Dana Swaps Underfunded Plans for Trusts

The bankrupt auto-parts supplier replaces retiree and employee benefits plans with a VEBA trust — a move that reportedly could save the company $100 million annually.

Dana Corp. has announced a number of deals that will substantially reduce its operating costs. Most significantly, the bankrupt auto-parts maker said its two largest unions, the United Steel Workers and the United Auto Workers, agreed to replace the company’s health-care and long-term disability obligations for union retirees and employees with Voluntary Employees’ Beneficiary Association (VEBA) trusts.

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. Under the arrangement, Dana will contribute $700 million in cash and $80 million in common stock of the reorganized Dana to the trust. In exchange, the unions will allow Dana to terminate its obligation to provide union workers with nonpension retiree benefits and long-term employee disability benefits.

The company will continue to provide benefits for the retirees and employees under its existing plans until it emerges from bankruptcy. The deal calls for four-year extensions of Dana’s collective-bargaining agreements with its unions, and also provides for the establishment of a two-tier wage structure at certain U.S. 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.

Dana officials said the company currently has $1.1 billion in unfunded nonpension benefits and long-term disability obligations related to union-represented retirees and employees. Further, the company reportedly will save more than $100 million per year as a result of the deal with the unions.

Dana also said that hedge fund Centerbridge Capital Partners has agreed to invest up to $500 million in cash for convertible preferred stock in the reorganized Dana and facilitate an additional investment by other investors of up to $250 million in convertible preferred stock. Proceeds from the investment will be used, in part, to fund the VEBA trusts.

The agreements are subject to approval by the Bankruptcy Court for the Southern District of New York. “These agreements will resolve significant ongoing cost issues when implemented, and they provide important momentum toward our completion of a reorganization plan that will position us to operate as a competitive, sustainable business after emergence,” said Mike Burns, Dana’s chairman and chief executive officer.

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