A123 Systems gains interim access to $15.5 million DIP financing

By Jim Witters

Wilmington, Del., Oct. 18 - A123 Systems, Inc. won interim access to $15.5 million of debtor-in-possession financing during a contentious hearing on Oct. 18 in the U.S. Bankruptcy Court for the District of Delaware.

As the hearing began, two lenders - Johnson Controls, Inc. and Wanxiang America Corp. - were vying to become the DIP lender.

A123 attorney D. J. Baker said the parties had been working through the night to reach terms and choose the financing option that would best benefit the debtors' estates. The company chose Johnson Controls before the hearing and notified Wanxiang.

Johnson Controls also is the proposed stalking-horse bidder for A123's automotive business assets, with a purchase price of $116 million.

Bojan Guzina, representing Wanxiang America and Wanxiang Clean Energy USA Corp., told the court his clients felt the terms of the DIP agreement and the asset purchase agreement with Johnson Controls unnecessarily restricted the debtors in seeking a final DIP lender, put forth a timeline that is too short and left Wanxiang "at the altar."

"Our primary concern is that there is a level playing field. We have been left at the altar a couple of times, and some of these procedures seem to have been put together to keep my client on the sidelines," Guzina said.

As part of a hastily negotiated agreement reached during the hearing's break for lunch, Wanxiang withdrew its opposition to the interim DIP facility after Johnson Controls and the debtors stated on the record the following:

• The debtors can and will cooperate with Wanxiang in meeting the necessary government requirements for an asset purchase agreement and a proposal for final DIP financing;

• Wanxiang is not precluded from becoming the alternate financing source for the final DIP facility; and

• If Wanxiang is confirmed as the final DIP lender, that selection will not automatically trigger defaults embedded in the asset purchase agreement or the interim DIP agreement.

Joshua A. Feltman, attorney for Johnson Controls, said that the third stipulation does not preclude his client from objecting to Wanxiang's selection as final DIP lender, nor does it prohibit the triggering of defaults for reasons other than the fact that Wanxiang was chosen.

Johnson Controls will not hamper negotiations between Wanxiang and A123, Feltman said.

"Welcome to the playing field," judge Kevin J. Carey told Guzina.

DIP terms

Debtors attorney Caroline A. Reckler said the competition for the interim DIP facility resulted in a lower interest rate for her clients.

Interest on the interim DIP facility will be 13.5% instead of the originally negotiated 15%.

The facility will mature on the earliest of 15 calendar days after the bankruptcy filing date unless a final order has entered a final DIP loan order and an order approving the bid procedures, the sale closing date, 34 days after the bankruptcy filing date if the auction has not begun by that date, 41 days after the filing date if the sale order has not been entered and Dec. 31.

If Johnson Controls is not selected as the final DIP lender, Johnson Controls will refund a 2% upfront fee and the debtors will reimburse Johnson Controls for its out-of-pocket expenses.

Reckler said the debtors were not seeking use of cash collateral as part of the interim DIP facility. A separate motion will be filed regarding cash collateral.

A hearing on a final DIP facility of $72.5 million is scheduled for Oct. 30.

Guzina said his client intends to "remain fully engaged" in the process and present an asset purchase agreement and final DIP facility that will be better economically for the debtors and extend the sale timeline to improve the chances of maximizing the value to the estates.

Business going forward

Baker said that A123 plans to either sell its other two business operations - a consumer battery business and an energy storage operation - or reorganize the company around them.

A123 holds about $497 million of net operating losses through 2011, he said, with an increase expected for 2012.

Under the proposed bidding procedures, competing bids are due by 5 p.m. ET on Nov. 16. Competing bids must be for at least $10.25 million more than the stalking horse bid.

If Johnson Controls is not the winning bidder for the assets, A123 will pay it a $3.75 million break-up fee and reimburse specified sale-related expenses.

Bids at auction must be in minimum increments of $500,000.

The auction will be held on Nov. 19 and the sale hearing is scheduled for Nov. 26.

The company has requested an Oct. 30 bid procedures hearing.

Judge Carey said that the timeline currently in place is not one dictated by the court.

The schedule is subject to change if objections are raised by any parties, including the yet-to-be-selected official committee of unsecured creditors.

Securities notice

Also during the Oct. 18 hearing, Carey approved a request from the debtors that they be notified if any entity gains or plans to gain control of 5% or more of the outstanding shares of the company.

If Wanxiang exercises the warrants it holds, its stock ownership could rise above that threshold, Guzina said.

The order allows the debtors a 30-day period to object to any transfers that would place 5% or more of the outstanding shares with any single entity.

A123 is a Waltham, Mass.-based company that designs, develops, manufactures and sells rechargeable lithium-ion batteries and battery systems, for bankruptcy on Oct. 16. Its Chapter 11 case number is 12-12859.

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