Auto Suppliers in Discussions with Treasury Over Bailout

By Jason Simpkins
Managing Editor
Money Morning

U.S. companies that make and supply auto-parts to major carmakers could seek as much as $25.5 billion in government aid, the Motor & Equipment Manufacturers Association (MEMA) said in a statement.

"We have had constructive conversations with Treasury and elected officials in Washington, but no official request has been submitted at this time," said Bob McKenna, president and chief executive officer of MEMA. "Suppliers now face unprecedented challenges that have created a crisis in our industry with consequences for the nation's economy as a whole."

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.

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.

MEMA represents companies such as Lear and American Axle & Manufacturing Holdings Inc., which posted a combined $800.3 million in fourth-quarter losses last week, in part due to lower vehicle output in North America, Bloomberg News reported.

MEMA, in conjunction with the Original Equipment Suppliers Association (OESA), outlined three different "bridge solutions" to help bolster the industry:

  • Provide funds for vehicle manufacturers that have received previous funding through the Troubled Asset Relief Program (TARP) to institute an immediate, quicker pay program for their suppliers.
  • Guarantee the receivables of suppliers of Chrysler LLC, Ford Motor Co. (F) and General Motors. This option will enable suppliers to use receivables once again as collateral for working capital loans from traditional banking sources.
  • Provide suppliers with direct access to TARP funds.

Under the first proposal, GM and Chrysler would receive a $7 billion revolving credit line from TARP. Suppliers typically get paid 45-55 days after parts are shipped to auto manufacturers. But under this proposal, that waiting period would be reduced to a 10 days.

The second suggestion would have the government guarantee payment for parts delivered, should any of the three automakers default. If the government guaranteed future payments, suppliers would be able to use them as collateral for bank loans, opening up about $10.5 billion in funding.

The third and final proposal is to make $8 billion in TARP funds available to suppliers.

One or more of these proposals could be implemented, or none at all, and "no official request" for help has been submitted by the auto parts industry. However, GM and Chrysler are using $17.4 billion in government loans to ward off bankruptcy and have until Feb. 17 to prove their viability.

Less than 5,000 companies supply automakers today, compared with 20,000 in 1990, which means the collapse of any of Detroit's Big Three could have enormous implications for the industry as a whole. More than half of the U.S. parts makers that do business with GM also sell to Ford and Chrysler. 

"Action is needed because it is impossible to separate the financial health of suppliers from that of vehicle manufacturers," said McKenna. "The failure of one or more key suppliers - large or small - can shut down entire supply chains and result in the closing of multiple vehicle assembly plants, directly affecting the future viability of domestic and foreign manufacturers."

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