12/16/2010 04:31:00 PM EST
Patrick E. Mears and John T. Gregg on the Workout Process for Troubled Suppliers and Other Automotive Entities
In this Emerging Issues commentary, Patrick E. Mears and John T. Gregg discuss out-of-court restructurings of auto suppliers or OEMs that are considering Chapter 11. The restructurings set up the bankruptcy case and often determine how it's administered. They write:
"In most cases, an auto supplier or OEM does not become insolvent overnight. Rather, the slide into financial distress normally occurs over time, sometimes over a period of years. General Motors' financial collapse, for example, likely began in 2005 and then accelerated at lightning speed during the world financial crisis of 2008-2009."
"Vendors to the financially troubled supplier, such as tooling fabricators and Tier II suppliers may respond to the failure of its customer to pay for goods purchased in a number of ways. These may range from commencing litigation to collect unpaid debts to negotiating an accommodation agreement with the troubled supplier, the troubled supplier's customers (which often include Tier I suppliers and/or OEMs) and the troubled supplier's financing bank."
"In conjunction with accommodation agreements, customers of financially distressed auto-suppliers acting as sole-source suppliers to these customers will typically insist upon negotiating and executing 'access and security agreements.' Access and security agreements are crafted to ensure that, if troubled supplier shuts its doors or defaults on its obligations under the accommodation agreement, the customers will have immediate access to the supplier's plant to manufacture required components for their assemblies, at least until they have built up sufficient inventory banks and have made appropriate arrangements for resourcing."
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Patrick E. Mears is a partner in the Grand Rapids, Michigan, office of Barnes & Thornburg LLP and chair of the firm's Finance, Insolvency and Restructuring Department. Mr. Mears concentrates his practice in insolvency, workouts and restructurings, commercial finance, securitizations, and creditors' rights. He represents financial institutions as individual creditors and as members of loan syndicates in matters throughout the country. He also represents debtors and creditors committees in bankruptcy cases and out-of-court workouts.
John T. Gregg is a partner in the Chicago and Grand Rapids, Michigan, offices of Barnes & Thornburg LLP. Mr. Gregg focuses on corporate restructuring, bankruptcy, and insolvency law. He has experience representing debtors, lenders, committees, trustees, asset purchasers, lessors, and other parties in interest in some of the country's largest and most complex restructuring matters.