On Friday, April 5, 2013, electric car maker Fisker Automotive laid off 160 workers, or about 75% of the company’s total workforce, without severance and without providing the statutory notices required for layoffs of that size. This latest move comes after a series of corporate body blows, any one of which would be a good indicator that something is rotten at Fisker – at the end of last month the company forced all U.S. workers to take a one week, unpaid furlough in order to conserve cash while at the same time engaging bankruptcy and restructuring lawyers at Kirkland & Ellis to represent the company; several weeks before that Henrik Fisker, the company’s founder and namesake, resigned as executive chairman, citing “major disagreements” with company management over business strategy.
At this point, you would be hard pressed to find someone able to credibly disagree with the attorney for the newly-fired Fisker workers who has said that Fisker is likely to file a bankruptcy case “sooner rather than later.” Unless the U.S. Department of Energy agrees to an extension, or the company opts to pursue a non-bankruptcy strategy, a Fisker bankruptcy filling could come on or just before April 22, the day on which Fisker’s next multi-million dollar loan payment is due to the DOE, which has provided Fisker with $192 million in financing secured on all of the company’s assets. From the perspective of troubled company experts, the likelihood and likely timing of any Fisker bankruptcy filing is clear. The issue that remains is what a Fisker bankruptcy case may look like and what creditors, investors, and other interested parties can expect to see.
In short, any Fisker bankruptcy course is likely to be what we in the troubled and distressed company industry call a “smoking hole.” First and foremost, the Fisker bankruptcy case is likely to be a liquidation. Companies don’t fire 75% of their workforce if they expect to emerge from the bankruptcy process intact or even similar to their pre-bankruptcy status. While the U.S. Bankruptcy Code provides Chapter 7, a form of bankruptcy case in which the debtor is liquidated, Fisker would be more likely to file for protection under Chapter 11 which, absent extreme action on the creditors’ part, would allow Fisker’s incumbent management to control the bankruptcy case and the company liquidation. Chapter 11 would also give incumbent management greater likelihood of controlling the preference, fraudulent conveyance, and other avoidance claims which may be asserted in any bankruptcy case. Incumbent management will want to control these claims because they themselves may be targets of these claims and because a large number of avoidance actions being pursued by an aggressive trustee (as would likely occur in a Chapter 7 bankruptcy) makes a lot of enemies in the business community and may inhibit incumbent management’s ability to obtain jobs in the future.
Fisker may also opt to file what is known as a pre-pack bankruptcy case – that is, a bankruptcy case in which the plan of restructuring (which in the case of a liquidation means the plan of liquidation) is agreed to prior to the bankruptcy and filed on or very shortly after the start of the case. This plan will probably call for some orderly process for the sale or liquidation of the company’s assets followed by a distribution of the proceeds to the company’s creditors. The days leading up to the filing date likely will be spent lining up potential asset purchasers. The most preferred of these asset purchasers may be able to obtain a number of protections ranging from minimum bid amounts or increments up to break up or overbid fees – actual cash payments which would be received by the preferred bidder in the event that another bidder wins the auction. In the parlance of the profession the preferred bidder is known as the “stalking horse” and these bid protections are known as “stalking horse protections.” Debtors like stalking horse protections, and bankruptcy courts tend to allow them, because they encourage a pre-approved buyer to step forward and make a credible play for the assets, which tends to help ensure a more spirited auction and a better return on the sale.
In addition to structuring the case and basic bankruptcy issues, a number of thorny issues would have to be overcome in any Fisker bankruptcy case – First, the senior lender appears to be secured by all of the company’s assets and thus, unless the sale pays more than the amount of the outstanding loan balance for those assets (not likely), that lender may have to agree to receiving a discount if any other creditor or class of creditors is to receive anything. Second, the senior lender in this instance is a government agency and the handling of this case and the resulting treatment of the government’s claims within the bankruptcy may be highly politicized, with the normal rules of corporate finance potentially taking a backseat to partisan gamesmanship. Third, there appear to be real questions about the value of Fisker’s assets to begin with. The company has produced only one model of automobile, which is expensive and has not met with much success in the marketplace. Moreover, problems with that automobile’s electrical system have been alleged to cause spontaneous fires in several separate incidents.
Even though the metes and bounds of a Fisker bankruptcy case can be described with relative clarity, successfully executing on this strategy will be a real challenge for the company and its advisors.
Note: Neither David Lee Tayman, the author of this post, nor any other attorney at Tayman Lane Chaverri LLP has had any involvement with Fisker Automotive, the company’s creditors, or any other parties-in-interest to any potential Fisker bankruptcy case. This article consists of the author’s opinion based upon publicly available news and information resources.