On March 30, 2010, Electrical Components International (“ECI”), filed a Petition for Bankruptcy in the United States Bankruptcy Court for the District of Delaware. One of the first documents filed in ECI’s bankruptcy proceeding was the Declaration of ECI’s CEO in Support of Chapter 11 Petitions (the “Declaration”). The Declaration provides a good summary of the nature of ECI’s business, the events leading up to ECI’s bankruptcy, as well as ECI’s objectives in bankruptcy. Relying primarily on information provided in ECI’s Declaration, this post will look briefly at why ECI filed for bankruptcy and what it hopes to achieve while in bankruptcy.
ECI’s Business and Bankruptcy
ECI designs, builds and sells wire harnesses to the “white goods” appliance manufacturers. The company’s goods are also sold to customers in the transportation and HVAC industries. Wire harnesses consist of wires and related components used in various electronic components. Some of ECI’s larger customers include Bosch, Chrysler, Delphi and GE. ECI manufactures its wire harnesses in eleven plants, six of which are in Mexico, two in China and one in Poland.
The company’s origins begin with Burcliff Industries in the 1950s. In 2006 ECI was acquired by Francisco Partners for $320 million. To finance the acquisition, ECI entered into a $250 million debt facility. In 2007, ECI increased its debt facility to $340 million so that the company could acquire Noma, another wire harness manufacturer. Within a year of the Noma acquisition, ECI had defaulted under its loan agreements and requested a modification of the loans.
As stated in the Declaration, ECI’s “financial difficulties [were] primarily due to the unprecedented downturn in the U.S. housing industry and global economic recession.” In 2008, the company began closing plants and laying off employees. Despite these cost-cutting measures, ECI lost $169 million in 2008. The drop in revenue prevented ECI from meeting its long term debt obligations ($321 million in debt). By the end of 2008, ECI notified its lenders that it was in default of the loan covenants under various credit agreements.
Objectives In Bankruptcy
During 2009, ECI and its lenders began discussions regarding a financial restructuring. The objective during negotiations was to reach consensus among ECI, the first and second lien lenders as well as the company’s equity holders. By February of this year, the parties had reached an agreement which, according to ECI, was supported by two-thirds (in dollar amount) of the first and second lien lenders. On March 6, 2010, less then one month prior to filing for bankruptcy, ECI sent out solicitations for votes of its prepackaged plan of reorganization.
Under the prepackaged plan, the first lien holders will apportion 50 million shares of new common stock of the reorganized ECI. Second lien holders will apportion $10 million in cash. General unsecured claim holders will remain unimpaired. When the plan becomes effective, a debtor in possession loan agreement will provide ECI with $165 million in cash.