visteon Corp., FORM 10-K at 59 (Feb. 26, 2010).
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April 10, 2012 Restructuring Visteon Page 35 of 62
From a D bond equivalent rating in 2008, Visteon's Z-score recovered to a CCC bond rating
equivalent in 2009. This rating is consistent with a 5-year cumulative loss of 36.29%.
Due to the improvement in Visteon's performance and market conditions, Visteon's note
prices rallied, as is illustrated by the chart below.131
As would be expected, the pricing of the
firm's term loans rallied sooner than the pricing of the firm's note issues, as the term loans were
secured and the notes unsecured.
131
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 22 (2010).
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2005 2006 2007 2008 2009
Z-S
co
re
Year
Visteon's Z-Score in Bankruptcy
WC / TA
RE / TA
EBIT /
TAMVE /
BV Liab.Sales /
TAZ-Score
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F. Negotiating Visteon's Plan of Reorganization
The rally in Visteon's note prices and increased valuations of Visteon resulted in
Visteon's secured creditors believing that they may achieve a full recovery.132
However,
Visteon's unsecured noteholders also realized that they may obtain a sizeable recovery.133
Visteon's secured lenders argued for a low valuation, claiming that they should receive full
ownership of Visteon.134
Visteon's unsecured creditors disputed this assertion, leading to delay
as negotiations occurred.135
As time passed, Visteon's performance improved further, making
clear that Visteon's unsecured creditors would achieve a substantial recovery, and denying
secured creditors their opportunity to obtain most of Visteon's equity at what would subsequently
be shown to be a bargain.
132
Snyder & Keiselstein, supra note 22. 133
Id. 134
Id. 135
Id.
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As noted in Part V(C)(2), car manufacturers are hesitant to contract with parts
manufacturers whose future is in doubt on new models, as a parts manufacturer failure could
cause production delays and require using another parts manufacturer, at additional expense.136
With Visteon's bankruptcy dragging on in contentious valuation discussions, Visteon's business
began to suffer as Visteon won less business.137
In an effort to increase the speed at which an
agreement was reached, Visteon filed its first Plan of Reorganization even though the plan was
viewed as not confirmable given the noteholders' valuation position.138
This plan sought the
termination of the company's defined benefit pension plans, creating claims by the Pension
Benefit Guarantee Corporation ("PBGC").139
Thus, it would have provided secured term loan
creditors with 96.2% of Visteon's common stock and a 100% estimated recovery, the PBGC with
3.8% of Visteon's stock and an estimated 12% recovery, and no recovery for unsecured
creditors.140
Visteon's noteholders argued that the valuation of Visteon was too low, and that they
should see a recovery. As market note prices rose and industry conditions improved, an
amended plan was submitted with a change in the treatment of Visteon's pension plans allowing
the unsecured creditors to realize a recovery.141
This reorganization plan contemplated a
$300mm exit financing and was expected to provide term lenders with a 100% recovery and
85% of Visteon's equity, holders of Visteon's 12.25% notes with a 55% recovery and 6.2% of
firm equity, and general unsecured claims a 20% recovery and 8.8% of equity.142
136
Id. 137
Id. 138
Id. 139
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 18 (2010). 140
Id. 141
Id. at 20. 142
Id. It is surprising that the 12.25% notes were to be provided with a higher recovery, as they ranked "equally
with the Company’s existing and future unsecured term debt," including the other notes. Visteon Corp., FORM 10-K
at 96 (Mar. 31, 2009).
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Following the filing of Visteon's first amended plan, a significant group of noteholders
formed an Ad Hoc Noteholder Committee to pursue options to pay off the secured term loans in
cash.143
The committee supported a plan to raise $1.25bn in cash through direct purchases and
rights offerings to take out the term loans.144
However, not all of the noteholders could be
counted on to put an additional investment into Visteon, and some noteholders refused to put in
more than a pro rata portion of the funds needed to take out the term loans, making the plan's
success contingent on having a substantial portion of noteholders agree to the plan.145
Thus, the
toggle plan was developed in Visteon's Second Amended Plan of Reorganization to avoid the
business disruption associated with a plan's failure, resulting in a substantial destruction of
value.146
To repay Visteon's term loans in full, including post-petition interest, the plan's Rights
Offering Sub Plan would use an exit facility with a $400mm term loan and raise $1.25bn in
exchange for 95% of Visteon's equity, of which $950mm would be raised in a rights offering and
$300mm would be raised through direct purchase commitments.147
The remaining 5% of
Visteon's equity would be provided to noteholders based on pre-petition claims, with general
unsecured claims receiving the lesser of a pro rata share of $141mm or a 50% recovery.148
If the
Rights Offering Sub Plan was unsuccessful in raising sufficient capital, the plan would toggle to
the Claims Conversion Sub Plan.149
This sub plan would follow the form of the First Amended
Plan of Reorganization, with term loan holders obtaining approximately 85% of Visteon's equity
and noteholders receiving 15%, while providing general unsecured claims the same treatment as
143
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 23 (2010). 144
Id. 145
Snyder & Keiselstein, supra note 22. 146
Id. 147
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 24, 25 (2010). The $950mm rights
offering was backstopped by the investors with direct purchase commitments. Id. at 24. 148
Id. 149
Id.
