Defective Air Bag Maker Takata To File For Bankrupacy

Jessica DiNapoli and David Shepardson writing for Reuters reported that Takata Corp, the Japanese company facing billions in liabilities stemming from its defective air bag inflators, is preparing to file for bankruptcy as early as next week as it works toward a deal for financial backing from U.S. auto parts maker Key Safety Systems Inc, sources said on Thursday.

Takata, one of the world's biggest automotive suppliers, has been working for months to complete a deal with Key Safety.

A person briefed on the matter told Reuters Key was expected to acquire Takata assets as part of a restructuring in bankruptcy.

The Nikkei business daily reported that a new company created under Key will purchase Takata operations for about 180 billion yen ($1.6 billion) and continue supplying air bags, seat belts and other products, leaving liabilities behind in a separate entity.

Takata declined to comment. Michigan-based Key, owned by Chinese supplier Ningbo Joyson, did not immediately respond to a request for comment.

The Tokyo Stock Exchange said on Friday it had suspended trading in shares of Takata following media reports of preparations for a bankruptcy filing. At its previous close, it had a market value of $360 million.

Also at stake is $850 million owed by Takata to major global automakers under a settlement agreed to earlier this year stemming from the automotive industry's largest ever safety recall.

Sources familiar with the matter, who asked for anonymity because they were not authorized to speak with the media, said a final deal with Key may not be reached before Takata files for bankruptcy. The company plans to begin proceedings in both the United States and Japan, the sources said.

Major global car manufacturers have expressed concern about the company filing for bankruptcy without a deal in place because of disruption it could cause to the production of replacement air bag inflators. More than 65 percent of 46.2 million recalled Takata air bag inflators in the United States have not been repaired.

A U.S. judge said earlier this year the costs of replacing all of the faulty Takata inflators could be $8 billion.

Takata inflators can explode with excessive force, unleashing metal shrapnel inside cars and trucks.

In January, Takata agreed to plead guilty to criminal wrongdoing and to pay $1 billion to resolve a U.S. Justice Department investigation into ruptures of its air bag inflators linked to at least 16 deaths worldwide. They also have been blamed for more than 180 injuries worldwide.

A federal grand jury in January indicted three former Takata executives for criminal wrongdoing in connection with the safety defect.

Takata has already paid a $25 million fine and $125 million to a victims' compensation fund, including for future incidents.

Takata has until early 2018 to pay the $850 million owed to automakers, or within five days of securing a financial backer.

Then-U.S. Attorney Barbara McQuade said in January that if Takata filed for bankruptcy, the Justice Department would be a creditor in the restructuring.

Key was chosen by Takata earlier this year as the favored buyer for the company. Since then, Key has been working with Takata on a restructuring plan.

Inflator recalls began around 2008 and involve around 100 million inflators around the world used in vehicles made by 19 automakers, including Honda Motor Co, Ford Motor Co, Volkswagen AG (VOWG_p.DE) and Tesla Inc. Recalls are to continue through at least the end of 2019.

Last month, four automakers including Toyota Motor Corp agreed to a $553 million settlement to address class-action economic loss claims covering owners of nearly 16 million recalled vehicles with Takata inflators.

(Reporting by Jessica DiNapoli in New York and David Shepardson in Washington. Additional reporting by Paul Lienert in Detroit and Taiga Uranaka in Tokyo; Editing by Tom Brown and Cynthia Osterman)

COMMENTS FROM COX Journalists:

Karl Brauer, executive publisher for Autotrader & Kelley Blue Book
“This is the largest, most expensive recall in the history of the automotive industry. Takata’s bankruptcy was almost a foregone conclusion, but the need to replace tens of millions of airbags remains. It’s likely that process will continue throughout Takata’s bankruptcy proceedings and will take years to complete. It’s cost will reach far beyond Takata, weighing on the financials of nearly 20 automakers. It’s a textbook case of what happens when a small number of suppliers service the entire global auto industry. In theory that system saves everyone money, but when a problem like this flares, there’s no escaping the impact.”

Michelle Krebs, executive analyst for Autotrader
“Ultimately the responsibility for the Takata airbag recalls rests with the automakers who must figure out how to replace the flawed airbags.
Presumably, Takata will continue manufacturing airbags throughout the bankruptcy proceedings. Longer term, the question is whether Takata, with a new owner, can rebuild trust with automakers to build future business. That will be a daunting task. A plus for Takata is the fact that the number of airbag suppliers has dwindled to a mere few.”

Akshay Anand, executive analyst for Kelley Blue Book
“Replacing defective airbags is still the most important issue for manufacturers on the Takata front, and the most important issue for this story as a whole. Beyond that, Takata faces a massive uphill climb, both from a financial and brand image perspective. Now that the company’s credibility has been shot, it’s possible the brand may never recover and gets back to where it once was.”