The past week has been pretty eventful indeed. Would the NEVS reorganisation come to an abrupt halt or was there hope anyway? Well at least we know now that the process can continue. But was there also a series of entirely new announcements as CEO Mattias Bergman was stating to the press before he entered the room where the creditors meeting was taking place? Not really. Or?
Vänersborg (sister city to Trollhättan and the home of the district court under which the case resides) was once more the center of the (SAAB) world on Wednesday. While apparently the turnout wasn’t as overwhelming as in 2011 when SAAB Automobile AB went through a similar exercise, the room was packed with both creditors and press. Notably absent however was Kai-Johan Jiang, NEVS chairman and majority owner. The company was represented by CEO Mattias Bergman and several members of the management team, including Director Communications & Public Affairs Mikael Östlund.
Purpose of the day was to have the court take a decision on whether or not the reconstruction could continue. But what is “reconstruction” anyway? For many non-Swedes, “företagsrekonstruktion” (translated: “corporate restructuring”, but I’ll be using the term “reorganisation” from now on as it is also officially used by the administrator) is an unfamiliar term, and I think it could be useful for past and future reference to try and explain it.
While I am by no means a legal expert myself, one could describe the reorganisation as a process where an administrator appointed by a district court shall assess whether the financially troubled company is able to continue its activities in whole or partially and if yes, how. Key in this assessment is also to protect the creditors’ interests and to see what possibilities there are to strike a financial accord with them.
For a reorganisation to take place, a few prerequisites need to be met. The first one is that the company can’t pay its bills or that this inability is expected in the foreseeable future. The second is that there has to be a reasonable chance for the reconstruction to succeed.
Both the company and its creditors can apply for reconstruction but even if the application is approved by the court, it –as we know from 2011- doesn’t mean that bankruptcy can be avoided.
Independently of who applies, an administrator needs to be appointed by the court. This person has to have good insight and experience and is normally an experienced lawyer.
When the company applies for reorganisation (which happened in the case of NEVS), the following documents need to be submitted to the court: 1) summary of current financial situation and reasons for inability to fulfil financial obligations 2) overview of how the company plans to run its business in the future and how an agreement will the creditors will be reached 3) proposal for an administrator.
If the court approves the application (which it finally did on 29 August after it had rejected the prior day), it appoints the administrator (Lars-Eric Gustafsson) and a creditors meeting (8 October).
The court decision also means that during the reorganisation phase: the company isn’t allowed to pay off any old debts, the company is protected from its creditors, no contracts can be cancelled because of payment difficulties, the company may only get new loans or other liabilities with the permission of the administrator. In practice, this means that the administrator is taking over executive decision power from the CEO. Another important point is that the salaries for the staff are covered by the government (“statlig lönegaranti”).
Within three weeks of the decision, a meeting with the creditors needs to be held. During this meeting a preliminary reorganisation plan is to be presented before the court. The reorganisation process will stop if the court deems that there are insufficient conditions for the reconstruction to continue, with the logical next step being bankruptcy. If however the court deems that the required conditions are met, a creditors committee is appointed. This committee is to consult with the administrator on all key issues including financing, structural alterations in the company structure and any staff changes.
Normally a reorganisation process takes up till 3 months (so in this case until November 29th), but can under specific circumstances be extended by another 3 months, with a maximum of one year.
So why is this relevant?
I could have summarized the above in just a few lines, but given the different nature of this journey to most other countries legal systems (I believe only “Chapter 11” in the USA is somewhat comparable and there are similar procedures in Brazil and Denmark) this hopefully is providing relevant context to what sometimes may feel like a mysterious process.
As we know the court decided on the 8th to allow the continuation of the reorganisation process and a creditors committee was appointed consisting of representatives from the Swedish tax office, Leannova Engineering, Orio, Hewlett Packard, Plastal and labor unions IF Metall and Unionen. Neither of the members has decision or veto powers.
So all in all quite good news, as the alternative most likely would have been bankruptcy.
