Notes From Saab’s Reconstruction Application
September 8, 2011 in Archive
While we wait for the court’s decision on Saab’s application for reconstruction, feel free to read it yourself. If you prefer the English translation, I’ve cleaned it up so you can read it after the break. You’ll all be very familiar with sections 1 and 2, but section 3 gives away the most concrete details of what Saab plans to do if allowed to move forward with this plan:
- If Pang Da and Youngman’s 245 million Euro investment is held up for whatever reason (which Victor Muller was very eager to explain he doesn’t expect during the press conference, going so far as to say applications have been prepared), “The Company is currently negotiating even short-term funding and has met a comprehensive interest in this. If the Company does not have the necessary time, management needs to consider putting the company into bankruptcy. When and if the necessary funding to start and maintain production is secured, the Company will continue to focus on its strategy to become a profitable and independent manufacturer of niche luxury vehicles, while implementation of all elements of the business plan which is still current and revising business plans, among other things, to include the potential of cooperation with the Youngman and Pang Da will mean.”
- “…the all-new 9-3 is expected to be launched in 2013.”
- “As part of its long-term strategy, the Company will apply a business model which retains both technology and design capability in-house to develop 1-2 new models in each 4-6-year cycle. Company also intends to cooperate with other parties on development of certain key components and technology and to develop further models.”
- “…the Company will streamline its organization by minimizing any overlap and duplication of functions, simplify work processes and the dismantling of non-necessary functions that remain from the days when General Motors organization. This will reduce costs, make the company more flexible and enable the Company to improve the organization’s potential, where it is needed.”
- SWAN will undertake “a streamlining and reduction of working capital and a review of business strategy in the U.S., which does not function satisfactorily and where both revenues and earnings are adversely affected by the currently unfavorable exchange rate.” (Tim Colbeck explained nothing was changing at SCNA now in his interview with Automotive News, but this statement implies changes are definitely ahead.
SAAB Automobile AB (“Bo1aget”) is a Swedish company that designs, develops, manufactures, markets and sells passenger cars in both the Swedish and the global market. The company’s main interest is in Sweden and conducts operations mainly from Sweden. The company has six organizational subsidiaries in Sweden and seven branches and six subsidiaries that import and sell Saab cars around the world. Of the latter two subsidiaries are pure resellers. The company also works with forty dealers in Sweden and nearly 600 retailers in the other 17 markets where the company has direct sales through subsidiaries or branch. In addition, the company is working with 18 importers who handle the import and contact with individual retailers in 28 countries.
The current product portfolio includes cars Saab 9-3, Saab 9-5 and Saab 9-4X. Saab 9-4X is produced by General Motors fabiík in Mexico and the production of 9-3 and Saab 9-5 is produced at the company’s factory in Trollhattan. The new model Saab 9-5 was recently introduced. The company is currently working on developing the next generation Saab 9-3.
The district court decided on reorganization of the Company on 20 February 2009. This reorganization continued up to 20 August 2009 when it ceased after such measures have been taken that the purpose of the reorganization was achieved. In parallel with corporate restructuring was going on a sales process where the Company’s then owner, General Motors, issued shares of the Company at a range of stakeholders. Then on the 12 June 2009 announced that Koenigsegg Group signed a memorandum of understanding with General Motors on acquisition of the Company. Koenigsegg Group announced September 9, 2009 that it intended to take in Chinese BAIC as minority shareholders in order to ensure the necessary capital for the acquisition of the Company. On 24 November 2009 the Koenigsegg Group, however, announced that the acquisition of General Motors had been suspended on the grounds that the time waiting for the planned acquisition, which was set at 30 November 2009, could not be maintained and that transaction therefore discontinued.
On 18 December 2009 the General Motors announced their intention to close down the company during an orderly wind down. January 12, 2010 General Motors filed for liquidation of the Company and SCRO appointed two liquidators to carry out the mission. On 23 February 2010, however, sold General Motors Company to Spyker Cars N.V. (Name later changed to the Swedish Automobile N.V. C ‘SWAN “‘)).
