Dana Corporation has reached agreements with the United Steel Workers (USW) and the United Auto Workers (UAW), which it said would cut labour costs and replace the company’s health care and long-term disability obligations for retirees and employees represented by those unions with Voluntary Employees’ Beneficiary Association (VEBA) trusts to which Dana will contribute about $700m in cash.
The parts maker also inked an agreement with Centerbridge Capital Partners and affiliates on the terms under which the firm will invest up to $500m in cash for convertible preferred stock in the reorganised Dana and facilitate an additional investment by other investors of up to $250m in convertible preferred stock.
The unions and Centerbridge will support Dana’s plan of reorganisation that includes both the labour settlements and the Centerbridge investment agreement.
The deals still require bankruptcy court approval and union member ratification.
“Through our negotiations with the USW and the UAW, and negotiations with Centerbridge for the investment that will contribute to our ability to fund the VEBAs, we have reached what we believe are fair and constructive agreements,” said Mike Burns, Dana’s chairman and chief executive officer.
“We welcome the investment by Centerbridge, a private equity investor with considerable expertise in the automotive industry and complex restructurings. Centerbridge brings a long-term perspective and a strong commitment to assisting us in building a solid future for Dana,” Burns added.
“While there is a good deal of work yet to be done, we are on track to file a reorganisation plan by the beginning of September and to emerge from bankruptcy by year end.”
The settlements with the USW and UAW include four-year extensions of Dana’s collective bargaining agreements with all of its USW- and UAW-organised facilities in the United States and new agreements with several recently organised facilities. Among other items, the extended and new bargaining agreements will provide for the establishment of a two-tier wage structure at certain affected US operations, changes in disability benefits, and a freeze on credited service and benefit accruals under the pension plans for active employees represented by the USW and UAW.
“These agreements will resolve significant ongoing cost issues when implemented and they provide important momentum toward our completion of a reorganisation plan that will position us to operate as a competitive, sustainable business after emergence,” Burns said.
Each of the union settlement agreements also calls for the establishment of a VEBA to replace the company’s current retiree health care plans and long- term disability obligations for employees covered by USW and UAW collective bargaining agreements.
A VEBA is a special, tax-deductible trust that can be used to provide certain benefits, such as medical reimbursement, to participants and their beneficiaries.
Once Dana emerges from bankruptcy, the company will contribute about $700m cash and $80m in stock to the VEBAs in exchange for the termination of Dana’s obligation to provide non-pension retiree welfare benefits for USW- and UAW-represented retirees and long-term disability benefits to USW- and UAW-represented employees.
The company will continue to provide benefits for these retirees and employees under its existing plans until emergence. Dana currently has an aggregate of approximately $1.1bn in unfunded non-pension benefit and long-term disability obligations under its US post-retirement health care plans for USW- and UAW-represented retirees and employees.
Dana estimates that the modifications to the USW and UAW collective bargaining agreements and other provisions of the union settlement agreements will collectively result in annual savings of more than $100m.
Centerbridge will purchase up to $500m of stock in the reorganised Dana and facilitate an additional investment of up to $250m in convertible preferred stock.
Proceeds from the investment will be deployed in part to fund the VEBA trusts that will be established under the settlement agreements with the USW and UAW.
“Last November, to address the harsh reality that Dana had generated more than $2bn in losses over the past five years, we announced a series of interdependent restructuring initiatives,” Burns added. “These initiatives, affecting all of the company’s constituencies – our customers, suppliers, both union and non-union employees and retirees – were designed to result in an aggregate pre-tax annual income improvement of $405m to $540m.”
“Without the settlements with the USW and UAW, essential savings in other areas could be jeopardised,” Burns said. “With these settlements, we will be solidly within the range of savings we need to move forward with our plan of reorganisation and emerge as a competitive, sustainable business.”