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under the Rights Offering Sub Plan.150
Unlike the Rights Offering Sub Plan, the Claims
Conversion Sub Plan would consider the term loan facility claims to be impaired, allowing term
loan creditors to approve the plan, facilitating a judicial cramdown over the noteholders'
objections.151
Because Visteon's situation had markedly improved since the first amended plan,
with higher debt trading prices, Visteon's noteholders had an economic incentive to ensure that
the Rights Offering Sub Plan worked, as it could be expected to provide a higher recovery. This
incentive structure allowed the toggle plan to alleviate the risk of plan failure and value
destruction.
Members of Visteon's Ad Hoc Noteholder Committee were provided access to
confidential information about Visteon, such as management forecasts, if they agreed to restrict
their trading of Visteon securities.152
This information was provided in part so that these
creditors could intelligently assess the Rights Offering Sub Plan, given the unwillingness of
investors to provide capital without full information, and convince other creditors to approve the
plan.153
On May 7, 2010, Johnson Controls ("JCI"), a competitor, offered to buy Visteon's
electronics and interiors businesses for $1.25bn in cash.154
The offer was subject to due
diligence.155
JCI had previously abandoned an acquisition of Visteon's electronics business.156
The offer failed as Rothschild advised that it undervalued the businesses and provided significant
150
Id. 151
Visteon Corp., FIFTH AMENDED JOINT PLAN OF REORGANIZATION OF VISTEON CORPORATION AND ITS DEBTOR
AFFILIATES PURSUANT TO CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE 21 (Sept. 7, 2010); 11 U.S.C. §
1129(b). 152
Snyder & Keiselstein, supra note 22. 153
Id. 154
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 27 (2010). 155
Id. 156
Id.
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execution risk.157
Amidst the offer and Visteon's continuing recovery, Visteon's stock prices
traded up sharply, as shown below.158
Hedge funds had purchased substantial portions of stock and formed an Ad Hoc Equity
Committee.159
They argued that Visteon's high bond trading prices and JCI's bid showed that all
of Visteon's bonds could be refinanced by the existing creditors of the firm.160
Eventually, a
settlement was reached whereby the shareholders would receive stock and warrants in Visteon
equity under the plan, and $4mm in legal advisor fees.161
While some hedge funds sought advantage through Visteon's equity, others purchased
unsecured trade claims and sought a participation in the rights offering alongside Visteon's
157
Id. 158
Id. at 29. 159
Id. at 28. 160
Snyder & Keiselstein, supra note 22. 161
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 28 (2010).
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noteholders.162
No agreement was reached with these funds, and confirmation objections were
eventually overruled by the bankruptcy court.163
Incorporating the results of these negotiations, Visteon's Fifth Amended Plan of
Reorganization was filed on Sept. 7, 2010 and confirmed on August 31, 2010.164
The plan
envisioned a $700mm exit financing, including a $500mm term loan and $200mm revolver.165
From three commitment proposals, Morgan Stanley's was selected as the best option, offering
interest at LIBOR + 6.25%, with a 1.75% LIBOR floor.166
A summary of the plan's sources of
cash and treatment of claims under the Rights Offering Sub Plan is shown below.167
162
Id. at 30. 163
Id. 164
Id. at 31. 165
Visteon Corp., FORM 10-K at 95, 96 (Mar. 9, 2011). 166
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 32 (2010). 167
Visteon Corp., FIFTH AMENDED JOINT PLAN OF REORGANIZATION OF VISTEON CORPORATION AND ITS DEBTOR
AFFILIATES PURSUANT TO CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE (Sept. 7, 2010); Visteon Corp.,
FORM 10-K at 75, 76 (Mar. 9, 2011); Rothschild, VISTEON PRELIMINARY VALUATION ANALYSIS 9, 11, 13, 15
(2010).