Already during the negotiations between General Motors and Koenigegg Group Company had brought extensive negotiations with the European Investment Bank (“PIP”) for a
project finance loans from the EIB to the Company by the Debt Office as guarantor. In February 2010 Government approved the Debt Office’s proposal to a guarantee agreement with the EIB and also noted that there were adequate collateral. In this context, the EIB gave its final approval of a loan of up to 400 million euros to be paid in shares of the Company until August 31, 2012 with reimbursement in 2017.
The company’s business plan, originally developed as part of the separation from General Motors, in brief aims to create a viable, independent and innovative company with a focus on “green technology” with an increased number of functions in Sweden, that management and decision making within the company as opposed to coming from above, as it was during the time of General Motors as the owner. This business plan, and production of company cars concentrated in Trollhättan would result in extended operations in Sweden, with higher capacity utilization, hiring, and increased purchases in Sweden.
Since the 2009 reorganization was completed and in the meantime with SWAN as the owner has a number of measures taken under the business plan in order to further refine
operations. Some examples are:
• The General Motors began the settlement of the Company have been suspended and all operation has resumed;
• The production company’s cars are largely concentrated in Trollhättan and resulted in an increased activity in Sweden with higher capacity utilization, recruitment and increased purchases in Sweden;
• An independent and innovative company has been created with a focus on “green technology” with increased number of functions in Sweden so that management and decision making within Company;
• A series of strategic partnerships have been established such as BMW, American Axle, and others;
• A complete sales network has been established. Seven branches and five subsidiaries established in the major markets where General Motors sales earlier was responsible for the sale of Saab cars. The company has now built up its own distribution of 80 percent of the market, in other markets seem independent importers; etc.
• The new car model Saab 9-5 Sedan has been successfully launched on the market;
• The new car models 9-4X and 9-5 SportCombi has developed and introduced, which means that both are ready to be launched in the market.
The company’s group structure shown in Appendix 1. The Company had on 31 July 2011 3,609 employees, including 3,441 in Sweden.
2. ECONOMY AND CAUSES OF INSOLVENCY
The company’s development and economic difficulties since 2010
Work on the sale of the company separate the business from General Motors were identified from the outset as one of the most challenging tasks. In practice, out to be even more complex than could have been predicted. In particular, separation from the replacement of General Motors existing sales ~ and distribution organization proved to be more time consuming and costly than anticipated. Although the substitution of different processes and associated systems was unexpected challenges and took significantly longer than planned to solve. In addition, the company took longer than expected to reduce the existing cost base in an appropriate way to reflect the new organizational structure and capabilities.
Finally, the business plan did not include the necessary flexibility in financing structure or an adequate financial cushion for the unexpected difficulties described in this section.
Delay of planned sales and the resulting lower revenues than planned, and the high cost base was charged to the Company’s working capital and liquidity more than anticipated
the business plan. A further problem was the high requirements for financial guarantees in the financing solution that was chosen for the Company. Although the unfavorable exchange rate for dollars, the currency in which the company had its revenues, helped to weaken the company’s position.
The first quarter of 2011 showed positive sales growth despite the challenging circumstances. March 2011 was the best sales month for the Company since it became
an independent company. Notwithstanding these positive developments, the Company began to receive payment difficulties.
The company’s financial difficulties meant that it was hit by a number of production stoppages in end of March 2011. April 6, 2011 the Company decided to halt production until further notice while management worked to secure additional funding for operations. Since additional funding secured resumed production May 27 2011th Production stoppage came back, however, over the next few days as a result of a uneven flow of modules and components for production. On June 9, 2011 the company stopped re-production and has since worked to ensure both the necessary funding agreements with providers of payment and shipping terms to provide for the sustainable resumption of production.
The negative gross margin for the first half of 2011 was caused mainly by production outages that lasted for most of the second quarter and the margin burdened with the full cost of the Company’s unused production capacity and costs for some untapped sales and delivery capacity.
Company’s Current Financial Position
The company’s owners, SWAN, and the Company have had discussions and negotiations with a couple of Chinese parties, Youngman and Pang Da, to secure additional financing in the short, medium and long term in order to strengthen the Company’s financial position. As of this date, the necessary financing could not be ensured due to the fact that Youngman and Pang Da need permission from Chinese authorities to bring money for investment from China.
