Dana in home stretch of bankruptcy

CEO Michael Burns guided the company through an expedited bankruptcy process.

TWENTY-ONE MONTHS after entering Chapter 11, Dana Corp. begins a crucial new phase in its bankruptcy case tomorrow in a federal courtroom in lower Manhattan.

Chief Executive Officer Michael Burns is among witnesses scheduled to testify during a hearing in which Bankruptcy Judge Burton Lifland will be asked to confirm the Toledo auto-parts supplier's plan of reorganization.

If the judge signs off on the deal, which has been approved by 96 percent of creditors of the firm, Dana hopes to exit bankruptcy by the end of January and re-emerge as a fully public company.

That is three months later than executives originally had hoped and will miss a more recent target by about a month. But the firm still is expected to emerge from bankruptcy more rapidly than several other auto-parts suppliers who entered Chapter 11 in late 2005 and 2006 as industry conditions spiraled out of control.

"It is the end game," said Michael Hammer, an Ann Arbor lawyer who heads the bankruptcy practice at Dickinson Wright PLLC in Detroit.

The plan is unlikely to face significant roadblocks, said James J. White, a bankruptcy expert at the University of Michigan law school in Ann Arbor. "Almost all plans are agreed-to plans," he said. "If I voted to accept a plan, I'm certainly not going to appeal it."

Dana, which is Toledo's largest corporation, listed assets of $7.9 billion and debts of $6.8 billion when it filed for Chapter 11 protection from creditors in March, 2006. Most creditors will receive 72 cents to 86 cents for each dollar they are owed.

Although observers expect the judge to OK the plan either at the end of the hearing or soon afterward, the deal is not without opponents.

Chief among them are the firm's asbestos claimants.

Lawyers for a committee representing the creditors are urging Judge Lif-

land to reject the plan, arguing that, contrary to company assertions, their claims could be damaged by its terms.

Committee lawyer Sander Esserman, of Dallas, didn't return a call for comment.

Dana faces as many as 150,000 claims, most filed by mechanics who say they were harmed by breathing asbestos fibers while installing or rebestos fibers while installing

or removing car parts that con-

tained the cancer-causing material.

Their suits were temporarily halted by the firm's bankruptcy filing.

Unlike other debts, the asbestos claims won't be extinguished by the bankruptcy. Instead, they will be reinstated once Dana emerges from Chapter 11.

As a result, Dana argues that asbestos claimants, who have special rights in bankruptcy cases where their claims are compromised, are unaffected by the case.

But committee lawyers, in court papers, reject that and assert that claims would be compromised.

Unlike Owens Corning and some other firms that produced asbestos-containing products, Dana's asbestos liabilities were deemed not large enough to file under special laws that apply in such cases and usually complicate negotiations with creditors.

If asbestos claimants convince Judge Lifland they are right, Dana lawyers could be forced back to the drawing board, or, as is more likely, to the negotiating table. But courtroom observers said that outcome is remote.

Although the asbestos objection appears to be most significant, it isn't the only criticism of the Dana plan.

The IRS is concerned that the plan doesn't provide for interest on $85 million in tax payments Dana owes. But that can be rectified with a Dana promise to make the payments.

Five of 11 objections were resolved as of the middle of last week, and negotiations were continuing on resolving others, lawyers said at a bankruptcy hearing Wednesday.

The number and complexity of objections will determine whether the hearing is finished in a day or goes on longer. Judge Lifland has blocked out the entire week on his calendar, but no one expects the procedding to last that long.

But Dana lawyers have armored up for a battle on the asbestos question.

A list of witnesses filed with the court last week includes a Washington consultant who has helped estimate how much Dana will pay to asbestos victims; a Washington lawyer who will discuss the firm's defenses against such claims; and a Baltimore defense lawyer who specializes in corporate asbestos cases.

Other prospective witnesses include Durc Savini, a consultant with Miller Buckfire & Co. LLC, which has advised Dana on financial matters, and Ted Stenger, an official with management consultant AlixPartners who is Dana's chief restructuring officer.

In recent months, company officials had talked about exiting Chapter 11 before the end of 2007.

But, according to people familiar with the case, the extra time is needed to allow the firm's new lenders to attract other banks to participate in financial arrangements for Dana after Chapter 11.

Lead banks have agreed to provide $2 billion to repay money borrowed during Chapter 11, pay debts, and provide cash for operations.

But, as is typical in corporate financing, underwriters Citigroup Global Markets Inc., Lehman Brothers Inc., and Barclays Capital will recruit other banks to assist in the financing.

Such efforts have become more difficult as credit markets have tightened, according to experts.

But that won't affect Dana because of the commitment it has obtained from the underwriters.

Financing details often delay a firm's final emergence from bankruptcy, which is the date its plan goes into full force or becomes "effective," said Mr. Hammer, of the Dickinson Wright law firm.

In terms of a hard deadline, Dana's settlement with creditors states only that the plan must become effective by May 1, Mr. Hammer said.

But lawyers in the case said they have no reason to doubt its new target date of Jan. 31.

Since filing Chapter 11, Dana has cut 8,000 of its 44,000 employees and lopped off $2.5 billion of its $11 billion in revenues through plant closings and asset sales.

When the plan is effective, up to 100 million new shares of stock will be paid to creditors to satisfy debt.

Existing shares, now trading at about 5 cents on the over-the-counter market, are expected to become worthless.

The company said it expects the new shares to trade on the New York Stock Exchange but isn't sure when trading will begin, Dana spokesman Chuck Hartlage said.

The CEO, who is also chairman of the board of directors, will retain a board seat.

But Mr. Burns will be replaced as chairman of that body. A new nine-member board will include retired U.S. Rep. Richard Gephardt (D., Mo.) and Jerome York, an adviser to investor Kirk Kerkorian.

Judge Lifland has authorized the company to pay up to $6.75 million in cash and stock to Mr. Burns when the company exits bankruptcy.

Five other executives will share in up to $4.77 million for their roles in steering the firm through the reorganization.

At some point after emergence, the company no longer will provide health benefits for retirees. The program will be taken over by a union-supervised trust fund.

Unionized retirees, including about 800 in the Toledo area, are uncertain about how their benefits will change.

"Of course, they're apprehensive," said Dick Rombkowski, a former Dana worker in Toledo who writes a column on retiree issues for a local UAW newspaper. "They don't know what will or won't be covered."

But company executives said they needed deep cuts to return the company to profitability.

And cost-cutting efforts are beginning to pay off.

After billions of dollars in losses, including $276 million through Oct. 31, company officials reported to Judge Lifland that Dana had a profit of $18 million in October.

Contact Gary Pakulski at:

gpakulski@theblade.com

or 419-724-6082.