(in millions except per share data)
Sources of Cash
Equity Rights Offering 950
Direct Equity Purchases 300
Noteholder Capital Raise (for
45mm shares)1,250
Exit Financing Term Loan 500
Exit Financing Revolver 200
Cash & Equivalents (9/30/2010) 1,113
Total Sources of Cash 3,063
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Visteon successfully emerged from bankruptcy on October 1, 2010 under the Rights Offering
Sub Plan.168
This significantly deleveraged capital structure placed Visteon in a competitive
position in the auto parts industry.169
VI. POST-BANKRUPTCY OPERATIONS
As discussed in Part V(E), the auto parts industry began to recover while Visteon was in
bankruptcy. This recovery continued after Visteon emerged. The chart below shows the
improvement in auto parts industry conditions from 2009 to 2011, with a substantial increase in
the number of investment grade firms using bond rating equivalents (from 33.3% to 52.2%), and
a substantial decrease in the number of firms rated at CCC, CC, or D (from 18.5% to 4.3%).170
168
Visteon Corp., FORM 10-K at 26 (Mar. 9, 2011). 169
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 34 (2010). 170
Data on 29 auto parts manufacturers operating in the U.S. with market capitalizations greater than $100mm from
S&P Capital IQ.
Average Treatment of Claims under the Rights Offering Sub Plan
Class ClaimForecasted
RecoveryCash
Shares of
Common StockWarrants
Subscription
Rights
ABL Credit Facility (Ford) 127 100.0% 127
Term Loan Facility Claims 1,629 100.0% 1,629
7.00% and 8.25% Senior Notes 668 8.5% 1.9mm shares Yes
12.25% Senior Notes 202 32.5% 0.6mm sharesFor 2.4mm shares at
$9.66 strike priceYes
General Unsecured Claims 203 50.0% 101
Equity 1mm sharesFor 1.6mm shares at
$58.80 strike price
Management Incentive Plan1.7mm restricted
shares
Total 2,829 1,858
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In part due to these improving industry conditions, Visteon substantially outperformed
expectations. In 2011, Visteon's first full year after emergence, the firm generated sales of
$8.0bn, well above 2009 and 2010 sales of $6.7bn and $7.5bn, respectively.
As shown below, Visteon achieved these improvements by increasing sales in Asia while its
sales were declining in North America. 171
171
Visteon Corp., FORM 10-K at 107 (Feb. 27, 2012).
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011
Percen
tag
e o
f F
irm
s
Year
Bond Rating Equivalents in Auto
Parts Industry
AAA AA A BBB BB B CCC/CC D
0
2,000
4,000
6,000
8,000
10,000
12,000
2007 2008 2009 2010 2011
($m
m)
Fiscal Year
Visteon's Sales
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Visteon also substantially changed its product mix. As shown below, Visteon’s climate product
group contributed a significantly higher percentage of sales in 2011 than pre-bankruptcy in 2008,
while electronics provided a lower portion of sales. 172
Ford's special relationship may be waning with Visteon as by 2011 Ford was no longer Visteon’s
largest customer. As shown below, Hyundai had replaced Ford, making up 31% of Visteon's
2011 sales.173
172
Visteon Corp., FORM 10-K at 127 (Mar. 31, 2009); Visteon Corp., FORM 10-K at 105 (Feb. 27, 2012).
Climate
32%
Elec-
tronics
34%
Interiors
29%
Lighting
5%
2008 Sales by
Product
Climate
49%
Elec-
tronics
17%
Interiors
28%
Lighting
6%
2011 Sales by
Product
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April 10, 2012 Restructuring Visteon Page 45 of 62
,
Visteon's strong post-bankruptcy performance is also demonstrated by its performance relative to
expectations. In both 2010 and 2011, the company substantially outperformed management
projections for both Revenue and EBITDA.
Post-bankruptcy, Visteon also benefitted from a substantially de-levered capital structure.
As shown below, Visteon's debt to equity ratio had substantially improved post-bankruptcy.
173
Visteon Corp., FORM 10-K at 8 (Mar. 31, 2009); Visteon Corp., FORM 10-K at 4 (Feb. 27, 2012).
Ford /
Mazda
34%
Hyundai
/ Kia
22%Nissan /
Renault
9%
Other
35%
2008 Sales by
Customer
Hyundai
31%
Ford
27%
Other
42%
2011 Sales by
Customer
Revenue EBITDA
2010 2011 2010 2011
Actual 7,323 8,047 745 658
Projected by Management 6,435 6,550 394 521
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Visteon's strong performance and decreased leverage improved its credit ratios, providing the
firm with substantially higher interest coverage ratios and much lower book debt to EBITDA and
market debt ratios.
