Auto Makers Struggle to Avoid Bankruptcy – Total Bankruptcy
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Auto Makers May File Bankruptcy

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The troubled economy and the global credit crunch are having a huge effect on U.S. car manufacturers. There have been mass layoffs in the industry, with more likely to come and whispers of mergers and bankruptcy. A recent article in the Wall Street Journal questioned if all three of the large auto manufacturers in Detroit will weather the storm.

The car makers are reportedly deep in debt and are facing an inability to get funding. There have been reports that General Motors is so strapped for cash that it has considered a merger with longtime rival Chrysler. GM, its lenders and Cerberus Capital Management, the owner of Chrysler, have been attempting to secure financing to make the deal work, but have been unsuccessful so far.

If GM were able to buy Chrysler, it would mean more layoffs in the industry (which could lead to more unemployed Americans filing Chapter 7). The proposed deal includes cost savings of up to $10 billion and promises for an immediate boost in revenue and an increase in available cash. Funding is necessary to pay for cost cutting measures such as buyouts and severance packages for laid off workers.

Ford Motor and Ford Motor Credit are also struggling. On October 6, they were downgraded by credit rater Fitch to CCC, the lowest junk rating.

Rod Lache of Deutsche Bank recently wrote that the auto industry may make it after all, due to federal bailouts and restructuring. However, Deutsche Bank believes that at least two of U.S. Big Three auto manufacturers could reach minimum cash levels within the next year. The bank is continuing to monitor the risks of the companies.

Lache paints a grim picture of the outcome of a serious cash crunch in the auto industry.

If the Big Three reach minimum cash levels as predicted, auto sales will immediately decline. This will impact businesses that depend on the auto makers, especially auto parts suppliers and retailers.

American Axle, Lear, Asbury and AutoNation would be expected to blow their debt covenants in the face of a cash crisis in the auto industry. As a result, retailers' and suppliers' shares will take a major hit. Lache says that in the current credit climate, the shares of any company that will potentially need to negotiate credit facility amendments have felt the impact.

In an October 6 report, Fitch wrote that production declines, lack of access to capital and higher commodity prices will likely force some auto suppliers into filing Chapter 11 bankruptcy. Tightened trade credit in the industry, combined with the fact that trade credit is essential to the capital structure of the supply industry and the auto makers, creates huge risks in the event that the credit market continues to narrow.

American Axle and Magna International could feel the greatest impact from the decline of auto sales, unavailable trade credit and potential bankruptcies in the industry.

Approximately 78 percent of American Axle's sales are to GM North America. This puts the company in the unenviable lead spot to fall if GM fails. American Axle would lose $832 million in sales if GM folds, according to Lache's analysis.

Magna International would suffer losses of $1.2 billion if GM files bankruptcy, $1.3 billion in the event of Ford filing bankruptcy and $1.5 billion if Chrysler goes under.

According to Credit Suisse analysts, the U.S. auto manufacturers are stuck with too much stock. In the face of this economic crisis, the Big Three will have to cut brands to survive.

Lache says that outside observers have questioned GM's ability to sustain eight distinct brands in North America. These long time concerns are amplified as GM's market share has declined by 20 percent. If GM were to increase its brands from eight to 11 after a merger, there would be reason for even more grave concerns.

If the Big Three, or Big Two in the event of a merger, are to survive in the long term and avoid filing bankruptcy, major changes will be necessary. Brands will be dropped, layoffs and buyouts are likely to be enormous, and major restructuring will undoubtedly take place as the auto makers struggle to make it in today's ravaged economic environment.


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