GM, Chrysler Shutdowns Could Prompt Supplier 'Armageddon'
May 20 2009 - 4:09PM
Dow Jones News
Auto suppliers are about to face a stress test of their own, and
the results are unlikely to be pretty for the banks and investors
that hold their debt.
Shutdowns at General Motors Corp. (GM) and Chrysler LLC this
summer will put already-lean auto suppliers on the equivalent of a
starvation diet. Over the last decade as demand for cars shot up,
much of the industry, which employs more than three times as many
people as the Detroit three, gorged on debt to build up capacity in
the boom years. The average debt-to-equity ratio in the $200
billion industry stands at four or five times. Now that same debt
is strangling them.
Hundreds of smaller parts manufacturers are in breach of their
bank-loan agreements - meaning they are already having trouble
servicing their debt. As the trickle of money coming in from car
makers comes to a stop this summer, many of them will not
recover.
This puts lenders in a tough spot. If they force companies on
the ropes to liquidate, they aren't likely to get much of their
money back. If they decide to swap their debt for an equity stake
they're not much better off - auto-parts suppliers will need about
75 days of working capital to get ramped up for renewed car
production in the fall, and would likely come to their new owners
hat in hand. As a result, lenders have frozen up.
"The banks are being a lot more hesitant to pull the trigger on
a lot of these suppliers," said Jim Gillette, Director, Supplier
Analysis at CSM Worldwide, who had predicted more bankruptcies
earlier in the year. "They've been hanging on, trying to keep these
things going rather than owning this junk they can't
liquidate."
Lender Of Last Resort
Suppliers are saying the only way out of this predicament is
government involvement.
"We're still hoping that our friends in Washington will
recognize that in order to ensure that money does not go to waste
they also have to support the supplier community," said Neil De
Koker, President of the Original Equipment Suppliers Association,
an auto-parts manufacturing group.
He estimates the government will need to commit around $20
billion in addition to the $5 billion in guarantees that have
already been put up. The support should come in the form of
guarantees on loans channeled through existing lenders, he
said.
In the end, $20 billion may just be a down payment. Richard
Tilton, former head of the bankruptcy group at Greenberg Traurig
LLP, now an analyst on autos for Covenant Review, pegs the final
price to the government for restructuring the auto industry at
"$100 billion plus."
However, other options may be worse. The auto industry is to the
real economy what Lehman Brothers was to finance: catastrophically
interconnected. Since the 1980s, car makers have taken much of the
slack out of the system, as just-in-time parts delivery and
single-source suppliers became more common. A single, small
manufacturer shutting down can cause temporary plant closures
across the U.S. A wave of them would be what one industry expert
called "Armageddon."
"If it's 500, that will shut down the entire North American auto
industry," De Koker said. "It could take 2 to 3 months to get
plants running again, and that affects 2.4 million jobs."
The wave has already begun to hit amid a drastic contraction in
production. North American auto production is expected to fall by a
third from 2008 to 8.4 million vehicles. Laser-welding company
Noble International Ltd. (NOBLQ), wheel and power-train component
maker Hayes Lemmerz International Inc. (HAYZ), and Intermet Corp.
(INMTQ) have already filed for Chapter 11. According to industry
strategist Craig Fitzgerald, many smaller companies have also
disappeared, going into what he called "quiet liquidations."
Others appear to be on the verge. Last week, Lear Corp. (LEA)
revealed that under the terms of the waiver with its secured
lenders that put it into a Catch-22 bind. In order to get the
waiver it agreed not to pay its June coupon payment to unsecured
bondholders. Lear has remained unwilling to commit to whether or
not it will make the payment.
"I think Lear's destiny is essentially out of its hands and in
the hands of its secured lending group," said auto-company debt
analyst Kip Penniman of KDP Advisors.
In the end, the restructuring will likely be good for the
industry. Making auto parts hasn't been a good business for
decades, as car manufacturers tried to wring every efficiency from
their supply chain. So a consolidation could allow for better
pricing and eliminate companies whose capital structures were
unsustainable to begin with.
"For the first time I can see these companies starting to make
some money," said Greg Charleston, an auto supplier turnaround
specialist at Conway MacKenzie Inc. "It's terrible what's
happening, but for those that can get through it, there may be
light at the end of the tunnel. it's going to be a long tunnel,
believe me."
-By Andrew Edwards, Dow Jones Newswires; 201-938-5973;
andrew.edwards@dowjones.com