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Tuesday, June 12, 2012

Allied Systems Consent to Involuntary Chapter 11

Story first appeared in The Wall Street Journal.

Allied Systems Holdings Inc., which specializes in transporting cars from manufacturers to dealerships, on Sunday put itself and 17 related companies into bankruptcy-court restructuring, consenting to a involuntary Chapter 11 petition filed against it last month.

Allied stopped making interest payments on its first lien credit facility in 2009 as Chrysler and General Motors entered bankruptcy and reduced production, it said in court documents filed with the U.S. Bankruptcy Court in Wilmington, Del. It had previously been out of compliance with the loan with a current balance of $244 million and hasn't made payments on it since.

Private-equity firm Yucaipa Cos., which owns a majority stake in Allied as the result of Allied's 2005 Chapter 11 reorganization, purchased the majority of Allied's first lien exposure in 2009 and entered into an agreement that gave it control of dealings with lenders.

Allied is asking the court to approve $20 million in bankruptcy financing being provided by Yucaipa. It plans to eliminate debt and strengthen its balance sheet while in Chapter 11. The company said it expects existing operations to continue during restructuring.

After exploring all of the options with respect to the company's current financial position and the involuntary petitions, it became clear that implementing the financial restructuring through a court proceeding presents the most effective means to improve the balance.

Earlier this year three lenders sued Yucaipa, in New York State Supreme Court, saying the firm was violating legal debt protections.

Yucaipa caused Allied to default on numerous provisions of the credit agreement and other agreements and then interfered with and frustrated the lenders' ability to exercise their rights.

That case is still pending, but these same lenders, Black Diamond Capital Management LLC and Spectrum Investment Partners LP, filed an involuntary Chapter 11 petition on behalf of Allied in May.

The involuntary filing came as the Atlanta company's revenues fell to $543 million in 2010 from $823 million in 2007, it said, a result of the slowdown in the automotive industry. Allied also lost the business of General Motors, Chrysler, Toyota and Honda when it implemented rate increases in March 2011.

At the same time, labor costs shot up 15%, it said. An agreement with Teamsters to lower costs, negotiated during its previous Chapter 11 case, expired in May 2010. The union insisted on an immediate snapback of wage rates, it said in court documents.

As of December 2011, Allied employed 1,835 and operated 2,400 tractors that transport cars out of 44 terminals. Of those, 1,062 are union employees.

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