Treasury’s auto supplier bailout offers expensive A/R funding that will attract few takers among large manufacturers

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Treasury’s USD 5bn automotive supplier guarantee program will cost participants far more than typical accounts receivable financing rates, two auto supplier executives and a number of market sources have told Debtwire.

That means that manufacturers with large, diversified balance sheets are unlikely to sign up, but suppliers currently locked out of the loan market because of heavy exposure to GM and Chrysler will pile in. The program will be administered by those two OEMs, as Ford has yet to accept a government bailout, meaning that struggling suppliers that sell to other car makers can’t benefit.

Some of the hardest hit manufacturers will sign up just to show their own supplier that they have a potential source of liquidity, somewhat calming concerns, said one of the auto execs.

Companies that stand to benefit the most are smaller “mom and pop” parts suppliers that rely almost completely on either GM or Chrysler, one of the advisors said. Many small suppliers have up to 90% of their sales tied to just GM, and correlatively have the most receivables due from it, the consultant said.

The package addresses the gap in funding that gaped open in early 2008 when banks stopped lending against accounts receivables from General Motors and Chrysler, the consultant, attorney and one of the company executives said. The program is open to domestic auto parts suppliers’ receivables shipped after 19 March.

Treasury’s program offers suppliers a government guarantee on receivables from General Motors and Chrysler. The guarantee comes with a 2% fee, meaning the company would get a guarantee on 98% of what the receivables are worth on their books, as previously reported. The company can then go borrow money with the guarantee from a third party bank. Participants would also be allowed to sell the receivables directly for a 3% fee, the sources said.

While the upfront fee sounds low, the annualized costs far outweigh interest rates in the pre-2008 market place, said the first company executive, an industry consultant and a financial advisor.

For example, a company that has USD 100m in accounts receivables from GM due every 45 days gets paid that much about eight times a year. Through the Treasury program, the cost to sell the receivable would be a 3% fee on the USD 100m every 45 days, amounting to USD 24m per year, the company executive and consultant said. Use of the guarantee instead would cost 2% every six weeks plus the rate charged by the participant.

Even in choppiest of markets, a supplier wouldn’t expect to pay more than 12% annually on a USD 100m A/R facility, the first company executive said. The cost of that financing would be USD 12m per year, much less than the fees from the Treasury’s supplier aid program, he said.

While the federal liquidity program is an unsavory alternative, it’s better than no alternative at all for borrowers dependent on teetering OEMs, the sources agreed.

American Axle derived about 75% of total sales from GM and 10% from Chrysler in 2008, according to regulatory filings. The axle maker had total sales of USD 2.1bn in FY08 and accounts receivable due from GM and Chrysler were USD 115.4m and USD 23.4m, respectively.

Right now, American Axle must wait 50 days for its receivables to be paid but Treasury’s program would allow management to monetize those sales immediately. That real-time boost to liquidity could be crucial given the pervasive fear currently gripping the automotive segment, the company executive and a buyside source said.

On the other end of the spectrum, companies such as Lear Corp with diversified customers and healthy balance sheets, will find only incremental value in Treasury’s scheme, the sources said.

Lear had FY08 total sales of USD 13.6bn, of which 23% were from GM and 3% were from Chrysler, according to regulatory filings. Accounts receivables were USD 1.2bn at the end of FY08 and while revolver availability was USD 24m, cash weighed in at a hefty USD 1.6bn.

Visteon is on far riskier footing than Lear but won’t get much out of the new program because only 5% of its total sales come from GM and Chrysler, the buyside source and industry consultant said. The company had USD 989m of accounts receivables at the end of FY08, according to regulatory filings. Visteon has significant covenant headroom, but a high cash burn combined with upcoming maturities is fuelling rampant speculation of a restructuring, as previously reported.

Auto stocks rallied after the aid package was announced last Thursday, while the bond and loan market saw more modest gains, as previously reported. American Axle’s USD 250m 5.25% senior unsecured notes due 2014 have since gained to 23.5 yesterday, up from 19 the day before the plan was announced, according to MarketAxess. Lear’s USD 600m in 8.75% senior unsecured notes due 2016 traded at 24 yesterday, up from 21 last Wednesday, according to MarketAxess.

American Axle’s USD 250m Libor+ 500bps term loan B was quoted at 29.75-33.625 today, down from 32.75-36.75 last Wednesday, according to Markit. Visteon’s USD 1bn L+ 300bps term loan was quoted at 14.583-17.417 today, up from 13.8-16.8 last Wednesday. Lear’s USD 1bn L+ 250bps was quoted at 30.625-34.188 today, down slightly from 31.5-34.083 last Wednesday.

Spokespeople for Lear, American Axle and Visteon did not return calls seeking comment.

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