Thus, Visteon's Z-score improved to a bond rating equivalent of BBB in 2010 and BB in 2011, in
comparison to rating equivalents of D in 2008 and CCC in 2009. These rating equivalents can
also be compared to Visteon's B+ rating on a new 6.75% notes issuance in 2011. Visteon's 2010
and 2011 bond rating equivalents are consistent with 5.75% and 10.96% 5-year cumulative
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2008 2009 2010 2011
($m
m)
Year
Visteon's Post-Bankruptcy Capital
Structure
MVE
Book debt
Cash and
equivalents
0%
20%
40%
60%
80%
100%
0
5
10
15
20
25
2008 2009 2010 2011
Year
Post-Bankruptcy Financial Metrics
Interest
coverage ratio
Book debt to
EBITDA
Market debt
ratio
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mortality rates, respectively, and 5-year average cumulative losses of 3.81% and 6.57%.
Visteon's Z-score decomposition, provided below, shows that the improvement in Visteon's Z-
score was due to improved performance in nearly all of the Z-score component factors.
In conjunction with Visteon's improved financial ratios, discussed above, Visteon's improved Z-
scores show a low likelihood that a Chapter 22 filing will be necessary any time in the near
future.
Given Visteon's strong performance, deleveraged capital structure, reduced risk of
distress, and improved macroeconomic conditions, Visteon's stock and 6.75% notes have
performed well in the markets. Visteon's beta has dropped from above 3.5 pre-filing to
approximately 1.5 today.174
As can be seen below, the market also perceives a low risk of a
Chapter 22 filing any time soon, as Visteon's 6.75% notes have traded very close to par.175
These notes do not include any affirmative financial covenants.176
174
Betas calculated using weekly returns on Bloomberg from June 1, 2007 to May 22, 2009, and from October 1,
2010 to March 23, 2012. 175
Chart from Bloomberg. 176
Visteon Corp. & Bank of N.Y. Mellon Trust Co., INDENTURE FOR 6.75% SENIOR NOTES DUE 2019 (Apr. 6,
2011).
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2008 2009 2010 2011
Z-S
co
re
Year
Visteon's Z-Score Post-Bankruptcy
WC / TA
RE / TA
EBIT /
TAMVE /
BV Liab.Sales /
TAZ-Score
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VII. DEMONSTRATION OF THE SENSITIVITY OF VALUATIONS IN BANKRUPTCY
Visteon's valuation provides an excellent opportunity to demonstrate the sensitivity of
valuation in bankruptcy. To facilitate this demonstration, we created a discounted cash flow
("DCF") model to value Visteon as of December 31, 2009, using only the information available
at that time. This is the information that would have been available to Visteon's advisors as they
negotiated Visteon's plan of reorganization. As we were seeking to value Visteon's equity post-
bankruptcy, we had to make several pro forma adjustments to correctly value Visteon. We
anticipated how Visteon's capital structure would change under the last plan of reorganization
with the rights offering, payoff of debt, conversion of debt to equity, and use of exit financing.
We adjusted Visteon's beta for the change in capital structure, unlevering and relevering it. We
also took the interest rate on Visteon's exit financing, executed at arms-length with a new lender,
to be indicative of Visteon's post-bankruptcy cost of debt. We found Visteon's marginal tax rate
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based on the countries in which it operates.177
Finally, using the 30-year treasury yield and
historical equity risk premium, we were able to calculate Visteon's post-bankruptcy weighted
average cost of capital.178
To estimate future cash flows, we calculated recurring EBIT. Next, we found it
necessary to normalize depreciation and amortization, capital expenditures, and investments in
working capital. We expected depreciation and amortization to drop in coming years (as it had
in the past several years) due to the substantial declines in Visteon's revenues and capital assets.
As could be expected, Visteon was minimizing its capital expenditures when in financial
distress. To estimate future free cash flows to equity ("FCFE"), we adjusted Visteon's interest
expense based on its changed capital structure and assumed no proceeds from new debt issues.
Management projected Visteon's revenues and EBITDA to grow at 3.3% and 18.9%,
respectively, over the next four years. However, Visteon had shrunk dramatically since its
spinoff and would continue to operate in a very competitive industry. Thus, we used a 10% four-
year growth rate and a 2% terminal growth rate in our base case analysis. This resulted in an
estimated equity value of $2,215mm, or $44.12 per share. This is within Rothschild's valuation
range for Visteon, from $1,575mm to 2,565mm.179
To demonstrate the sensitivity of our DCF
model, we considered the sensitivity of our model to different betas, growth rates, and EBIT
margins, also analyzing the accuracy of the management projections underlying DCF valuations
in bankruptcy.
