Autos

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Company goes insolvent; shares surge.

It's a sign of the strange world that airbag-maker Takata Corp. has entered that this story more or less played out in Tokyo Friday. Takata, whose misfiring safety devices have been linked to at least 17 deaths worldwide, is close to a $1 billion settlement with the U.S. Justice Department that would draw a line under the criminal portion of the world's biggest auto safety recall, people with knowledge of the matter told Bloomberg News. The shares jumped 16 percent to their highest level since 2015.

Relief Rally
Takata shares have soared as the prospects of a restructure and bailout have risen
Source: Bloomberg

Such a settlement wouldn't quite be enough to wipe out Takata's 125 billion yen ($1.1 billion) in shareholder equity and leave it with more liabilities than assets -- and it's cash-flow insolvency, not balance sheet insolvency, that companies really need to worry about. As long as the yen doesn't weaken further, Takata would still have about $80 million of net assets left after paying a billion-dollar settlement, the upper end of a likely range. Still, that's a rather weak foundation for a company facing a recall that could cost 1 trillion yen.

The reason for shareholders' delight is that such an agreement could allow Takata's tortuous rescue to proceed. Airbag-makers Autoliv Inc. and Key Safety Systems Inc. are the front-runners in a planned restructuring and takeover, Bloomberg News reported last month, but one of the biggest threats to a deal is the unknown and unquantifiable liabilities that may yet emerge as automakers, class-action lawyers and prosecutors try to divvy up the costs and blame from recalling 100 million airbags. A settlement with the U.S. Department of Justice, as Volkswagen AG has learned, can go a long way towards taking those risks off the table.

A long way -- but not the full distance. Volkswagen has also learned that automotive scandals have a hydra-like ability to spawn fresh investigations and lawsuits all over the world -- the $4.3 billion penalties to close the Justice Department case come alongside a $14.7 billion figure imposed by a California judge to fix affected cars as well as an investigation in Germany and separate cases under U.S. clean air and customs-violation regulations.

Takata is in a similar position. At least six U.S. class action lawsuits had already been filed against the company by the end of 2014, and Hawaii last May became the first U.S. state to file its own suit, seeking potential penalties of $700 million each from Takata and Honda Motor Co., whose vehicles were sold in the state with the faulty airbags installed. That's not even counting actions that may yet emerge outside the U.S., where at least 20 million of the affected cars were sold.

Takata might choose to argue that it, and its potential saviors, are victims of this chaotic process -- but it's a perpetrator, as well. Almost a decade since Takata's first airbag recall, there's still no official accounting from the company of how many devices have been affected, how much the process will cost, or who will pay.

Safety Cushion
Takata's provisioning for the costs from its airbag recall is already starting to deflate
Source: Company reports, Bloomberg

Takata's own provisioning is clearly inadequate to cover more than a fraction of the costs, so its only hope of survival is if customers agree to shoulder part of the burden.

As Gadfly has argued previously, automotive companies tend to be far too slapdash in disclosing the progress of global recalls in a way that would help investors understand risks to their business. Amid that fog of uncertainty, no wonder Takata's white knights are advancing with extreme care.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net