Marelli files for Chapter 11 bankruptcy in US as hedge funds take control

Time of India

a day ago

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KKR & Co backed Marelli Holdings, one of the world's largest auto parts suppliers, has voluntarily filed for bankruptcy protection in the US, giving it leg room to continue operations and a reprieve from its warring hedge fund and distressed debt lenders, banks and PE owner.An existing lender consortium led by hedge fund Strategic Value Partners are offering $1.1 billion debtor in financing to buy the company with KKR writing off its entire investment. Motherson Group has been in active dialogue to take over the company and have been negotiating for months with the company and its lenders.ET on June 10th was the first to report its plans for the takeover attempt – its biggest so far – hit a stumbling block as SVP revised its offer last weekend to take control. Vivek Chand Sehgal led Motherson has been in discussions with banks to raise a $2 billion bridge financing line under the same special financial framework called debtor in possession or DIP financing, applicable for bankrupt companies in the US.However, as per US bankruptcy laws, there will be a 45 day window for potential suitors including Motherson will be allowed to put in an improved offer under the 'overlap window.' Sources said, the Indian auto components group, that has taken a pause for now, do plan to pursue this acquisition. Since 2008, Motherson Group has an ongoing 50:50 joint ventures with the Japan headquartered Marelli in India for components such as automotive lighting and shock absorbers.'After careful review of the company's strategic alternatives, we have determined that entering the Chapter 11 process is the best path to strengthen Marelli's balance sheet by converting debt to equity, while ensuring we continue operating as usual,' David Slump, Marelli chief executive said in a statement.'While we are pleased with our recent progress and profitability, industry-wide market pressures have created a gap in working capital that must be addressed,' said Marelli chief executive David Slump in a statement.Marelli got created when Japanese auto component maker Calsonic Kansei, a KKR portfolio company, acquired Italian business Magneti Marelli. Calsonic Kansei had been loaded with ¥1.1 trillion in debt and about ¥700bn of that was used to finance the purchase. The company underwent debt restructuring in 2022 with haircuts close to 40% after revenue plummeted during the Covid pandemic. KKR wrote off close to $2 billion and injected a further $650 million. It's unlikely to infuse more equity into the business and will now fully write off the investment, selling its equity to SVP for a nominal ¥1.There have been two consortiums of lenders in Marelli, each holding about 50% of the debt. One is Japanese, led by Mizuho and including the Japan Bank for International Cooperation. The international consortium is led by Strategic Value Partners (SVP), New York private equity group Fortress Investment, MBK Partners and Deutsche Bank. SVP holds 29%, giving it significant influence over decisions. The SVP led group will now buy some of the large Japanese lenders including Mizuho and take control.The lenders are rolling over on a month-by-month basis nearly $122.4 million (¥18 billion) of debt due for repayment, according to the people cited. The company's total debt outstanding is $4.4-4.5 billion. Gross revenue stood at $11.6 billion (10.7 billion euros). In comparison, Motherson Group's gross revenue was $25.7 billion in FY25.Since late last year, the SVP consortium has been proposing packages that involve infusing fresh capital, including an equity injection of around $690 million (¥100 billion). But these came with the caveat that new loans and old borrowings from those participating in the round would be made senior to other debt under a special mechanism called 'up-tiering.' Such rejigs are common in distressed situations in the US and Europe but not in Japan. Thus, Mizuho and the other Japanese creditors have been opposed to it.'SVP is a hedge fund. In comparison Motherson brings huge cost and business synergies,' said a person in the know. Several of Matrelli's customers including Nissan, Honda and Stellantis are believed to have supported the Motherson offer.