The Company also privately held talks with its suppliers regarding materials supply and supply conditions in order to resume production in Trollhättan. The company is well aware that the prolonged production outage is financially burdensome not only for the Company and its employees but also for many suppliers and other creditors.
Given that the Company has limited financial resources available, the Company’s opinion is that a reorganization would bring in the best position to provide the Company the opportunity to use their time and resources in an optimal way. A reconstruction would also give the company breathing space to focus on negotiations with future funding and that they can obtain permission from the Chinese authorities for investment in the Company and in this way can the company be able to sort out their financial situation. This would also create an orderly procedure for dealing with the Company’s outstanding debt and stop the sanctions and subsequent execution by various creditors initiated. The company would thus have the opportunity to secure the new financial solutions worked up and the strategic partnerships described below. The company must immediately initiate a reconstruction even for to ensure that employees receive their wages and to avoid continued losses and a distractions for the company and its efforts to find a solution to the resulting problems.
For a more detailed description of the Company’s current financial position, see attached statement and balance sheet, Appendix 2.
3. FUTURE FUNDING, EVENTS AND OBJECTIVES
On 13 June 2011 the parent company SWAN reached an agreement on Conditional long-term financing through a Memorandum of EUR 245 million with the above-mentioned Chinese companies Pang Da and Youngman. As part of the settlement acquired Pang Da Saab cars for a value of 45 million that was paid in advance. As security for these payments
Pang Da has a lien on the SWAN’s share of Saab Great Britain. Furthermore pledged Pang Da to subscribe for shares in SWAN with a value of EUR 109 million, representing a 24-percent interest in the SWAN. Youngman pledged to the EUR 136 million to obtain an ownership of 29.9 percent in SWAN. The Memorandum of Understanding also includes a strategic alliance consists of both manufacturing and distribution partnership cooperation. A binding agreement was concluded with Pang Da and Youngman July 4, 2011, but these are still subject to approval from relevant Chinese authorities.
On The fourth of July 2011 SWAN and the Company also has a conditional agreement with Youngman Passenger Car on the formation of a Sweden-based joint venture company (“NPJV”) for development of three new Saab models. NPJV comes to 50 percent to be owned by the Company and to 50 percent by Youngman Passenger Car. Cooperation is the basis for an expansion of Saab product portfolio of models that have not previously been part of the Company’s current or future portfolio. NPJV will focus on developing additional all-new Saab cars. Within the development of this new model series, the Company will be responsible for controlling and managing the design, development and testing processes by the production start and provide other necessary technical and quality support. For this purpose the Company to utilize existing capacity and expertise from its ultra-modern technology development department in Trollhättan. Youngman Passenger Car will be responsible for provision of necessary financial investments. Agreement on NPJV is also
subject to approval from relevant authorities, as SWAN, the Company and the Youngman Passenger Car hopes to receive sometime in autumn 2011.
The Company’s current assessment is that the resumption of operations can be ensured based on the Pang Da and Young’s contingent investment of 245 million. The Company is
currently negotiating even short-term funding and has met a comprehensive interest in this. In order to have time to obtain necessary permits and final negotiation funding is needed, additional time, which the Company would receive through a reorganization. If the Company does not have the necessary time, management needs to consider putting the company into bankruptcy. When and if the necessary funding to start and maintain production is secured, the Company will continue to focus on its strategy to become a profitable and independent manufacturer of niche luxury vehicles, while implementation of all elements of the business plan which is still current and revising business plans, among other things, to include the potential of cooperation with the Youngman and Pang Da will mean.
Management believes that the objectives of the overall strategy is still valid. The Company has launched an attractive and largely renewed product portfolio of models 9-5 and 9-4X
during the last 12 months and the all-new 9-3 is expected to be launched in 2013. Furthermore, the Company at the permission of the Chinese authorities, through cooperation with
Pang Da and Youngman have access to the world’s largest and fastest growing market, China. With this positioning in the market, combined with the global and strong brand
Saab, the company is well positioned to achieve the strategic objectives of a viable and independent developer, manufacturer and distributor of premium cars that compete on
world market with other premium brands such as Audi, BMW, Volvo and others.
