Cadence Innovation forced into bankruptcy by 'sky-rocketing' costs, declining revenues

By Caroline Salls

Pittsburgh, Aug. 26 - Cadence Innovation filed for Chapter 11 bankruptcy Tuesday in the U.S. Bankruptcy Court for the District of Delaware.

According to a company news release, the declining production volumes and significant changes in vehicle segment mix in the United States have reduced Cadence Innovation's revenues during a period of rapidly increasing materials costs.

The company said this combination of sky-rocketing material costs and quickly deteriorating revenue prompted its bankruptcy filing.

"The cause and effect in this situation is obvious and the cause is a clear set of external factors - collapsing revenue and material costs increasing at double digit rates," president and chief executive officer Jerry Mosingo said in the release.

"The Cadence team has managed the internal issues exceptionally, and in most cases, we were prepared in advance of the next OEM plant shutdown or price increase from our supply base.

"The reality is that this groundswell of external factors and environmental change exceeds the flexibility of our business model."

Cadence said all of its European operations are excluded from the restructuring.

During the bankruptcy process, Cadence said it expects to maintain current staffing levels at its plants and support facilities.

The company said it has been actively engaged in an effort to divest both its North American- and European-based operations, and these activities will continue as Cadence moves through Chapter 11.

Financing details

In conjunction with the filing, Cadence is requesting court approval for $50 million in debtor-in-possession financing and of accommodation agreements with major customers General Motors Corp. and Chrysler.

Bank of America, NA is the DIP lender agent.

The DIP financing will be in the form of a $50 million revolving credit facility, with a $2.1 million letter-of-credit sublimit.

According to the motion, the DIP agreement includes a condition that the maximum revolver amount will be reduced to $35 million after 10 days from the bankruptcy filing.

The company will also have the option of requesting term loans from GM and Chrysler under the accommodation agreements.

The maturity date of the DIP revolver will be Dec. 31.

Interest will be Base rate plus 150 basis points.

Cadence will pay a $500,000 closing fee, a 0.5% unused portion fee, a 3.25% letter-of-credit fee and a 0.25% letter-of-credit fronting fee.

Under the accommodation agreements:

• GM will pay the company $1 million and Chrysler will pay it $1.8 million within five days of entry of the order approving the agreements in full satisfaction of commercial claims;

• Both customers have agreed to pay liquidity enhancements in connection with their collateral as an inducement to lenders to provide additional liquidity.

The enhancements include a set-off rights limitation of 5% of the face amount of Cadence's post-bankruptcy receivables, an agreement to repurchase inventory acquired by Cadence to produce supplies for the customers at 100% of cost for raw materials and at the purchase order price for finished goods and an agreement to fund a last-out participation in the lenders' DIP loans to allow Cadence to fund tooling and equipment needed to produce supplies for GM and Chrysler;

• The agreements include a requirement that the lenders immediately eliminate a $6 million block under the loan agreement upon entry of the interim DIP financing order, increase the advance rate against the company's inventory to 70% for GM and Chrysler inventory and 90% against GM and Chrysler accounts receivable and immediately increase the amount of the block by $2.5 million for a carve out; and

• GM and Chrysler have agreed not to resource business that Cadence produces for the customers during the time the company is attempting to sell some of its businesses as a going concern.

According to court documents, Cadence has $10 million to $50 million in assets and $100 million to $500 million in debt.

Unsecured creditors

The company's largest unsecured creditors include:

• Chrysler LLC, Auburn Hills, Mich., with a $9.93 million money lent claim;

• Ventra, Detroit, with a $2.37 million trade claim;

• Recticel Interiors North America, LLC, Clarkston, Mich., with a $1.43 million trade claim;

• Bayer Material Science, Pittsburgh, with a $1.4 million trade claim; and

• Blackhawk Automotive Plastics, Chicago, with a $1.03 million trade claim.

Cadence is a Troy, Mich.-based auto parts supplier. Its Chapter 11 case number is 08-11973.

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