Former A123 Systems wins court approval of bankruptcy plan

July 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

Bankrupt electric car battery manufacturer B456 Systems Inc., previously known as A123 Systems Inc., won court approval for its Chapter 11 bankruptcy exit plan in late May. The plan will see B456 pay off its creditors’ claims from the proceeds of selling virtually all of its assets.

The company, which produces lithium ion batteries for hybrid vehicles, filed for bankruptcy protection in October after the market experienced weaker than expected demand for hybrids.

Judge Kevin Carey of the Bankruptcy Court in Wilmington, Delaware, approved the company’s liquidation plan on 20 May, after hearing from Caroline Reckler, a lawyer acting for B456, that the company’s creditors were “overwhelmingly in favour of the plan”. According to court documents filed in October, A123 filed for bankruptcy with assets of $459.8m and debts of $376m as of 31 August. Ms Reckler added in an interview following the court hearing “We are thrilled with the result and believe it’s in the best interest of creditors.”

The liquidation plan, which resolved the remaining outstanding issues surrounding the company’s exit from bankruptcy, will see unsecured creditors receive between 32.7 percent and 63.6 percent of their claims, or around 65 cents in the dollar.

The plan, however, does not offer to repay any of the $130m worth of government grants the then A123 received. In 2009, the Obama administration controversially attempted to kick-start the market for electric vehicles and advanced lithium-ion batteries by providing large government grants to a number of businesses. A123 was awarded a $249m grant via the Department for Energy and the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program. However, the company only drew around $132m of the grant in order to build two plants in Livonia and Romulus, Michigan. The company had intended to hire around 6000 workers for these two plants but only around 1000 were employed.

2012 Republican presidential candidate Mitt Romney cited the failing A123 as an example of the Obama administration’s failed investments in green technology. President Obama had previously hailed A123 as a success story.

The Waltham, Massachusetts-based A123 was forced to file for bankruptcy protection in October 2012 after a proposed $465m deal with China’s biggest auto-parts manufacturer, Wanxiang Group Co., was blocked. The deal, which would have seen Wanxiang take an 80 percent stake in the company, was nixed amid congressional Republican unwillingness to allow the company to be sold to a foreign company.

However, in December 2012, Wanxiang’s US unit acquired A123’s automotive, grid and commercialbusiness assets for $256.6m at a court-approved bankruptcy auction. The Wanxiang deal won the approval of the Committee on Foreign Investment in the US (CFIUS) on 29 January; CFIUS reviewed the asset sale after members of Congress expressed national security concerns over allowing a foreign firm to obtain technology developed with government funding.

Wanxiang won the auction by beating a joint bid from Johnson Controls Inc. and Japanese firm NEC Corporation. Johnson Controls had originally registered an offer of $125m for A123 when the company first entered Chapter 11 protection.

Following significant political wrangling and widespread Congressional anxiety, Wanxiang and A123 agreed to exclude A123’s government business assets from the deal. Subsequently, Chicago firm Navitas Systems LLC, a company spun off from Sun MicroSystems, acquired A123’s government business for around $2.25m.

The bankruptcy plan also sought the approval of a settlement involving newly re-christened B456, its official creditors committee, and Johnson Controls. The committee suggested that Johnson Controls had improperly lobbied to halt A123’s sale to Wanxiang after losing out on the bidding. Accordingly, Johnson Controls agreed to pay $200,000 to the bankruptcy estate and the committee agreed to drop any claims against Johnson Controls.

B456 also reached a settlement with Fisker Automotive Inc. in April, reducing Fisker’s claims against the company from $140m to $15m. This 89 percent reduction will see Fisker’s breach-of-warranty claim against B456 reduced from $48.7m to a $15m unsecured claim.

Richard Summerfield