Auto Suppliers Next Shoe to Drop in Detroit Crisis
Auto suppliers face increasing pressure as the Bush Administration continued to deliberate about a possible auto industry bailout over the weekend and White House officials warned there was little likelihood of an announcement by Monday.
In an article this weekend, Barron’s pointed out that a bailout would not be a panacea but a stop-gap measure for the industry until the Obama administration is in place.
So it’s not surprising to see Wall Street analysts and ratings agencies scramble to revise their outlooks for auto suppliers in light of the deepening crisis.
Moody’s Investors Service lowering its ratings for Lear Corp.’s (NYSE:LEA)corporate family debt to B3 from B2 and Lear’s secured senior debt ratings to B2 from B1 Friday after Lear pulled its earnings guidance.
The lowering of Lear’s Corporate Family Rating to B3 reflects sustained lower North American production levels at the Detroit-3 automobile manufacturers and the likelihood of further production declines going into 2009.
Gimme Credit’s Shelly Lombard downgraded Lear and four other auto suppliers Friday, including ArvinMeritor Inc. (NYSE:ARM), BorgWarner Inc. (NYSE:BWA), TRW Automotive Holdings (NYSE:TRW), and Tenneco Inc. (NYSE:TEN), and warned that a General Motors bankruptcy would severely impact the companies.
BorgWarner reduced its earnings targets for 2008, citing the “downward spiral of the auto industry” across the globe.
Fitch Ratings warned it might also cut its ratings on seven auto suppliers and said 2009 looks grim for the sector. A possible bankruptcy by GM, which Fitch expects would be closely followed by bankruptcy filings from Ford Motor Co. and Chrysler, is only part of the reason for the dour outlook.
Given the global decline in auto production forecast for 2009, auto supplier operating performance and balance sheet deterioration will continue to take place across the vast majority of the sector, with access to capital becoming even more restricted.
Finally, CreditSights paints a picture of chaos and uncertainty on the ground for auto suppliers and original equipment manufacturers in “Autos: Hand Over Cash Meets Hand Over Flame:”
The process from here, apart from praying for a TARP fix and leaving the issue for the Obama Administration, is more likely bankruptcy unless the Treasury department buys [automakers] some time. The damage checklist and fallout risks will dominate the headlines in coming days, but the immediate question for an OEM is ‘Do I pay the suppliers?’ and the question for suppliers is ‘Should I ship at all until my last bill is paid or only on COD terms?’
These are not small questions, considering that 3,000 automotive suppliers are currently owed $13 billion, Neil De Koker, Original Equipment Suppliers Association chief executive, told the New York Times.
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