Magazine article Business Credit

Lessons to Be Learned: Auto Supplier Industry Workouts Encourage Parties to Communicate

Magazine article Business Credit

Lessons to Be Learned: Auto Supplier Industry Workouts Encourage Parties to Communicate

Article excerpt

Credit professionals often find that the problem their company is experiencing is just one of many that the debtor has, and may be inextricably linked to similar problems being experienced by the debtor, its lenders, its customers and other vendors within the automobile supply industry. While the proper response may be to put pressure on the debtor and run with whatever you can get, it may be worth taking a look at the negotiations that often occur in this industry. While the dynamics may be quite different than other industries, there are lessons to be learned from the multidimensional negotiations and resulting accommodation agreements which allow production and collection to continue--ultimately leading to the satisfaction of many different interests of the players.

Automobile parts manufacturers and other players in the auto supplier industry often find themselves in out-of-court negotiations for the financial and operational restructuring of a financially troubled auto supplier. A cash-poor debtor-supplier may request its customers pay a price increase for production of parts. Vendors to the debtor-supplier may refuse to extend credit terms, insisting on cash in advance or cash on delivery. The debtor-supplier's bank may realize that its collateral position is threatened and may threaten to cut off the line of credit it has advanced, or to call the term loan. The debtor-supplier may have failed to make its payments to the Internal Revenue Service, to state taxing authorities or to its pension fund. The cost of the debtor-supplier's raw materials, such as petroleum-based products, may have soared and the original equipment manufacturer ("OEM") may be exerting pressure to cut costs further, or to reduce expected production impacting the bottom line of the already struggling debtor-supplier. None of these problems are limited to the auto supplier industry, as every credit professional has experienced them. What is unique to auto suppliers is that often a supplier is a single source supplier, or the "just-in-time" inventory requirements may mean the halting of the OEM's final product if the supplier is unable to deliver its parts.

In the auto supply industry, this type of strain affects three significant stakeholders: the supplier's customers, which may include OEMs, the supplier's bank or lender, and the supplier's vendors. Because the failure of the parties to resolve the stress incurred by the supplier may cause the OEM to halt its production line, enormous problems will impact the chain. As a result, in the auto supplier world, out-of court workouts or restructurings are not uncommon. For first-time and even seasoned participants, it is important to recognize and be familiar with the interests of each of the parties impacted by the crisis.

The Players

Customers: Customers may be Tier One suppliers such as Delphi, Dana, Tower Automotive, Collins & Aikman or Meridian, or they may be the OEMs themselves. If the debtor-supplier is a sole source supplier for these customers who operate on a just-in-time delivery basis, the customers will often want to keep the debtor-supplier operating while the customer builds up a "parts bank" or finds an alternative source for the part. The customer will also be concerned that its special tooling is maintained in a safe location so that it can be used for a new supplier. As a result, customers are often willing to enter into agreements that result in an increased price, for more rapid payment of invoices or for short-term financing of the debtor-supplier, just to ensure the continued flow of parts and the safety of the tooling while it locates a new source for the part.

Banks: The debtor-supplier most likely has an asset-based loan with a bank. The financing may include a term loan secured by all assets of the debtor-supplier and a revolving line of credit also secured by all assets; but particularly focused on the level of accounts receivable and the inventory maintained. …

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