This in fact seemed to have been the convincing reason of why the creditors and later the court decided in favour. For creditors, a bankruptcy could be a solution when the outlook is so dark that it seems the least of the two evils, but in this case the materials presented were more positive towards a continuation, at least from a financial standpoint. Simply put: the assets NEVS has on the books (approx. SEK 2,6B, or USD 330M) outweigh their liabilities (approx. SEK 800M, or USD 100M) and there is a decent chance that NEVS’ stated intent to pay all their bills in full in fact becomes reality if in fact they’ll stay in operation.
The Vänersborg announcements
Another reason is obviously the actual reorganisation plan. I wrote about this in “Plan B” earlier, and on the 8th some additional details were shared by Lars-Eric Gustafsson and Mattias Bergman:
- The current owners have invested around SEK 3 Billion / USD 390M.
- There is sufficient reason to believe that the company will be able to continue its business and that no debts need to be written off.
- There are four sources of income for NEVS during the reconstruction phase: the current owners, additional loans, sales of spare parts and from the vehicle manufacturers NEVS has been negotiating for quite some time.
- Reasons for the financial issues include the very significant investments needed to develop electric vehicles and the fact that minority owner City of Qingdao required NEVS to build petrol cars, which wasn’t foreseen in the original business plan. Qingdao committed to purchase a large quantity of these cars but unfortunately didn’t follow through and never provided the promised SEK 1,1 Billion /USD 140M loan, which was the immediate cause of the payment difficulties.
- Defense and security company SAAB AB suspended the license for NEVS to use the SAAB brand when the reconstruction process started. NEVS expects to be able to regain the rights.
- NEVS has lost SEK 1,4 Billion/ USD 180M since it acquired the assets from the SAAB Automobile bankruptcy estate in summer 2012.
- As NEVS started to produce the 9-3 again, the SAAB Automobile bankruptcy estate became afraid for possible violation of GM-owned patents, which has slowed down the negotiations between NEVS and the two Asian automotive manufacturers. This risk of patent violation is also the stated reason why the bankruptcy estate has a pawn on NEVS’ real estate company, and in turn why NEVS is challenged to secure the required significant additional loans (it cannot mortgage the buildings) so it could have avoided the financial difficulties and reconstruction.
- NEVS has been negotiating with two Asian automotive manufacturers for several months. Their names cannot be made public yet given stock market regulations in the countries they operate in. The two manufacturers are complementary to each other and over the last two weeks, very significant advancements in the negations have been made. The hope and expectation is that the contracts (supposedly 11 different ones) can be signed by the end of the reconstruction deadline (29 November).
- The Trollhättan factory has a capacity of 190,000 cars and the goal is to reach that volume.
- The recent reduction of the staff by 155 workers was required to save significant cost.
- Development for the model year 2016 version of the 9-3 had advanced well, but has been paused since the start of the financial difficulties.
- The Phoenix platform is the key to future as NEVS is planning to launch four new models based on it and hence will be offering a broader product portfolio than SAAB Automobile ever had. The plan is to form a joint-venture with one of the negotiation partners. This company is planning to make a “double digit Billions” investment to start the production and to further develop the Phoenix platform as the basis for these future SAAB models, to be released two years after the agreement is signed. The platform will also be offered to other automotive manufacturers as the basis for their own cars.
- “Plan A” remains the main and preferred strategy, yet a “plan B” is available. “B” will only turn into the main track if and when agreement with the partners in “A” cannot be reached within a reasonable time frame.
- NEVS will be able to develop and manufacture complete cars for other brands yet the preference and main strategy is to be the manufacturer of SAAB cars only.
- Reorganisation costs during October and November are calculated to be approx. SEK 35M / USD 4,5M per month.
So was there something new?
Not really if you’ve read the preliminary reconstruction plan. What was new though was the fact that both the creditors and the court in fact confirmed that they saw sufficient reason to believe in the viability of Lars-Eric Gustafsson and Mattias Bergman’s plans.
What do I think? Not that it matters too much, but directionally I think the plans could make sense, assuming that the NEVS crown jewels (with the Phoenix platform in particular) are indeed as attractive, powerful and flexible as we are made to believe.
Much has been written in the media about the work that also needs to happen to rebuild the trust in the SAAB (car) brand, design of the new models, the rebuilding of a strong reseller and service channel and much more. All true and important, however securing long-term investors/co-owners with very deep pockets is the key and everything else is secondary, apart from time probably…