Washington pressured by auto-supply quagmire

DETROIT (Reuters) - As Washington weighs a request for nearly $40 billion of loans for General Motors Corp and Chrysler, it must soon decide what to do about the cash-strapped auto suppliers seeking a bailout of their own.

U.S. auto suppliers have asked the U.S. Treasury for $18.5 billion in emergency funding, saying two-thirds of some 5,000 suppliers face financial distress due to the drastic cutback in production that accelerated in the early weeks of 2009.

Suppliers receive payment 45 to 60 days after delivering parts, and analysts have warned of a wave of failures in March and April, when the near-total shutdown in U.S. auto production at the beginning of the year starts to hit their balance sheets.

“The industry is in very bad shape, and it has the peculiar problem that there were no receivables really created since January,” billionaire investor Wilbur Ross said at a restructuring conference last week.

“So as you get out to March, what are people going to use to pay their bills?”

However, the sheer number of suppliers needing relief -- and which of the 5,000 companies deserve taxpayer-funded rescue -- suggests the kind of bailout offered to GM and Chrysler is an unlikely scenario for suppliers.

Rather, restructuring experts and analysts said the U.S. Treasury could stave off a disorderly failure of the supply basis by providing debtor-in-possession (DIP) loans if any of the suppliers has to file for bankruptcy.

Suppliers like Federal-Mogul Corp and Dura Automotive Systems have successfully restructured under bankruptcy in recent years. But that mechanism no longer works due to the lack of credit and DIP financing, leaving distressed suppliers with little choice other than liquidation, according to PriceWaterhouseCoopers.

“It would have to be a government-backed DIP, because there’s no alternative,” said Brad Coulter, a restructuring adviser at O’Keefe & Associates.

“There’s a real question how long the banks will finance some of these suppliers.”

QUAGMIRE

Delphi Corp, which filed for bankruptcy in 2005, is still struggling to exit from it after investors led by Appaloosa Management backed out of a $2.55 billion plan to support its emergence last April.

“Delphi is a classic example -- (suppliers) can’t get out. They are scared to go in because there is no game plan right now for them to get out the other side,” said Michael Bruder, managing director of Macquarie Capital.

Bruder said whether lawmakers like it or not, the U.S. government would have to support exit financing to prevent a broader industry collapse that could cripple production across North America, even for international automakers, at a time when automakers can least afford it.

“This quagmire is not helping anyone. Without the supply basis, you can’t make cars,” Bruder said.

Even before the latest crisis, the U.S. supply sector had been severely squeezed by high commodity costs and pressures from automakers to cut prices.

PWC estimates operating margins averaged below 2 percent for the top 20 U.S. suppliers between 2003 and 2007.

“The supplier base has been squeezed, and squeezed and squeezed again over the last four to five years. There’s not a whole lot more they can go,” Bruder said.

“At a certain point, you have to give them a margin and give them enough liquidity to pay their own suppliers.”

Payments to suppliers from Detroit automakers are expected to fall to $2.4 billion in March, versus $8.7 billion in December, according to the Motor and Equipment Manufacturers Association, a trade group that represents suppliers.

Suppliers have relied on these receivables as collateral to secure working capital loans. Access to this source of credit has been frozen due to heightened risk of bankruptcy for GM and Chrysler.

Visteon Corp warned last week it was in danger of breaching its debt covenants as it posted its 10th consecutive quarterly loss. Lear Corp said it was no longer in compliance with its credit facility and expected auditors to cast doubt on its ability to continue as a going concern.

Analysts believe a disorderly failure of large suppliers would be very expensive to all major automakers manufacturing in North America, who lack both time and agility to weather the re-sourcing of components.

That could thwart months of sweeping restructuring efforts at the U.S. automakers, for which the government has already spent $17.4 billion and is considering $22 billion more.

“You are kind of halfway across the ocean, and it’s no good pulling the remaining funds at this point. I think the government would have no appetite for doing that,” said Van Conway, managing partner of turnaround firm Conway MacKenzie & Dunleavy.