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Rival emerges to stalking-horse bidder for A123 Systems

by Jamie Mason  |  Published November 2, 2012 at 3:25 PM
The alternative debtor-in-possession financing lender for government-backed A123 Systems Inc., is also interested in buying the bankrupt lithium-ion battery maker .

Prepetition lender Wanxiang America Corp., which is hoping to provide the debtor with a $50 million DIP loan that will replace a postpetition financing from proposed stalking-horse bidder Johnson Controls Inc., is interested in buying more of A123's assets than Johnson Controls is. In addition, Wanxiang is willing to pay more for the assets than Johnson Controls, provide a greater consideration for them, Wanxiang said in court documents filed Nov. 1.

Judge Kevin J. Carey of the U.S. Bankruptcy Court for the District of Delaware in Wilmington is set to consider approval of Wanxiang's alternate DIP loan, as well as bidding procedures for the sale of the debtor's automotive assets on Nov. 5 with Johnson Controls as the stalking horse.

Johnson Controls has made a $125 million offer for A123 Systems' automotive business, but Wanxiang America is objecting to the proposed bidding procedures and said it wants to be the stalking horse bidder for the sale of substantially all of the debtor's assets.

An A123 company spokesman refused to comment on the Wanxiang America bid.

Although A123 hasn't \engaged in negotiations with Wanxiang America over the details of that proposal, Wanxiang America is hopeful that such negotiations will commence as soon as possible and that significant progress will be made prior to the start of the hearing, the objection said. The involvement of Wanxiang America, however, is also drawing scrutiny. Republican Senators Chuck Grassley of Iowa, and John Thune of South Dakota have asked Treasury Secretary Timothy Geithner to direct the Committee on Foreign Investment in the U.S. to examine reports that Wanxiang America's Chinese parent, Wanxiang Group Corp., intends to provide A123 with DIP financing.

Wanxiang America is a manufacturer of automotive components based in the U.S. and is a subsidiary of Wanxiang Group.

The lender also said the proposed bidding procedures would chill competitive bidding and the timeline for the sale process was too short. Under the proposed bidding procedures for the sale, Johnson Controls would receive a $3.75 million breakup fee and up to $4 million in expense reimbursement if it were not the winning bidder. Competing bidders would have until Nov. 16 to deposit 10% and offer at least $10.25 million more than the stalking-horse bidder, which includes the breakup fee, expense reimbursement and a $2.5 million initial overbid. If A123 Systems received at least one rival bid, it would hold an auction on Nov. 19, at which bids would have to increase in increments of at least $500,000. Carey would consider approval of the sale on Nov. 26.

The deal would include all of A123 Systems' automotive technology, products and customer contracts; its facilities in Livonia and Romulus, Mich.; its cathode powder manufacturing facilities in China; and A123 Systems' equity interest in Shanghai Advanced Traction Battery Systems Co. Milwaukee-based Johnson Controls, a manufacturer of automotive components and building controls, would license back certain technology to A123 Systems for its grid, commercial and government businesses.

A123 Systems originally had a $72.5 million DIP loan from Johnson Controls, but is now seeking approval of the alternative DIP from Wanxiang on Nov. 5. Carey on Oct. 18 approved interim use of the $72.5 million Johnson Controls DIP, priced at 15% per annum. The loan matures when the proposed sale of A123 Systems' transportation business to the lender closes or on Dec. 31, whichever comes first. The new $50 million DIP from Wanxiang will repay the amount outstanding on the Johnson Controls DIP and fund the debtor's operations in Chapter 11. The new DIP is priced at 12% per annum and, like the first loan, matures on the earlier of Dec. 31 or when the sale of the automotive business closes. If the debtor defaulted on the DIP, the interest rate would increase by 200 basis points. The replacement DIP carries a $1.25 million upfront fee and a 0.5% exit fee. The debtor also must reimburse the lender for its expenses.

A123, a Waltham, Mass., designer, developer, manufacturer and seller of rechargeable lithium-ion batteries and energy storage systems, filed for Chapter 11 on Oct. 16 with affiliates A123 Securities Corp. and Grid Storage Holdings LLC. The debtor, which has received numerous grants and awards from state and federal governments, won joint administration of the cases on Oct. 18.

The company's petition came after A123 Systems missed an almost $2.7 million interest payment on its 3.75% convertible subordinated notes due Oct. 15. The missed interest payment caused it to default on its debt, filings with the Securities and Exchange Commission said. Before filing for Chapter 11, A123 received an investment offer from Wanxiang America,, but because of certain closing conditions, only a portion of the agreement was funded. A123 then couldn't find additional funding before its liquidity fell below the amount needed for operations outside of bankruptcy.

Wanxiang America would have provided the company with $200 million in 8% senior convertible notes, warrants and a $75 million senior secured bridge loan. Instead, it provided the company with a $12.5 million initial cash advance and a $10 million letter of credit. Wanxiang America is owed $22.67 million in prepetition debt.

A123 has suffered from contract and warranty issues in the past several years, along with increased competition in the battery industry, that affected its liquidity, court papers show. The company primarily focuses on developing new lithium-ion batteries and battery systems for hybrid electric vehicles, plug-in hybrid electric vehicles and electric vehicles, as well as electrical grid services and industrial and commercial products, according to court filings.

The debtor also looks to sell its grid energy storage and commercial businesses as going concerns during its bankruptcy case. It has 1,763 employees at 10 facilities in the U.S., China and Germany. Its U.S. manufacturing facilities are in Michigan and Massachusetts.

A123's products include starter batteries and lead acid replacement batteries, as well as packaged modules and multi-megawatt and prismatic battery systems. The batteries are made from a patented nanophosphate material.

D. Jan Baker, Caroline A. Reckler and Adam S. Ravin of Latham & Watkins LLP and Mark D. Collins and Michael J. Merchant of Richards, Layton & Finger PA are debtor counsel. Lazard is the debtor's financial adviser, and Alvarez & Marsal North America LLC is its restructuring adviser. Joshua A. Feltman, Andrew R. Brownstein and David K. Lam of Wachtell, Lipton, Rosen & Katz represent Johnson Controls. John R. Box, Thomas P. Brown and Bojan Guzina of Sidley Austin LLP are counsel to Wanxiang America.
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