$5 Billion Plan Staves Off Auto Supplier Failures – For Now
U.S. auto suppliers, some of which were facing imminent collapse according to Standard & Poor’s Credit Research, will get a significant reprieve from their cash flow troubles as a result of the Treasury’s plan to provide $5 billion in aid.
But the ratings agency writes in a new commentary that the reprieve will be short-lived and will not help the long-term ratings of most of the suppliers.
The crux of the plan is that auto suppliers could sell their receivables to the U.S. government, thus easing an immediate cash flow crunch. But it’s far from a panacea, as the suppliers are simply getting payment for the parts ordered by automakers earlier than the usually 60 days.
The financial vulnerability of the U.S. automotive sector is evident in our ratings: Nearly half of the original equipment suppliers that we rate have ratings of ‘B-’ or lower, and a third are in the ‘CCC’ category. These ratings imply significant default risk in the near term, and we believe smaller, unrated suppliers are generally in even worse financial condition.
For example, Delphi Corp. remains in limbo, unable to exit bankruptcy or secure an extension of its debtor-in-possession funding ahead of a June deadline.
Bloomberg News reports that Citigroup (NYSE: C) may be the Treasury’s choice to implement the $5 billion program, and will likely work with General Motors (NYSE: GM) and Chrysler LLC to determine how the funds are dispersed among auto suppliers.
Bottom line, according to S & P, is that the “continuation of low and volatile production by the automakers is a far more serious problem for suppliers because it could erode their liquidity even with their newfound ability to sell receivables.”
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