Chrysler shutdown pushes suppliers closer to edge

By Soyoung Kim and Chelsea Emery - Analysis

DETROIT/NEW YORK (Reuters) - With all 30 of Chrysler's plants idled through the automaker's bankruptcy process, its cash-strapped parts suppliers will have no new revenue for the next 60 days -- or indefinitely.

As the 80-year-old icon of the American auto industry delivered itself into the hands of a bankruptcy judge, the U.S. Treasury assured that suppliers would be paid in full for any parts to be delivered during the Chapter 11 restructuring.

The twist: Suppliers will not have any parts to deliver, after Chrysler shut down all of its production starting on Friday. There is no assurance the company will exit bankruptcy in less than two months.

Some of the automaker's major suppliers include Johnson Controls Inc (JCI.N), Magna International (MGa.TO) and Visteon Corp VC.N -- all of whom were pinched by the industry downturn before Chrysler went into Chapter 11.

In court documents, Chrysler said that in some cases it may not wish to take delivery of goods or services while manufacturing facilities are idled.

Chrysler purchases 78 percent of its parts and materials from U.S.-based suppliers.

The bankruptcy filing, along with economic conditions, "will cause a number of suppliers to experience acute financial distress in the upcoming weeks," the automaker said in court documents.

"New orders will be paid out of debtor-in-possession financing. In the case of Chrysler, during the bankruptcy process they are not actually placing orders and the perceived benefit of bankruptcy is taken out of it," said Tony Clary, an executive at Eulerhermers, a provider of accounts receivable insurance.

Worse, Chrysler's idling comes ahead of an extensive shutdown scheduled by General Motors Corp GM.N. GM is idling 13 assembly plants in North America for as long as nine weeks starting mid-May.

That is expected to deal a further blow to the U.S. supply base already teetering on the brink of failure as a result of the near total shutdown in U.S. auto production in January and February.

"Prior to this, 30 to 40 percent of auto parts companies are in some form of distress financially, and I would guess all of these shutdowns are going to pump that up to maybe 50 percent suppliers being in a real financial distress situation," said Anthony Faria, an analyst at the auto research center of the University of Windsor in Ontario, Canada.

"Undoubtedly a number of them, over the next several months, are going to fail," Faria said.

Credit rating agency Standard & Poor's said it may cut ratings on six North American auto suppliers, including Harman International Industries Inc (HAR.N), Johnson Controls and TRW Automotive (TRW.N).

It said there are "multiple scenarios -- almost all of them negative -- that could play out over the next few months despite the government's efforts to maintain a smooth postpetition operation of Chrysler and minimize the duration of the bankruptcy."

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