Friday, 01 May 2009 14:29

Chrysler shutdown pushes suppliers closer to edge

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 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, Magna International and Visteon Corp -- 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 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, Johnson Controls and TRW Automotive.

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."

QUICK EXIT?

A disorderly failure of large suppliers would be costly to all major automakers manufacturing in North America, including Toyota Motor Corp and Honda Motor Co , due to the interlocking chain of the U.S. supply base.

Chrysler's 20 largest unsecured claimants include Cummins Engine Company, with a claim of $43.9 million, and Johnson Controls with a claim of $50.3 million

"The right outcome is a quick, orderly prepack bankruptcy. We may not be able to get there," said David Bitterman, managing director at Huron Consulting Group.

"Can't tell you how many times people say quick, it's never quick. Delphi promised a quick one and they're still in. That may be the case here," Bitterman said.

Delphi Corp, which filed for bankruptcy in 2005, is still struggling to emerge after investors led by Appaloosa Management backed out of a $2.55 billion plan to support its emergence in April 2008.

BRIGHT SPOT

Still, Chrysler has requested the court allow the automaker to continue its so-called Troubled Supplier Program, which would allow the company to extend financing to suppliers in distress.

Bankruptcy attorney Kenneth N. Klee pointed to a clause in Chrysler's motion to pay vendors which could provide hope and support for some suppliers.

The clause, which appears under a section on paying essential supplier claims, says that vendors can be included in the preferred vendor program -- and get paid -- if they give up legal rights that could interfere with restructuring efforts, said Klee, a partner with Klee, Tuchin, Bogdanoff & Stern LLP.

"It's a classic carrot-and-stick proposition," Klee said. "It helps (suppliers) because it gives them money and preferred treatment in a Chrysler bankruptcy and thereby assures their short-term cash flow."

However, he said "their long-term ability to survive depends on whether Chrysler can restructure." (Additional reporting by Tom Hals in New York and Pav Jordan in Toronto, editing by Matthew Lewis)

Read 859 times