Japanese Takata will restructure and to seek cash amid Airbag Recalls
TextileFuture has reported on the immense airbag recalls because these have been installed with inherent danger of exploding and hurting car drivers. Now, Takata Corp. hired investment bankers to seek a cash infusion and negotiate with auto makers over the ballooning costs it faces for rupture-prone air bags linked to 11 deaths and more than 100 injuries world-wide
Takata tapped Lazard Ltd. to help craft a restructuring plan to help it deal with what are expected to be billions of dollars in liabilities stemming from the faulty air bags, a steering committee for the Japanese company said Wednesday, confirming an earlier report from The Wall Street Journal.
The company hopes to find a financial investor or automotive company to provide more cash, and reach a deal with car makers on sharing the costs of recalling nearly 70 million air bags in the U.S. alone.
The steering committee, made up of business, financial and legal experts in Japan, retained Lazard within the past month, according to people familiar with the matter. Lazard’s work soliciting an investor and conversations with auto makers remains in early stages.
Takata doesn’t have a sense of how long it will take to complete the restructuring plan, the people said, adding that it doesn’t have any payments due in the near term.
But the money-losing company, which has some USD 523 million in cash, can’t cover the ultimate costs stemming from the defective air bags, the people said. The air bags use an ammonium-nitrate propellant that can degrade amid prolonged exposure to moisture, leading to explosions that spray shrapnel in vehicle cabins.
“These are highly challenging and complex issues, but the committee strongly believes that it is in the best interests of all Takata stakeholders for Takata and its automotive customers to reach a consensual resolution that addresses the costs of the inflater issues while enabling Takata to remain a viable and valued global supplier to the automotive industry,” said Hideaki Sudo, a partner at Tokyo Fuji Law office and the steering committee’s chairman.
Takata’s restructuring poses a dilemma for auto makers not eager to shoulder massive bills for defective air bags the company manufactured. On the other hand, car makers have an interest in keeping Takata—which supplies air bags, seat belts and other parts needed to keep automotive production lines humming—in business.
Only a handful of other companies supply air bags, and auto makers prefer competition among their parts makers. Still, car makers are amassing claims against Takata for replacements they bought for the recalled air bags, and are bound to seek repayment. They are expected to have significant influence over the approval of any new Takata investor, the people said.
For Takata, a restructuring deal is expected to include new measures at the company for ensuring quality and undetermined corporate-governance changes, the committee said. Takata also plans to continue working to pinpoint a root cause for the air-bag ruptures to better prevent them, the panel said.
Earlier this month, U.S. regulators identified the age of air-bag inflaters, along with longtime exposure to moisture and fluctuating high temperatures, as the root causes.
Takata hopes to raise money and appease auto makers without having to resort to bankruptcy court, the people said. But the Japanese company’s advisers haven’t ruled out a bankruptcy filing should efforts to restructure outside of court fail, they said. Companies facing massive liabilities sometimes seek bankruptcy protection to develop payment plans.
In addition to Lazard’s bankers, Weil Gotshal & Manges LLP restructuring lawyers are working with the Takata steering committee, the people familiar with the matter said, a development the Journal reported in March. Takata’s board created the five-member steering committee in February to develop the company’s restructuring plan.
In May 2016 the U.S. National Highway Traffic Safety Administration ordered the recall of up to an additional 40 million Takata air bags, on top of 28.8 million already included in such orders.
For Lazard, a main challenge in seeking an investor and negotiating with auto makers will be quantifying Takata’s liabilities, which depend on how many consumers get recalled vehicles repaired and the outcome of litigation and government investigations.
Recent U.S. regulatory action could lead to another 55 million Takata air bags being recalled globally, and more than USD 6 billion in additional costs, according to an estimate from Jefferies Group LLC analyst Takaki Nakanishi.
In addition to recall costs, Takata faces widespread wrongful death, personal-injury and economic-loss litigation, and potentially a hefty financial penalty depending on the outcome of a U.S. Justice Department criminal probe.
Takata in November admitted to failing to alert U.S. regulators to defective air bags in a timely manner as legally required and received a USD 70 million fine that could jump to USD 200 million for additional lapses. Takata has said it is cooperating with government officials.
Takata has acknowledged manipulating testing reports, straining relations with auto makers including Honda Motor Co., its largest customer. Honda and other auto makers have said they will no longer use front Takata air-bag inflaters. Takata, under the terms of a U.S. regulatory settlement, must eventually stop producing inflaters with ammonium nitrate that lack a drying agent and eventually recall all devices using the chemical unless they’re proven safe.
Takata posted a USD 121 million loss for the year ended in March. The company recorded a collective more than USD 180 million in special losses for recalls and settling legal claims from air-bag victims. Takata’s shares are off more than 50 % so far this year, but rose earlier this month when the company predicted future profits.
A cash investment for Takata could come in the form of debt or equity, the people said. For an investor, Takata will likely need to quantify expected liabilities stemming from defective air bags, and give assurances that auto makers intend to keep doing business with the Japanese supplier. An equity investor could bet that Takata eventually weathers its safety crisis and continues to command significant automotive market share. A lender could hope to charge an attractive interest rate with assurances of being among the first repaid should Takata resort to a bankruptcy filing.