U.S. Releases Aid To Auto Suppliers
Thursday, April 9, 2009
The Treasury Department yesterday gave cash-strapped auto suppliers the green light to begin shipping parts with the promise that the government would guarantee payment.
Treasury left it up to General Motors and Chrysler to decide which suppliers would be eligible for the aid. GM will initially get $2 billion in federal support, and Chrysler will receive $1.5 billion. Ford declined to participate, saying it had enough funds to support its supply base. In all, the government said it is prepared to set aside $5 billion to help finance the deals.
"These efforts, backed by U.S. Treasury resources, will help stabilize the auto supply base and restore credit flows in a critical sector that employs more than 500,000 American workers across the country," Treasury spokeswoman Jenni Engebretsen said in a statement.
Suppliers are paid 45 to 60 days after they ship parts. Under normal credit conditions, companies could borrow against these billings, but banks have been unwilling to lend because of the uncertainty in the industry. Under the Treasury program, suppliers can either pay a fee for their receivables to be guaranteed by the government or they can ask for payment upfront. The federal backing is essentially a line of credit, with the requirement that the automakers make capital infusions of 5 percent.
"We appreciate the Treasury's support and this program recognizing how critical the domestic supply chain is in keeping America's auto industry running," GM spokesman Dan Flores said. "This program will help suppliers access much needed liquidity during these difficult economic times."
At the same time, GM and Chrysler, which together received $17.4 billion in government loans, are trying to rework their restructuring plans to qualify for additional federal aid.
A government-led team of 15 financial experts arrived in Detroit yesterday and will return there next week to work with GM on its restructuring efforts, said an administration official, who spoke on the condition of anonymity because the meetings are private. The team is led by Harry Wilson, a former hedge-fund partner who is a member of the White House's auto task force. It includes experts from Boston Consulting Group and investment bank Rothschild Inc.
President Obama gave GM 60 days to gain concessions from the United Auto Workers and its bondholders.
Today, Ed Montgomery, President Obama's new point man to help manufacturing communities deal with the auto industry's downfall, plans to visit Cleveland to discuss the president's plan to revitalize the business. Montgomery, who visited Michigan last week, is scheduled to meet with Ohio Gov. Ted Strickland (D) and local officials for a private meeting.
Moody's analyst Bruce Clarke predicted that there is a 70 percent chance that at least one of Detroit's three automakers will file for bankruptcy because of the complexity of brokering concessions out of court.
As mandated by the auto task force, Chrysler is rushing to finalize its alliance with Fiat. Jim Press, Chrysler president and vice chairman, told CNBC yesterday that the company is prepared to file for protection in case it can't complete the deal with the Italian automaker within its 30-day deadline.
"We can't predict what will happen," Press said. "We're working toward avoiding bankruptcy. That's not our goal, but we'll be responsible in regards to the equity and the assets of the company whatever the outcome for the company is."
At the New York International Auto Show yesterday, Press arrived at his company's press conference in a Fiat 500 subcompact, one of Fiat's most successful models.
"Wouldn't that make a great new company car?" he told the crowd of journalists. "We're dreaming about the possibilities for the future."
Jim Lentz, Toyota's top U.S. executive, told reporters at the show that Toyota is prepared to deal with a possible GM bankruptcy. Toyota shares about two-thirds of its 500 parts suppliers with GM.
Still, foreign car companies like Toyota might need to prepare for bankruptcies of their shared suppliers even if the Detroit automakers don't go under, analysts said.