Auto part suppliers in the US have been racing to cut exposure to
Unfortunately, the moves have not happened fast enough to counteract the effects of a catastrophic drop off in sales for the Big Three in the third and fourth quarters of this year – year-on-year sales for US automakers are expected to have fallen by 35% in November. But even suppliers that have a diversified book are under the gun. The Japanese Big Three, Toyota, Honda, and Nissan, are expected to post sales declines of 28%, 24% and 37% respectively, according to Barclays.
GM, Ford and Chrysler went to Washington to ask for a bail-out of at least US$25bn to get them through 2009. GM, burning through more than US$2bn a month in the third quarter, faces certain collapse without a cash infusion.
Despite the dire need, US lawmakers refused to capitulate and instead demanded that the automakers come up with a plan to return to profitability before offering a lifeline. When the manufacturers return to Washington this week they are expected to reveal plans that will most certainly cut production drastically.
GM is expected to offer to trim the number of brands it sells by getting rid of Saturn, Saab and Pontiac. Its Hummer brand was already on the chopping block. If the company cannot find a buyer, the brands might go the way of Oldsmobile, which GM simply abolished.
Fewer cars in production for fewer brands will trigger belt-tightening for the supplier base that some part makers may not survive.
Even before the current collapse in auto sales, Ford and GM were looking to streamline their suppliers. Hedge fund managers looking at the sector are expecting the current process will lead to a consolidation that did not occur during the last cycle of restructuring for parts makers, when Tower Automotive, Dura, Dana, Collins & Aikman, Metaldyne, and Delphi, among others, filed for bankruptcy protection.
Unlike the previous cycle, currently there are no lenders willing to add to their auto exposure, said one hedge fund manager involved in the sector. If a parts maker is not able to adjust to the current market, it faces liquidation, the manager said, leaving the stronger players to scoop up assets for next to nothing.
The production cuts already on the board for US automakers are likely to force Lear to breach debt covenants next year. While it is expected to win covenant relief, if the production cuts are drastic enough banks could drastically tighten terms for Lear, setting impossible benchmarks. The company said it has about US$523m in cash and had about US$1.3bn on its revolver at the end of the third quarter.
Dana emerged from bankruptcy protection early this year and is facing an environment it did not expect. The company will also breach debt covenants as a result of production cuts. It surprised analysts with a loss of US$2.78 a share in the third quarter, suggesting that cost savings won in bankruptcy might prove illusory.
The strain on Ford may prevent the company from continuing to support its former parts unit, Visteon. Visteon’s 8.25% 2010 notes trade at 33 – down from 61 a month ago. Its shares have fallen to 27 cents a share.