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Treasury Throws 5 Billion Dollar Lifeline to Auto Suppliers
Posted By Paige On March 22, 2009 @ 1:06 PM In Finance and Economy,Finance, Economy & Government Issues,Government | Comments Disabled
RISMEDIA, March 23, 2009-(MCT)-Adding to the growing list of economic sectors going under the protective wing of the Government, the Treasury Department announced that U.S. auto-parts suppliers will receive up to $5 billion in a taxpayer-funded revolving line of credit.
The Auto Supplier Support Program will let troubled carmakers General Motors (GM) and Chrysler determine which suppliers need the credit. The idea is to ensure that suppliers to the two auto giants – which are trying to avoid bankruptcy – don’t go bankrupt themselves and create problems for the automotive production chain.
Automotive suppliers employ at least 500,000 workers nationwide, but are unable to tap credit at banks because of the credit crunch. Many of them face growing financial uncertainty as GM and Chrysler wrestle with plunging sales and production.
“The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period of restructuring that lies ahead,” Treasury secretary Timothy Geithner said in a statement. “The program will provide supply companies with much-needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need.”
In normal times, suppliers ship auto components such as axles or windshields to the carmakers and are paid within 45 to 60 days. In the interim, they usually could sell, or borrow against, those expected payments, called receivables.
These aren’t normal times, however, and banks, worried about a GM or Chrysler bankruptcy, aren’t willing to lend against these expected payments.
The Treasury Department has guaranteed that it will provide against these expected payments, and participating suppliers can also tap a short-term revolving line of credit if they wish to sell their expected payments to someone else at a discount in order to have cash on hand.
“It says that no matter what happens to GM or Chrysler, we recover our receivables and will be paid,” said Neil De Koker, the president of Original Equipment Suppliers Association in Troy, Mich., a trade group for suppliers.
The new initiative is funded through the Troubled Asset Relief Program, created under last October’s $700 billion Wall Street bailout. It comes just days before a March 31 deadline for a special presidential automotive task force to decide whether to give GM another $4.6 billion and Chrysler another $5 billion in taxpayer bailout money to help them avoid bankruptcy.
A member of the task force, speaking on the condition of anonymity in order to talk freely, said that the aid to parts suppliers shouldn’t be seen as a decision to keep the carmakers out of bankruptcy.
“We are going to articulate something before March 31, but I would not draw any inference on what that would be,” the official said.
Only suppliers to U.S. automakers, not foreign transplants such as Toyota and Nissan, may apply. However, suppliers that are foreign-owned but are U.S.-based subsidiaries can participate.
New car sales for GM plunged 53% in February; for Chrysler, 44%. Consumers are afraid to spend amid the deepening recession, and banks are fearful of lending.
“The most important thing that we need is credit availability for consumers, so they can get loans to buy cars. That solves all the problems for the automotive sector,” De Koker said. “Whatever they can do to stimulate the economy and get banks to provide credit … that’s more important than anything we (suppliers) have talked about.”
© 2009, McClatchy-Tribune Information Services.
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