Dana Credit negotiating new forbearance agreement; portfolio asset sale proceeds would go to noteholders

By Caroline Salls

Pittsburgh, Aug. 4 - Dana Credit Corp., a wholly owned subsidiary of Dana Corp., and its ad hoc committee of noteholders are negotiating the terms of a forbearance agreement that would allow Dana Credit to market, sell and monetize the value of its lease and other portfolio assets and use the proceeds to make payments to noteholders, according to an 8-K filing with the Securities and Exchange Commission.

Under the proposed forbearance agreement, participating noteholders would agree to forbear from exercising any rights or remedies under the Dana Credit notes until the earlier of an event of default under the forbearance agreement; the later of the allowance of any Dana Credit claims against Dana and the effective date of a plan of reorganization for Dana; or 24 months after the effective date of the forbearance agreement.

In exchange for the forbearance, Dana Credit would agree to:

• Grant security interests in the assets of Dana Credit and a pledge of the stock of its subsidiaries to the forbearance noteholders;

• Pay an amount equal to all accrued interest at the non-default contract rate on the notes;

• Accrue interest on the principal amount outstanding under each note held by each forbearance noteholder at the non-default contract rate;

• Try to sell the lease and portfolio assets within the next 24 months and pay the aggregate proceeds of the sales, as long as Dana Credit keeps at least $7.5 million of cash, to the forbearance noteholders on a quarterly basis to be applied first to the accrued and unpaid interest at the non-default contractual rate and then to the outstanding principal amount of notes held by the forbearance noteholders; and

• Use cash only to pay operating expenses and for the quarterly payments, and to not make any acquisitions or investments or loans, dividends or similar payments to Dana; and pay some fees of the professionals retained by the committee.

There is $399 million principal amount of the notes outstanding, the filing said.

Following Dana's bankruptcy filing, the holders of a majority of the Dana Credit notes formed the ad hoc committee and declared the notes immediately due and payable as a result of the bankruptcy filing.

On April 10, Dana Credit and the committee entered into a 30-day forbearance agreement, under which members of the committee agreed to work with the company toward a global consensual restructuring of the notes and to forbear from exercising rights and remedies with respect to any default or event of default under notes.

That forbearance agreement expired on May 9.

Tax consequences

According to the filing, during the past several years, Dana Credit has completed several portfolio asset sales.

As of Aug. 1, Dana Credit had about $50 million in cash on hand from previous asset sales and operations, and the company believes the marketing and sale of its portfolio of remaining assets could generate $200 to $300 million in aggregate sale proceeds.

Accordingly, the continued sale of assets is expected to generate $80 million to $115 million in additional tax liabilities owed to Dana by Dana Credit under a tax sharing agreement.

In addition, Dana said the Internal Revenue Service is currently examining some stock sale transactions completed by Dana Credit from 2002 through 2004, and Dana Credit did not recognize any tax liability for the $640 million capital gain on these stock sales transactions at the time because it used Dana's capital loss carryforward as an offset.

Under the modified tax sharing agreement, Dana Credit incurred no obligation arising from capital gains.

Dana said it believes that these stock sale transactions were completed in accordance with appropriate tax regulations and that the likelihood of an adverse outcome is remote, but if the IRS determines that gains from these transactions were not capital in nature, then Dana Credit's gains on the transactions would be re-characterized as ordinary gains, and it would not receive any benefit under the modified tax sharing agreement in connection with Dana's capital loss carryforward.

If the entire $640 million were re-characterized as ordinary gain, and assuming a 35% tax rate, Dana Credit would be liable to Dana for an additional $224 million under the tax sharing agreement.

Dana, a Toledo, Ohio-based supplier of components, modules and systems to vehicle manufacturers and related aftermarkets, filed for bankruptcy on March 3 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 06-10354.

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