GM tells suppliers they'll get paid, even in bankruptcy

ERJ staff report (CDB)

By Ryan Beene, Crain's Detroit Business

DETROIT -- Suppliers with outstanding receivables not covered by Thursday's $2 billion early payment by General Motors are likely to be paid even after the automaker files for bankruptcy.

Bo Andersson, GM group vice president for purchasing and supply chain, told a group of suppliers in a Friday conference call that its production parts suppliers and logistics providers would be included in any "critical vendor" motion included in a GM bankruptcy filing.

If approved by the court, such a motion ensures those "critical vendors" are paid for parts shipped to the automaker.

But much of the cash-strapped supply base is already teetering on the brink of bankruptcy, with little to no chance of car and truck production volumes growing in the near-term.

Industry experts say without a source of capital or bridge-loans to the supply base to prevent a rash of failures, automakers could find themselves unable to begin making cars when demand returns.

Supplier failures

Craig Fitzgerald, a partner and automotive supplier consultant at Plante & Moran PLLC of suburban Detroit, said critical vendor status will keep some suppliers from going belly-up, but not all.

"For certain suppliers, it will not make a difference and they will still go into liquidations and bankruptcies," he said.

Additional auto parts suppliers are likely to follow Visteon Corp., Metaldyne Corp. and at least six other automotive suppliers that have filed for Chapter 11 this year. They are being starved of revenues as the summer schedule of significant production cuts continues. In addition, capital markets remain essentially off-limits to suppliers.

"There has been very little discussion, at least outwardly, about what to do for the supply base," said Robert Gordon, an automotive and bankruptcy attorney with Clark Hill plc in Detroit. "Even if they get their pre-petition debts paid, that is not going to be sufficient to save the suppliers from the problems that have been created by January shutdowns, historic low volumes in the first quarter and expanded shutdowns beginning now."

All production at Chrysler LLC halted after it filed for bankruptcy on April 30. GM began putting its assembly plants on staggered, extended summer shutdowns starting May 2.

As North American vehicle production volumes hover at roughly half last year's level, many of GM's largest suppliers are already on the brink. Some have warned that they could file for bankruptcy.

For example, Lear Corp., which was granted a credit line default waiver until June 30, has said it could file for bankruptcy if its lenders and debt holders don't agree to a revamp of its debt-heavy balance sheet.

The supplier saw its first quarter revenue drop 43.8 percent to $2.17 billion from $3.86 billion a year earlier.

American Axle & Manufacturing Holdings Inc. saw revenue drop 31.5 percent in the first quarter to $402.4 million from $587.6 million.

American Axle supplies GM with rear axles and other components for nearly every truck and SUV in the automaker's lineup. GM, which spun off several plants to form the supplier in 1994, accounts for about 75 percent of the supplier's annual revenue.

Suppliers facing liquidity shortages will likely not survive the next few months, said Van Conway, president of turnaround firm Conway MacKenzie & Dunleavy in suburban Detroit.

'Not good enough'

"You're going to see more production reductions, more layoffs," Conway said. "And if you've got a supplier that's on the critical supplier list, that's not good enough."

"That supplier is still going to run out of money."

Suppliers' access to credit has been crippled by production cuts. Suppliers usually borrow against the payments automakers owe them, but with less vehicle production comes fewer parts deliveries and thus fewer automaker IOUs.

Complicating the issue of preserving shaky suppliers from collapsing is the completion of Chrysler's linkup with Italian automaker Fiat S.p.A. It isn't known yet when Chrysler plants will begin building cars again.

"If [Chrysler] has some longer-term extended bankruptcy or shutdown than planned, those same suppliers become even more vulnerable," said Laurie Harbour-Felax of the Harbour-Felax Group.

Some suppliers have renegotiated covenants to waive any loan default during the Chrysler shutdown, assuming it's for 60 days. If it drags out, defaults could abound.

"If Chrysler doesn't come out of bankruptcy and we go into July and Chrysler is still down -- it's a whole new ballgame," Harbour-Felax said.

Automakers historically have stepped in to prop up troubled suppliers, but in bankruptcy, that may prove more difficult.

"The question is, has the government really factored in the amount of money needed to keep the tiers alive?" Conway said.

A bankrupt GM could potentially issue bridge loans to a crucial supplier using its debtor-in-possession financing, which is expected to be provided by the government.

"There's no legal impediment to doing that; it's not unlike an essential supplier situation," said Robert Gordon, an automotive and bankruptcy attorney with Clark Hill plc in Detroit. "It's highly unusual, but certainly [in a GM bankruptcy] it could be done. The only question would be if it can be demonstrated that there is a need to do this."

Calls for aid

Supplier trade groups have long called for direct federal assistance for suppliers.

The Original Equipment Suppliers Association requested $18.5 billion in aid earlier this year, and Michigan Gov. Jennifer Granholm last week pressed Ed Montgomery, the Obama administration director for recovery of automotive communities and workers, for additional supplier aid.

The U.S. Treasury Department launched a $5 billion receivables insurance and quick-pay fund, but red tape has caused the program to flop.

"The reality is providing bridge loans to keep otherwise healthy auto supplier businesses afloat is the lowest-cost support that the government can provide to sustain hundreds of thousands of jobs," Fitzgerald said.

Such a program could be executed by distributing billions in bridge loan funding to more than a dozen regional banks that have historically done business with suppliers.

But some suppliers to key GM vehicles could still see some revenue trickle in. Andersson said in the conference call that GM plans to carry out its production plans for rolling shutdowns throughout the summer and keeping some of its manufacturing operations on line. That would be unlike Chrysler's bankruptcy in which it shut down all plants until the sale of most of its operations to Fiat concludes.

Neil DeKoker, OESA's CEO, said Chrysler's shutdown was partially due to suppliers who stopped shipping parts when the automaker filed for bankruptcy.

"It was a surprise to the supplier community that Chrysler decided to shut down. It was not something we knew, nor was it something that we expected," the association head said.

"In the case of GM, they are saying very specifically it's not their plan. Chrysler never said it wasn't not their plan, they just never said anything about it," he said.

GM is being very transparent and communicative with the supply base, DeKoker said, with Andersson hosting conference calls like Friday's every week to provide updates and answer questions.

GM "is recognizing the fragility and the absolute need that the suppliers have to get paid for parts they've shipped and will ship at the back end of bankruptcy," Fitzgerald said. Suppliers "are not in a position to absorb relatively small receivables write-offs."

From Crain's Detroit Business / Automotive News (A Crain publication)