Reorganisation In Store As Hayes Lemmerz Files For Chapter 11

Hayes Lemmerz, the wheel manufacturer that has been undergoing difficult times recently, has filed for restructuring under Chapter 11 of the US Bankruptcy Code. The company is at pains to point out that it has not “gone bankrupt”, neither is it going out of business and that Chapter 11 is a court-supervised restructuring proceeding, not a liquidation proceeding. It also applies only to Hayes Lemmerz’s own operations in the USA and that operations outside the country (except for one plant in Mexico) and joint ventures are not included.

Declining market conditions and excessive debt were blamed for the action.We examined the plight of the company in an article in the November issue of Tyres & Accessories, in which we noted that Hayes Lemmerz shares had fallen in value in three years from $30 to $1. This was described as “an alarm bell that cannot be ignored” and we noted that the company “was in great danger of collapse”.

The news of Chapter 11 has done little to improve matters, as the company’s shares fell to a low of 52 cents at the news.What exactly is Chapter 11? It is often regarded as seeking protection against creditors and it is true that it triggers an automatic stop on any collection actions against the company.The next step, says Hayes Lemmerz, is to present a plan of reorganisation, which sets out how creditors will be compensated for debts and the company and its creditors negotiate a final form of the plan, which is then voted on by them and confirmed by the court.

The writing has been on the wall for some time. Last year the group had a turnover of $2.2 billion and debts of $1.

9 billion, with interest charges running at $150 million annually – not a healthy situation by any standards. There was a cut in the workforce of 11 per cent, some management changes and the closure of two factories as it became obvious that the US vehicle market was not showing any signs of a quick recovery.However, Hayes Lemmerz is being as positive as it can about the latest moves and its website gives full details of what has happened and what the company hopes will happen.

It has received commitments for up to $200 million of debtor-in-possession financing to fund operating expenses and to pay suppliers and workforce. Chairman and CEO Curtis Clawson says “This step will give us the flexibility to reduce our debt and restructure our balance sheet. We fully expect to emerge from Chapter 11 as a stronger, more competitive company than we are today.

“A statement from Hayes Lemmerz says “No facilities will close and no jobs will be lost as a result of this filing” then it goes on “(although business and operational conditions may require changes in employment and facilities usage)”. As we have often remarked in the past, no-one ever “reorganises”, “reconstructs” or “right-sizes” by taking on more staff, so it seems fair to assume that we have not seen the last of the redundancies. This is confirmed by a comment later on in the statement, which refers to the plant closures at Kentucky and Michigan and which says “Additional plant closures may be necessary to ensure operational efficiency”.

In a letter to customers, Hayes Lemmerz describes Chapter 11 as “a commonly-used business tool in the US that provides companies with ‘breathing room’ so they can work out their financial issues without the burden of near-term debt.” It then goes on to list a number of companies who have filed for Chapter 11 and been successful later; Macy’s, Texaco and Toys-R-Us among them.Hayes Lemmerz stresses that its activities outside the US are not affected, saying that capacity at the aluminium wheel plant in the Czech Republic has been increased to meet demand.

Once restructuring is complete, says Clawson, the international operations will be even stronger, with the removal of any uncertainty about the parent company’s financial situation.All in all, the noises coming from Hayes Lemmerz are extremely bullish, which is perhaps only to be expected. Take for instance the following comment: “The actions we are taking will make us a much stronger company in the future, because we will have a balance sheet and financial structure that will enhance our position as a leading worldwide provider to the automotive industry.

” Fine words – brave words, but the truth is that nobody yet knows how far-reaching will be the effects of the restructuring or how swingeing the necessary cuts. Our November article suggested that one way out of the group’s mounting problems might be to split it up once again into two separate companies. Only time will tell how deep the restructuring cuts will need to go, but one thing’s for sure; the world’s biggest wheel manufacturer seems certain to be a good deal smaller in the near future.