177
Marginal tax rates by country are available at Aswath Damodaran, DAMODARAN ONLINE (last visited Apr. 1,
2012), http://pages.stern.nyu.edu/~adamodar/ (click "Updated Data" and then "Marginal tax rate by country"). 178
The historical risk premium is available at Aswath Damodaran, DAMODARAN ONLINE (last visited Apr. 1, 2012),
http://pages.stern.nyu.edu/~adamodar/ (click "Updated Data" and then " Historical Returns on Stocks, Bonds and
Bills - United States"). 179
Rothschild, VISTEON PRELIMINARY VALUATION ANALYSIS 9, 11, 13, 15 (2010).
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There is substantial discretion for choosing different betas. With historical betas,
subjectivity is present in the selection of the index used in the calculation (S&P 500 or an
international index), time period considered (2 years or longer), and how often returns are
calculated (weekly or monthly). Historical betas must be adjusted for the expected change in a
bankrupt company's capital structure. Given the issues with historical betas,180
industry betas
and bottom-up betas can be used. Given these alternatives, the low beta was 0.88 and the high
beta was 3.53, as can be seen in Appendix Exhibit 3.181
The chart below provides a histogram of
the betas of auto parts manufacturers, with the median 5-year beta being 1.94 and the median 2-
year beta being 1.55.182
The following chart demonstrates the considerable effect that beta choice can have on our model,
with calculated equity values ranging from $3,158mm to $1,250mm for betas ranging from .75
to 2.50.
180
Aswath Damodaran, APPLIED CORPORATE FINANCE 139 (3rd ed. 2011). 181
Rothschild used an unlevered beta of 0.7 to 0.8, with an assumed 30% debt ratio. Rothschild, VISTEON
PRELIMINARY VALUATION ANALYSIS 26 (2010). However, beyond the equity risk premium, they added size and
industry risk premiums in deriving a cost of equity. Id. 182
Data from S&P Capital IQ.
0
1
2
3
4
5
6
7
8
9
Nu
mb
er o
f F
irm
s
Beta
Betas of Auto Parts Manufacturers
5 Year
Beta
2 Year
Beta
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We next considered the various possibilities for growth rates. Visteon's revenue had
steadily declined since the firm's spinoff, with a CAGR of -11.2%. Over the same time period,
Visteon saw declines in FCFE from its highs. As discussed above, management projected
Visteon's revenues and EBITDA to grow over four years at 3.3% and 18.9%, respectively.183
Finally, the industry's growth rate is expected to be 11.46% over five years,184
with a median
firm growth rate of 18%. Shown below is a histogram of auto parts manufacturers' forecasted
long-term earnings per share growth rates.185
183
Rothschild used management projections in its valuation, with a terminal growth rate of 0% to 2%. Rothschild,
VISTEON PRELIMINARY VALUATION ANALYSIS 25 (2010). 184
Yahoo Finance. 185
Data from S&P Capital IQ.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50
($m
m)
Beta
Sensitivity of Equity Value to Beta
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The chart below shows that Visteon's calculated equity value ranges from $1,382mm to
$2,510mm for growth rates between 0% and 5%.
EBIT margin is another key input in a DCF valuation. Visteon's EBIT margin was 4.34%
in 2009, with its recurring EBIT margin being 4.64%. The firm's average recurring EBIT margin
0
1
2
3
4
5
6
7
<5% 5-10% 10-15% 15-20% 20-25% 25-30% >30%
Nu
mb
er o
f F
irm
s
Long-Term EPS Growth Rate
Long-Term EPS Growth Rates for
Auto Parts Manufacturers
0
500
1,000
1,500
2,000
2,500
3,000
0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
($m
m)
Growth Rate
Sensitivity of Equity Value to
Growth Rate
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from 2004 to 2009 was 3.59%, while the median industry EBIT margin was .01% in 2009. The
histogram below shows industry EBIT margins in 2009.186
As a DCF values a firm based on future cash flows, it is appropriate to use a recurring EBIT
margin in DCF valuations. The chart below shows the substantial effect that small changes in
EBIT margin expectations have on Visteon's valuation, with the calculated equity value
extending from $614mm to $3,042mm for EBIT margins of 2% to 6%, respectively.
186
Data from S&P Capital IQ.
