U.S. throws lifeline to distressed auto suppliers

WASHINGTON/DETROIT (Reuters) - The Obama administration pledged up to $5 billion on Thursday to immediately assist auto suppliers whose health is crucial to the survival of stricken U.S. car manufacturers.

The emergency aid is the first act of the government’s autos task force, which is overseeing the restructuring of General Motors Corp and Chrysler LLC that includes a new bailout request from the two of nearly $22 billion.

U.S. Treasury Secretary Timothy Geithner said the short-term supplier initiative “will stabilize a critical component” of the industry owed billions by carmakers.

Bob McKenna, the top lobbyist for the parts sector, said the move signaled the administration would not allow Detroit to collapse amid recession and high unemployment.

Analysts called the step overdue, and supplier and GM shares rose. Chrysler is controlled by Cerberus Capital Management.

A task force official said propping up suppliers was an “urgent matter” since carmakers cannot function if their parts stream is disrupted. The supplier network for domestic and overseas car companies is deeply interconnected.

“This is the first piece of our efforts to assist this important industry,” said the official, who was not authorized to speak for attribution.

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The official would not project any steps for GM and Chrysler, which must prove by March 31 they are viable and worthy of new federal aid. The two received $17.4 billion in December from the same source that will help suppliers - the Troubled Asset Relief Program. It was established to stabilize the financial system and stimulate credit markets.

“I would say we want to move responsibly,” the official said. “We do expect to have something to say before March 31st of the overall situation to give people a sense of direction.”

GM said in a statement the move on suppliers can help reduce risks of any disruptions in its vehicle output. A Chrysler statement called the decision a “vote of confidence” for the industry and “the future of our company.”

Ford Motor Co is restructuring without a bailout and said it would not participate in the parts rescue. Ford said it saw no problem paying its suppliers. Overseas manufacturers, like Japan’s Toyota Motor Corp, also are ineligible.

Suppliers had requested up to $25.5 billion in emergency funding, saying two-thirds of some 5,000 companies face financial distress due to the drastic cutback in production that accelerated in the early weeks of 2009.

Major suppliers, including Lear Corp and American Axle & Manufacturing Holdings Inc, received warnings this month from auditors about their ability to continue as a “going concern,” while Visteon Corp has warned it was in danger of breaching its debt covenants.

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Lear said on Tuesday it may be required to file for bankruptcy protection, despite winning an agreement with lenders that gives it until May 15 to restructure its debt- heavy balance sheet.

Shares of American Axle rose 0.7 percent to $1.56 on Thursday, while Lear surged 84.7 percent to $1.33. GM rose 8.7 percent to $2.87, and Ford rose 1.6 percent to $2.51.

Payments to suppliers from U.S. automakers are expected to fall to $2.4 billion in March, compared with $8.7 billion in December, according to McKenna’s group, the Motor and Equipment Manufacturers Association.

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Under the rescue program described by one analyst as the easiest way to get cash to hurting companies, the government will guarantee receivables rapidly and allow GM and Chrysler to only focus on firms they plan to work with in the future.

“The reason this is a big deal is that March and April are the points of maximum pain for the supply chain from a cash perspective,” said Key Banc analyst Brett Hoselton in a note for clients. “Most suppliers are on a 45-60-day (payment) cycle and, since production was limited in December and January, there is little cash coming in.”

U.S. auto sales tumbled almost 39 percent through the first two months of 2009 to their lowest levels in 27 years.

GM and Chrysler will be gatekeepers for the fund, which will be administered through a bank that has not been named, and suppliers will pay a fee to participate. Companies can opt to pay 2 percent to secure a government guarantee of funds they are owed. For a higher payment of 3 percent, suppliers can opt for immediate payment from the fund, the Treasury said.

The plan also allows suppliers easier access to bank lending that dried up last year.

But there was some question within industry circles about whether the $5 billion will be sufficient. “It’s not as much as I thought we would see. It may be enough to keep things going for a little while, but this is not a sweeping, lasting fix,” said Aaron Bragman of IHS Global Insight.

Industry allies in Congress, like Rep. John Dingell of Michigan, praised the decision. But others, like Sen. Judd Gregg of New Hampshire, an influential Republican in creation of the financial sector bailout initiated by the Bush administration, said help for suppliers far exceeds the program’s mandate.

Additional reporting by John Crawley in Washington and David Bailey and Kevin Krolicki in Detroit; editing by Gary Crosse, Andre Grenon and Leslie Adler