TOKYO — Struggling Japanese auto parts supplier Marelli Holdings will enter a court-led restructuring process after failing to get creditors to back an alternative workout plan that would have brought faster debt relief.
Marelli, a KKR-owned supplier that counts Nissan and Stellantis as clients, plans to continue operating while going through restructuring. But the switch to the court-led program will delay debt forgiveness by lenders and could disrupt business.
Marelli’s 26 institutional lenders took part in a creditors meeting Friday to review the supplier’s alternative dispute resolution (ADR) procedure. The restructuring plan, filed in March, had named KKR as the sponsor and called for debt relief totaling 450 billion yen ($3.3 billion). But with some Chinese-affiliated banks raising transparency concerns, it failed to win the unanimous support needed.
After the meeting, Marelli immediately filed for a court-led process, which was approved that day by the Tokyo District Court.
“Our priority is to move the process forward quickly,” said a Marelli spokesperson, explaining its decision to immediately switch to a court-led process.
A KKR spokesperson added, “We are fully prepared to extend additional financing to Marelli, as needed, to ensure that the company operates its business as usual through the proceedings.”
Marelli can still move forward with the current restructuring plan presented for the ADR process if three-fifths of creditors based on liabilities agreed to it. Because there is limited opposition to it, the plan is likely get the green light.
The current management can remain in place, with Marelli denying the possibility of bringing in a new slate of executives.
But the court-led process will further delay the approval of the restructuring plan, which was originally scheduled for the end of May. In addition, even if Marelli receives the 450 billion yen debt waiver, it would still be left with liabilities of over 600 billion yen. The capital infusion it is slated to receive from KKR is likely to be $650 million, a fraction of the amount needed to pay off the remaining debt.
Anxiety is spreading among suppliers.
“We think the company will be OK for a year or two once the plan is approved, but it is unclear what will happen after that,” said an executive at a trading house that supplies raw materials to Marelli.
Unlike an ADR, companies that go through a court-led rehabilitation could suffer reputational damage that could affect business relationships.
Currently automakers have been forced to cut back on production due to the semiconductor shortage and supply disruptions caused by the Shanghai lockdown. Marelli and other parts makers have seen orders decline significantly.
To cope, Marelli temporarily closed three locations, including its headquarters and research bases, on June 17, and its 15 domestic factories have been affected by temporary suspensions.
Marelli reported a consolidated net loss of 28.2 billion yen for the fiscal year ended in December 2020. It did not disclose the results for 2021 but remained in the red for four consecutive years. Even if it receives debt relief, unless the company turns around operations to start generating profit, it will use up its new cash infusion.
Nissan, which accounts for nearly 30% of Marelli’s sales, will be vital to its recovery.
After Marelli switched to a court-led process, Nissan issued statement Friday expressing support.
“We will continue to work with the company as an important partner,” said Nissan.
Marelli has its roots in Calsonic Kansei, the automotive supplier under Nissan keiretsu system, in which Japanese automakers maintain close-knit networks with parts suppliers. KKR stepped in and bought Nissan’s stake in Calsonic Kansei in 2017. Calsonic Kansei later acquired Magneti Marelli, once a supplier for Stellantis, then merged with the target in 2019, changing the name to Marelli.
The court-led restructuring plan currently on the table is similar to an ADR in that debt relief will only apply to financial liabilities. Suppliers are not expected to be affected by the process.
At the same time, some suppliers anticipate difficulty collecting payments in the future. For that reason, they have started negotiations on having Nissan shoulder payments for raw materials furnished to Marelli.
Nissan’s consent will determine whether Marelli will be able to maintain stable business operations. But Nissan has been progressively distancing itself from old keiretsu companies as well.
Another challenge to the proposed turnaround plan are the potential hurdles to planned layoffs. Marelli looks to cut 3,000 jobs, or just over 5% of the entire workforce. The group also seeks to shut down sites from the 170 factories and other locations worldwide, mainly in Europe.
Marelli has been attempting to improve efficiency in Europe in response to weak earnings, but stiff opposition by unions have prevented those efforts from proceeding as planned. At present, a concrete approach to instituting structural reforms remains to be seen.