0
2
4
6
8
10
12
14
<(1
0%
)
(10
%)-
(5%
)
(5%
)-
0%
0-5
%
5-1
0%
10
-15
%
>1
5%
Nu
mb
er o
f F
irm
s
EBIT Margin
EBIT Margin of Auto Parts
Manufacturers
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2.00% 3.00% 4.00% 5.00% 6.00%
($m
m)
EBIT Margin
Sensitivity of Equity Value to EBIT
Margin
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Management projections, which may be instrumental in forecasting EBIT margins,187
are also
subject to selective judgment. This is particularly important given the potential incentives for
management to undervalue or overvalue a firm operating in bankruptcy. An overvaluation may
help management to avoid a liquidation and subsequent job loss, while an undervaluation sets
low expectations and places management in a position to profit on incentive compensation. A
comparison of Visteon's management projections to actual results is shown below. This
demonstrates that management can make substantial errors in their estimates in bankruptcy, even
failing to predict the directional change in such key numbers as revenue and EBITDA. Thus,
poor management forecasts may decrease the accuracy of DCF valuations, by influencing
operating assumptions such as the EBIT margin used.
Given the importance of the variables discussed above and the difficulty of selecting an
appropriate value, a non-expert bankruptcy judge can be expected to face difficulty in selecting
an appropriate DCF valuation model.
Judges are in little better position with relative valuations, however, as these valuations
are subjective in the selection of comparable firms and multiples. The chart below shows the
enterprise value to EBITDA multiple for auto parts manufacturers as of year-end 2009.188
The
significant left and right tails are likely a byproduct of the significant effect that the recession had
187
Rothschild based its DCF valuation of Visteon on management projections. Rothschild, VISTEON PRELIMINARY
VALUATION ANALYSIS 25 (2010). 188
Data from S&P Capital IQ. Visteon had recurring 2009 EBITDA of $662mm.
Revenue EBITDA
2010 2011 2010 2011
Actual 7,323 8,047 745 658
Projected by Management 6,435 6,550 394 521
Difference (% of projected) 14% 23% 89% 26%
Difference (% of expected change) -355% 1302% -131% 108%
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on auto parts manufacturers, causing many firms to have negative or very low levels of
EBITDA.
As Appendix Exhibit 4 demonstrates, many different enterprise and equity values for Visteon
can be generated using different multiples and sets of comparable firms. Thus, relative
valuations also provide substantial room for disagreement, leaving room for valuation fights and
substantial litigation costs in bankruptcy.
VIII. FAIRNESS OF PLAN VALUATION TO SECURITY HOLDERS
A goal of the bankruptcy process is to be "fair and equitable" to security holders.189
Given that goal, it is common for bankruptcy judges and security holders to rely on valuations
provided by financial experts. Rothschild valued Visteon in bankruptcy using the three standard
valuation methodologies of DCF valuation, comparable trading multiples, and transaction
multiples.190
Rothschild evenly weighted results under the three methodologies, recognizing the
189
11 U.S.C. § 1129(b). 190
Rothschild, VISTEON PRELIMINARY VALUATION ANALYSIS 3 (2010).
0
2
4
6
8
10
12
14
16
18
Nu
mb
er o
f F
irm
s
EV/EBITDA Multiple
EV/EBITDA Multiple for Auto
Parts Manufacturers
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limitations of each valuation technique.191
Rothschild's valuation, which resulted in the success
of the Fifth Amended Plan of Reorganization, valued Visteon's equity at between $1,575mm and
2,565mm.192
As provided in Part V(F), this valuation was expected to result in average
recoveries of 8.5% on Visteon's 7.00% and 8.25% notes, 32.5% on Visteon's 12.25% notes, and
50.0% on Visteon's general unsecured claims. Rothschild's valuation is important, as it
influenced the allocation of value among Visteon's claimants. For instance, if Rothschild's
valuation was too high, noteholders may have overpaid for Visteon's equity in the rights offering.
If the valuation was too low, Visteon's original shareholders may have not been provided the fair
value of their shares through the plan, resulting in the overcompensation of the noteholders.
Based on Visteon's stock price history, it is possible to analyze both the equity value of
Visteon and the effective recovery of Visteon's security holders under the plan of reorganization.
The chart below shows that Rothschild underestimated Visteon's post-reorganization equity
value, or market capitalization, with its valuation.193
191
Id. at 4. For instance, many underlying assumptions in valuation are predicated on assuming efficient markets,
and there may be a lack of truly comparable trading companies and relevant transactions. Snyder & Keiselstein,
supra note 22. 192
Rothschild, VISTEON PRELIMINARY VALUATION ANALYSIS 9, 11, 13, 15 (2010). 193
Data from Yahoo Finance.
