On the Brink of Bankruptcy, U.S. Auto-Parts Companies Seek Bailout
By Jason Simpkins
Managing Editor
Money Morning
U.S. companies that make and supply auto-parts to major carmakers are pleading for a bailout from Washington, as many are now on the verge of declaring bankruptcy. Auto-parts companies may seek between $10 billion and $12 billion in cash and guarantees from the federal government as soon as this week.
A sharp drop in U.S. car production has waylaid the auto-parts industry and now skittish banks are holding credit back from companies looking for a life preserver. Alarmed by the precarious state of Detroit’s Big Three, many banks have stopped accepting receivables, or income that suppliers book in anticipation of future sales, as collateral.
A vast network of smaller suppliers, which rely heavily on receivables to get loans from smaller banks, is particularly at risk. But even larger parts makers with stronger financials are bracing for what could turn into an industry-wide meltdown.
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Lear Corp., General Motors Co.’s (GM) second-largest supplier has already hired New York investment-banking firm Miller Buckfire & Co. and Goldman Sachs Group Inc. (GS) to amend credit agreements to avoid defaulting on loans, The Wall Street Journal reported.
“A couple of significant failures could bring the entire industry down,” said Daniel Ninivaggi, Lear’s executive vice president.
Visteon Corp. was one company identified by The Journal as being perilously close to liquidation. One source familiar with situation said Visteon is “about 65% to 70% of the way there.”
The company has instituted a four-day workweek for 2,000 salaried employees and plans to cut pay by as much as 10% for employees making more than $75,000 a year.
A large portion of the domestic car industry was idled in late December as companies extended holiday shutdowns, but with cash is running low, there is growing anxiety that the weakest suppliers will start to succumb to bankruptcy by February.
Industry leaders have stepped up their lobbying efforts in recent weeks, as a result, and Neil de Koker, president of the Original Equipment Suppliers Association, told the Financial Times that representatives are planning to make a formal request for access to the Troubled Asset Relief Program (TARP), just as Ford Motor Co. (F), GM, and Chrysler LLC did last month.
“[Suppliers] need money, otherwise all the money put into GM and Chrysler will go for naught,” said de Koker.
Mainly, industry lobbyists want government guarantees on receivables so banks will again start accepting them as collateral.
Suppliers book $13 billion to $15 billion in Big Three receivables each month, according to the Original Equipment Suppliers Association and the Motor and Equipment Manufacturers Association.
The government would have to guarantee $10 billion to $12 billion, or 80%, of those receivables for banks to loosen credit terms, according to industry estimates.
Other measures could include direct cash infusions and a three or four-month moratorium to keep banks that received help from the TARP from pulling or altering terms on credit lines to auto-parts makers.
News and Related Story Links:
- Wall Street Journal:
Bankruptcy Fears Grip Auto-Parts Suppliers
- Financial Times:
Car parts sector looks for $10bn US bail-out
- Money Morning:
Fiat Takes 35% Stake in Chrysler, Opens Global Auto Market
- Money Morning:
U.S. Auto Sales Post Worst Year Since 1992
Pingback by Auto Suppliers in Discussions with Treasury Over Bailout on 6 February 2009:
[...] A sharp drop in U.S. car production has waylaid the auto-parts industry and now skittish banks are holding credit back from companies looking for a life preserver. Alarmed by the precarious state of Detroit’s Big Three, many banks have stopped accepting receivables, or income that suppliers book in anticipation of future sales, as collateral. [...]
Comment by Portable Dishwasher.net on 11 February 2009:
This whole bailout mindset makes me sick. All we’ve done the past 8 years is spend and spend, and look where we are. Why do we think spending even more will make things better? Also, do we really want to reward companies for failing? Because that is basically what it is. People are learning that if your company fails, then the government will be there to pick it up. It is the same mentality as welfare was in the 90’s. And we all know that went too far and had to be ended. Are we going to have to face an economic collapse in order for people to realize welfare for companies is not what we need?
Comment by Lightenex on 23 June 2009:
I’d be intrigued to know now that time has moved on a bit and various things have happened in the US auto industry, just what peoples thoughts are now.
Similar huge sums of money poured into the banking system in the UK seem to have made little or no difference to the money supply there.