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TakataOn Monday 26 June 2017, after three years of substantial losses and hobbled by a deadly air bag scandal, Japanese auto supplier Takata Corp. filed for bankruptcy protection. This represents one of the most spectacular bankruptcy filings in the automotive industry since the cases of Delphi (2005), and GM and Chrysler (2009).

With an interesting decision, the company decided to file for a primary proceeding both in the U.S. (Chapter 11, Delaware with its subsidiary TK Holdings) and in Japan (Tokyo District Court for the parent company). This decision is thought would facilitate the sale of the good assets to the Chinese-owned but U.S.-based Key Safety Systems (KSS). KSS is a Michigan-based parts supplier owned by China’s Ningbo Joyson Electronic Corp., which acquired the company in 2016 for US$ 960 mln.

Takata Corp., at its peak the world’s second producer of safety products, is one of the largest suppliers of the auto industry in the world. The company faced tens of billions of dollars in costs and liabilities resulting from the ‘air bag inflator scandal’. It is estimated that its liabilities stand as high as US$50 bln, but the final figure is subject to fluctuations and depends on the outcome of discussions with car makers, authorities and customers.

RecallIn an affair which shares striking similarities with the VW dieselgate, the Japanese company put on the market millions (according to the court affidavit, up to 125 million) of defective air bags inflators. It has been proven that, upon impact with another vehicle, the Takata air bags may explode and send metal fragments flying, thus causing serious injuries and sometime the death of the driver. In February 2017, Takata pleaded guilty to criminal charges in the U.S. criminal court of Detroit, agreeing to pay US$ 1 bln in penalties (out of which only US$ 125 mln for victim compensation).

The ammonium nitrate compound used in the air bags was found to become volatile with age and prolonged exposure to heat, thus causing the device to explode. While an unidentified Takata executive admitted to manipulating test data on air bag inflators as early as February 2004, the Japanese parent company continued to defend the compound until as late as 2015, when it reached an agreement with U.S. regulators to phase out its use. Up to now, their defective operation has been linked to at least 17 casualties and 180 injuries. Recalls of the defective inflators are still ongoing, hence the number of air bag-associated casualties is likely to rise.

Takata’s bankruptcy filing has been carefully orchestrated – and partially funded – by major automakers, which need to assure a supply of replacement inflators for tens of millions of their cars (since no other suppliers could provide the same amount of air bag inflators as Takata, should the company cease its operations overnight). Automakers affected by the Takata scandal include Ford, GM, FCA, Toyota, Mazda, Mitsubishi, Nissan, Subaru, BMW and Honda. They agreed on providing Takata up to US$400 mln over the course of the bankruptcy by accelerating payments and agreeing not to withhold what Takata owes them in exchange for access to its supplies and plants.

This strategic, pre-pack bankruptcy – which appeared to have been negotiated for 16 months – will certainly spark a heated debate, since the company asked not to be auctioned because “it was extensively shopped before bankruptcy” and “there is no risk of under-valuation of its operations”. KSS is expected to pay US$1.6 bln for Takata’s viable operations, while the rest of the company will be reorganised to continue churning out millions of replacement air bag inflators (but it is not clear how long it will operate).  The recall of defective vehicles will continue unabated.

Usual criticisms include the lack of transparency and accountability of pre-pack procedures. Existing and perspective tort claimants are expected to be the major losers from this filing, while “substantially all” of Takata’s workers (60,000 people in 23 countries) have been promised that they won’t lose their jobs. The biggest winners, however, appear to be on one hand Key Safety System, which is expected to become one of the strongest competitors in the global market for air bags and safety technology, and on the other the car manufacturers (despite the costs associated with the recall campaign, which could amount to up to US$ 10 bln).

The companies expect to seal definitive agreements for the sale in the coming weeks, and to complete the twin bankruptcy process in the first quarter of 2018.