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As a consequence of this, Visteon's noteholders obtained a substantial amount of
overcompensation through the plan of reorganization.194
Noteholder recoveries based on
Visteon's share price would range from 70% to 282%, with a median of 192%, depending on
when noteholders sold their shares and exercised their warrants post-bankruptcy. Actual
recoveries are likely to be higher, as distressed investors, such as hedge funds, likely bought
Visteon's notes at distressed prices. The calculated recoveries equate to undercompensation of
$261mm to overcompensation of $1,586mm, with a median of $804mm in overcompensation. It
is likely that many of Visteon's noteholders sold their shares within several months of Visteon's
successful emergence from bankruptcy, locking in higher recoveries than would be available by
selling today. The calculated noteholder recoveries and overcompensation are shown below.195
194
Note that we assumed that the rights offering would be priced at fair value and generate a return equal to
Visteon's post-bankruptcy cost of equity. Thus, we considered all noteholder recoveries above the $871mm in
claims and $1.25bn raised through the rights offering grossed up at the cost of equity to be overcompensation. 195
Data from Yahoo Finance.
1,000
1,500
2,000
2,500
3,000
3,500
4,000
5-O
ct-
20
10
4-D
ec-2
01
0
2-F
eb
-20
11
3-A
pr-
20
11
2-J
un
-20
11
1-A
ug-2
01
1
30
-Sep
-20
11
29
-No
v-2
01
1
28
-Ja
n-2
01
2
28
-Ma
r-2
01
2
($m
m)
Date
Visteon's Market Capitalization
Market
Cap
Rothschild
High
Rothschild
Low
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Shareholders could argue that they were not treated fairly under the plan, as the
overcompensation of Visteon's noteholders comes directly from the pockets of Visteon's pre-
bankruptcy shareholders. However, during bankruptcy proceedings there is a high level of
business, financial, and industry uncertainty, compounding the difficulties of valuation. In
addition, it is rare for shareholders to receive any post-reorganization equity after a Chapter 11
proceeding. However, given the low predicted recoveries calculated by Rothschild, the
recoveries observed in the Visteon case were very high, even for the strong performance of the
distressed markets in 2009 and 2010.196
IX. CONCLUSION
Visteon's bankruptcy demonstrates the multi-faceted field of modern reorganization and
offers several lessons. The firm was spun off from Ford and became increasingly distressed, as
shown by a declining Z-score, due to recurring losses. Visteon was forced into bankruptcy by
the sharp decline in auto sales during the financial crisis. Visteon's bankruptcy demonstrates the
196
In 2009 and 2010, high yield bond returns averaged 55.2% and 14.3%, respectively. Edward I. Altman & Brenda
J. Kuehne, DEFAULTS AND RETURNS IN THE HIGH-YIELD BOND AND DISTRESSED DEBT MARKET: THE YEAR 2011 IN
REVIEW AND OUTLOOK 32 (2012).
0%
50%
100%
150%
200%
250%
300%
0
350
700
1,050
1,400
1,750
2,100
5-O
ct-
20
10
4-D
ec-2
01
0
2-F
eb
-20
11
3-A
pr-
20
11
2-J
un
-20
11
1-A
ug-2
01
1
30
-Sep
-20
11
29
-No
v-2
01
1
28
-Ja
n-2
01
2
28
-Ma
r-2
01
2
($m
m)
Date
Average Noteholder Recovery
Noteholder Overcompensation Avg. Noteholder Recovery
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power of companies to extract concessions from counterparties in bankruptcy. When Visteon
filed, there was little outside availability for a DIP loan, so it sought DIP financing from the
government, its customers, or its term lenders, and eventually obtained a lender financed DIP
loan. Visteon extracted concessions from its customers with the threat of supply disruption, and
from Ford with the possibility of a fraudulent conveyance claim. To avoid such claims, parents
must carefully structure spinoffs, ensuring that the spun off subsidiary should be able to survive
in reasonable downside scenarios. Visteon also sought to unilaterally terminate employee
benefits in bankruptcy, making precedent when it was not allowed to do so even when it could
outside of bankruptcy.
