July 6 (Bloomberg) -- Dana Corp., the bankrupt auto-parts maker, arranged a $500 million investment from a private-equity firm to create two trust funds that will help pay health-care expenses for retirees.

Centerbridge Capital Partners LP will get as much as a 25 percent stake in the axle supplier for its contribution. The funds, supported by $780 million from Dana, will be managed by the United Auto Workers and United Steelworkers unions. The changes include reduced wages for new workers and buyouts and will save more than $100 million annually, Dana said today.

The agreement moves Toledo, Ohio-based Dana closer to its goal of emerging from bankruptcy by the end of the year. The company has to file a reorganization plan by Sept. 3, and workers must vote to accept the proposed contract.

``This industry desperately needs to have its balance sheet replenished, and private equity has the cash for the restructuring,'' said John Casesa, managing partner of Casesa Strategic Advisors LLC in New York.

The investment, including an additional $250 million to be arranged by Centerbridge, marks the latest rescue of a troubled U.S. partsmaker by a private-equity firm. Three of the five major U.S. suppliers to file for bankruptcy protection since early 2005 are reorganizing with the help of buyout firms.

Broader Reach

The UAW's agreement to administer a fund for retiree health- care costs is another sign the union may support such a plan in this month's labor talks with U.S. automakers General Motors Corp., Ford Motor Co. and Chrysler.

The three companies had preliminary discussions about proposing a similar fund to cover as much as $114 billion in combined retiree obligations, people familiar with the talks said last month. Such a fund is the top priority for GM, people familiar with the company's strategy said.

Dana will present the plan in U.S. Bankruptcy Court on July 25. The Steelworkers' 1,000 Dana employees are scheduled to vote July 20. The UAW didn't say when its 3,300 members at 12 Dana plants would vote.

Dana's 5.85 percent note due in January 2015 rose 2.5 cents to 98.5 cents on the dollar, according to Trace, the NASD's bond reporting service. Dana's shares fell 36 cents, or 17 percent, to $1.70 at 4:02 p.m. New York time in over-the-counter trading.

Two-Tier Wages

The four-year agreements with the UAW and Steelworkers also create two-tiered systems that preserve wages for established workers while cutting pay for new employees to $14 an hour.

Under the plan, New York-based Centerbridge will purchase up to $500 million in convertible, preferred stock after Dana exits bankruptcy to help pay for the two Voluntary Employees' Beneficiary Association, or VEBA, trusts to cover the health benefits and long-term disability obligations of current and future retirees. Dana's contribution would come from $700 million in cash and $80 million in stock.

In addition, the agreement freezes defined benefit pension plans for union employees and arranges for buyouts of some retirement eligible or recently retired employees at some factories.

Centerbridge is ``going to play a key role in the future of Dana, and we look forward to working with them,'' said UAW President Ron Gettelfinger in a statement.

Annual Savings

As a result of the changes, Dana expects to remove $1.1 billion in combined retiree health-care obligations from its balance sheet.

``We will be solidly within the range of savings we need to move forward with our plan of reorganization and emerge as a competitive, sustainable business,'' Chief Executive Officer Mike Burns said in a statement. Dana filed for bankruptcy in March 2006, two years after Burns left GM to become Dana's CEO.

In December, Akron, Ohio-based Goodyear Tire & Rubber Co. reached a similar agreement with the Steelworkers to create a health-care trust fund. The funding level for the Dana plan is about 71 cents on the dollar; the Goodyear agreement was for about 80 cents.

The additional $250 million Centerbridge has agreed to help secure will be in the form of convertible preferred Dana shares. When the transaction is complete, Dana estimates Centerbridge will own less than 25 percent of the outstanding shares in the reorganized company.

Sept. 3 Deadline

The investment is dependent on Dana filing its reorganization plan by Sept. 3. Dana can terminate the agreement with Centerbridge, with the consent of the unions, if it gets a better offer.

The deal also calls for Centerbridge to appoint three of seven directors in the reorganized company. The unsecured creditors committee will name three additional directors, one of them to be approved by Centerbridge. Dana's chief executive will be the remaining director, according to a U.S. regulatory filing today.

In addition, Centerbridge will have the authority to approve a merger or sale and negotiate employment agreements with senior management. Dana must limit its debt to $1.5 billion after reorganization and keep ``adequate'' cash to ensure the company isn't in danger of another bankruptcy.

Private Equity

Other auto-parts suppliers to get private-equity investments include Tower Automotive Inc., which is being bought for $1 billion by Cerberus Capital Management LP. A group of investors led by Appaloosa Management LP is preparing to spend as much as $3.4 billion to lead Delphi Corp., the biggest U.S. auto-parts supplier, from bankruptcy, also by the end of this year.

Appaloosa, Dana's largest shareholder with 15 percent of the stock, has asked the company for information about its reorganization plan. Dana has denied the request. It also has asked the company to suspend a takeover defense so the investment group can more easily file an alternative reorganization plan.

Centerbridge was co-founded by former Blackstone Group LP executive Mark Gallogly and hedge-fund partner Jeffrey Aronson. It raised $3 billion in 2006 to fund leveraged buyouts of financially distressed companies.

Gallogly, who left Blackstone in 2005, was a 16-year company veteran and involved in investments in Sirius Satellite Radio Inc. Aronson was a partner at Angelo, Gordon & Co., a New York- based hedge-fund manager.

Former Morgan Stanley analyst and GM adviser Steve Girsky joined Centerbridge in November to provide guidance on automotive investments.

This year Centerbridge teamed with Blackstone in bidding for a controlling stake in DaimlerChrysler AG's Chrysler unit, which subsequently has been sold to Cerberus.

To contact the reporter on this story: Mike Ramsey in Southfield, Michigan, at mramsey6bloomberg.net

Last Updated: July 6, 2007 17:24 EDT