As part of its long-term strategy, the Company will apply a business model which retains both technology and design capability in-house to develop 1-2 new models in each 4-6-year cycle. Company also intends to cooperate with other parties on development of certain key components and technology and to develop further models. The company plans to continue manufacturing cars in its modern facility in Trollhättan, currently has an annual capacity of around 190,000 cars. Moreover, the Company, depending on how demand unfolds, to supplement this system with assembly and later manufacturing capacity in China with their Chinese partners Youngman and Pang Da. The company will retain control over car distribution in most of its current and future markets by establishment of its own sales companies, such as in Australia, or through collaborations with qualified importers, a development company has already begun in Russia and Brazil. For a handful of others the Company also implements an innovative and more cost-effective distribution model of type “direct distribution” that puts the necessary functions only where they can collectively achieve economies of scale.
In order to implement his vision for product development, the Company has developed a “Modular concept” to achieve a very high level of standardized design. This concept
called “Phoenix” contains systems and components for future development of meaning reduce the required investments and shorter lead times from development prototypes to
market launch. The Company evaluates the feasibility of creating a more efficient technology development based on their current two separate development entities, TDC / Vehicle Development and PWT / Powertrain Development. This integration work is expected development costs reduced by 15-20 percent while maintaining and in some cases strengthened
ability of the Company in this area.
Even outside the field of technology relating to the Company will streamline its organization by minimizing any overlap and duplication of functions, simplify work processes and the dismantling of non-necessary functions that remain from the days when General Motors organization. This will reduce costs, make the company more flexible and enable the Company to improve the organization’s potential, where it is needed. Other important initiatives to improve the financial results include a streamlining and reduction of working capital and a review of business strategy in the U.S., which does not function satisfactorily and where both revenues and earnings are adversely affected by the currently unfavorable exchange rate.
The above measures for streamlining and cost reductions, together with improved revenues and margins, is expected to reduce the levels of production leads to profitability from 140,000 to 160,000 cars sold per year to less than 100, 000 sold cars per year, a goal the company expects to achieve during the year 2013 in accordance with the revised business plan. This revised plan will, when it has completed, in addition to the above efficiency improvements also include the new opportunities for revenue growth and cost reductions as the cooperation with Pang Da and Youngman allows.
In the short to medium term, management continued to focus on strengthening the Company’s financial position and stabilize its business by securing additional medium and long term funding. The management’s focus will continue to be on:
• Managing issues of liquidity, cost, contact toll and the necessary investments;
• Continued product development of measures to renew and expand the product portfolio;
• Continuing to develop an independent distribution business for the Company’s products;
• Continuing to focus on initiatives to reduce the levels of production leads to profitability and to make the Company’s costs more flexible, and
• Continue to improve the conditions that run an independent company within the areas such as technology development, sales, marketing and finance.
In conclusion, the company by securing its long-term funding will to work to restore confidence among its customers, distributors, suppliers, shareholders and other stakeholders in order to support increased sales and improved margins from its value-added product portfolio.
As for the debt that has accumulated as a direct consequence of the lack of liquidity is any impairment of receivables is not intended in the current situation.
The company expects to slow sufficient liquidity to meet its obligations under reorganization.
4. SUGGESTIONS FOR ADMINISTRATOR
As an administrator’s proposed lawyer Guy Lofalk, Lofalk Law Firm, PO Box 7764, 103 96 Stockholm.
Lawyer Lofalk has extensive experience in large companies reconstructions and also ordered regularly as bankruptcy trustee. Lofalk, which is spoken to and received information about the scope of his duties as administrator, has declared itself to undertake the mission.
Since Lofalk was acting as administrator when the company was reconstructed in 2009, he is familiar with the Company’s operations, structure and market.
5. CREDITOR LIST
List of the Company’s creditors attached, Appendix 3.
Trollhättan September 7, 2011 -
SAAB Automobile Ltd
Also available are the applications for Saab Automobile Powertrain AB and Saab Automobile Tools AB (note, the parts business is profitable and separate as noted by Victor Muller in his Q&A yesterday).