The Visteon bankruptcy also illustrates the downside of taking overly aggressive
negotiating positions. Visteon's term lenders would have likely succeeded in an early plan of
reorganization if they provided noteholders with a minimal recovery. However, by taking the
extreme position that noteholders should get no recovery, they allowed time for Visteon's
business and security prices to recover, leading them to be taken out under the innovative toggle
plan that provided an incentive for noteholders to commit capital through the risk that a less
favorable plan might be approved. Visteon's bankruptcy demonstrates the flaw in taking extreme
positions given the sensitivity of valuation in bankruptcy, leading term lenders to only receive a
full recovery while noteholders received substantial overcompensation to the detriment of
Visteon's pre-bankruptcy shareholders. Since plan confirmation, Visteon's performance has
exceeded expectations and the company demonstrates a low risk of a Chapter 22 filing. Thus,
Visteon's bankruptcy exemplifies the creativity and intense negotiations that occur in modern
bankruptcies, providing lessons for future spinoffs and other troubled firms.
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Appendix
Exhibit 1. Wave of Auto Industry Restructurings Following Recession.
197
197
Rothschild, OVERVIEW OF THE VISTEON CORPORATION RESTRUCTURING 9 (2010).
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Exhibit 2. Timeline.
o 2000: Spun off from Ford.
o 2005: Transferred 23 North American facilities back to Ford.
o 2006 – 2008: Evaluated 30 facilities for restructuring, closed 14 and divested 7.
o December 2008: Retained financial advisors.
o Early 2009: Evaluated strategic alternatives.
o May 2009: Chapter 11 filing.
o June – November 2009: Secured DIP financing.
o December 2009: Filed Plan of Reorganization.
o Early 2010: Developed Toggle Plan and filed Amended Plans of Reorganization.
o June 2010: JCI offer.
o August 2010: Confirmed Plan of Reorganization.
o October 2010: Emerged from Chapter 11.
Exhibit 3. Betas Considered.198
198
Damodaran betas were from Aswath Damodaran, DAMODARAN ONLINE (last visited Apr. 1, 2012),
http://pages.stern.nyu.edu/~adamodar/ (click "Updated Data" and then "Levered and Unlevered Betas by Industry").
Bloomberg Betas
Betas: Using S&P 500
Unadjusted Weekly Monthly Adjusted Weekly Monthly
5-year 3.437 3.436 5-year 2.625 2.624
2-year 3.530 3.289 2-year 2.687 2.526
Betas: MXEA Index
Unadjusted Weekly Monthly Adjusted Weekly Monthly
5-year 2.879 3.436 5-year 2.253 2.624
2-year 3.124 2.466 2-year 2.416 1.977
3-year Beta Unlevered and Relevered 1.158
Damodaran Betas
Avg. Levered Auto Parts Beta 1.700
Avg. Unlevered Industry Beta Adjusted for Cash and Relevered 0.883
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Exhibit 4. Subjectivity of Multiples Based Valuation.199
199
Data from S&P Capital IQ. Auto parts industry average generated using data from 29 auto parts manufacturers
operating in the U.S. with market capitalizations greater than $100mm. Selected key comparables included Lear,
TRW Auto Holdings, Tenneco, and Dana Holding. These four firms were selected for their focus on auto parts.
(in millions except per share data)
Comparables Based Valuation
Multiple UsedEnterprise
ValueEquity Value
Equity Value
per Share
Enterprise
ValueEquity Value
Equity Value
per Share
Price to book NMF NMF NMF NMF NMF NMF
PBV/ROE NMF NMF NMF NMF NMF NMF
Price to asset value1)
1,959 2,489 49.59 1,322 1,852 36.90
Trailing price to sales1)
2,588 3,118 62.11 1,271 1,801 35.88
Forward price to sales1)
2,264 2,794 55.66 1,107 1,637 32.61
Trailing EV to sales 6,464 6,994 139.32 4,810 5,340 106.38
Forward EV to sales 5,793 6,323 125.95 4,371 4,901 97.63
Trailing EV to EBITDA2)
9,176 9,706 193.34 8,061 8,591 171.14
Trailing EV to EBIT2)
11,056 11,586 230.80 14,737 15,267 304.13
Trailing price to earnings NMF NMF NMF NMF NMF NMF
Trailing PEg ratio NMF NMF NMF NMF NMF NMF
Average 5,614 6,144 122.40 5,097 5,627 112.09
Average Excluding Outliers 6,128 6,658 132.63 4,591 5,121 102.00
Median 5,793 6,323 125.95 4,371 4,901 97.63
High 11,056 11,586 230.80 14,737 15,267 304.13
Low 1,959 2,489 49.59 1,107 1,637 32.61
1) Designated as an outlier due to Visteon's substantially lower leverage post-reorganization in comparison to comparables.
2) Designated as an outlier due to the poor performance of many auto parts manufacturers in 2009, inflating multiples.
Visteon Multiples Based Valuation
Auto Parts Industry Average Average of Key Comparables