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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 2, 2008 12:01 AM ET
It's potentially devastating news for Chrysler, which is rapidly running out of cash, according to a report last week by accounting firm Grant Thornton. Chrysler may exhaust its $11 billion in reserves by the second quarter of 2009, the analysis found. And GM has problems of its own: It posted a $15.5 billion loss in the three months ended June 30 as sales fell 18% from a year earlier. Moody's Investors Service last week cut its rating on GM's debt to Caa2—its fourth-lowest grade—and said the automaker could run out of cash by the middle of next year. GM and Chrysler aren't the only companies whose future has been clouded by the government's decision not to lend them money for their merger. Each manufacturer buys components and supplies from networks of hundreds of parts makers facing their own liquidity issues. A GM-Chrysler would likely be a company that was considered too big to fail in the future. Suppliers might find the resulting consolidation of the auto industry painful, according to the Grant Thornton analysis, but a bankruptcy among the Big Three could be akin to an extinction-level event. Many manufacturers of gears, axles and other components will likely fail if companies like GM and Chrysler (which use their parts and are known as original equipment manufacturers among industry insiders) are forced into bankruptcy, said Kip Penniman, a high-yield credit analyst who covers automakers at KDP Investment Advisors. “If the OEMs go bankrupt, that will stop up receivables and payables and cause a liquidity crisis in this industry on top of what they're facing already, and there will be numerous bankruptcies thereafter,” Mr. Penniman said. Many suppliers are used to coping with an uncertain outlook because their industry has been in flux for some time, with large parts manufacturers including Dana Corp. and Delphi Corp. declaring bankruptcy in recent years. (Dana emerged from bankruptcy in February.) “Consolidation in the supply base was happening already without a merger, and at alarming speed,” said Laurie Harbour-Felax, an automotive industry consultant. That consolidation probably would have continued if GM and Chrysler had merged, Ms. Harbour-Felax said. Suppliers well positioned for the new competitive landscape include those with a strong international presence and solid management, such as BorgWarner, a big maker of transmission components, and Johnson Controls, the largest manufacturer of car seats, she said. But even the strongest suppliers may have trouble justifying opportunistic deals for weakened rivals in this environment. One reason is an industry-wide lack of liquidity. Sales of the Big Three's cars have slumped in recent years, damaging earnings throughout their supply chains. Add the impact of a still-frosty credit market, which has made it more difficult for companies of all kinds to obtain loans, to doubts about the health of the U.S. auto business, and many suppliers are facing a serious liquidity shortage, according to a report by analysts at Fitch Ratings. “The global credit crisis adds yet another serving to the steady diet of challenges facing the auto supply industry,” the analysts wrote. “The very rapid pace of production cutbacks, which will continue through 2009, will result in further deterioration to the operating and financial conditions of companies in the industry.” 
Bloomberg
Robert Nardelli's Chrysler runs out of cash next year.
Additionally, shareholders at publicly traded suppliers might revolt if even a financially sound supplier used spare cash to acquire a competitor, said Mr. Penniman. “At this point, I don't see a lot of companies that are aggressively seeking to consolidate,” Mr. Penniman said. “Any company that did get aggressive, unless they were in a very strong financial condition, would probably be punished severely in this environment. Some suppliers have found their shareholders skeptical of stock buybacks, preferring instead to keep cash on the balance sheet to guard against future shocks.” In any case, such deals may have to wait until after Chrysler's fate becomes clearer. A merger with GM could lead to the shuttering of half of Chrysler's 14 plants, as 19 of the company's 26 models may be discontinued, Grant Thornton found. Chrysler's suppliers could suffer too. Grant Thornton estimated that “hundreds” of such companies could be forced to shed up to 50,000 jobs if GM eliminates flagging Chrysler models such as the recall-plagued Sebring. All told, more than 200,000 workers across the industry could lose their jobs in a GM-Chrysler deal. But worse could be in store if the two companies go belly-up. Chrysler might pursue another deal. Nissan is one possible partner: Last spring, Chrysler agreed to make a pickup truck for the Japanese automaker in exchange for a small car manufactured by Nissan. Or the winner of tomorrow's election might take a different view of facilitating a merger between GM and Chrysler, reigniting talks. For suppliers, a Big Three deal may be a matter of life and death, said David Cole, chairman of the Center for Automotive Research. “If they merge, suppliers live,” he said, “and if they come apart and one of the big guys like GM or Chrysler goes down, it'll take the suppliers down.” FW
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