Outlook For Auto-Parts Suppliers Not Getting Much Better

Turnaround expert says debt levels, weak performance of U.S. automakers could mean more bankruptcies.

CHICAGO (AP) - A leading turnaround adviser on Thursday painted a bleak picture for the automotive parts supplier industry, saying that high debt levels and falling volumes at U.S. auto makers could lead to more defaults and filings for bankruptcy protection.

An industry that saw the recent Chapter 11 filings of Delphi Corp., Dana Corp., Collins & Aikman Corp. and Tower Automotive Inc. still has the deck stacked against it, said Al Koch, vice chairman and managing director at Southfield, Mich.,-based AlixPartners LLC, a turnaround firm, and at Questor Management Co. LLC, a private equity firm.

Koch, who spoke at a corporate reorganization conference here, is a veteran turnaround manager and was interim chief financial officer of Kmart Corp. during its Chapter 11 restructuring.

''I do think that this is one very, very troubled sector,'' Koch told a group of bankruptcy attorneys, turnaround managers and private equity managers. ''It is one that is likely to remain troubled for some amount of time.''

The problem for suppliers is that production volume and market share continue to drop at General Motors Corp. and Ford Motor Co. GM's intention to stick to value pricing - which relies less on incentives - helps it increase vehicle profits but likely will lead to lower production, the lifeblood of suppliers.

High gasoline prices also are driving buyers away from profitable sport-utility vehicles to lower-margin cars.

Suppliers have lower earnings margins and higher capital spending requirements than other industries and debt levels are high.

Market conditions will make it tough for suppliers to earn enough cash flow to pay off debts, Koch said.

''As volumes fall and cash flow drops, there just isn't going to be adequate cash coming in to service the debt,'' he said.

Loan defaults increased tenfold in the industry from 2004 to 2005 and loan defaults usually precede Chapter 11 filings, Koch said.

While there's been plenty of credit available for the auto sector, that could change ''overnight,'' Koch said. Visteon Corp. and Lear Corp. were both able to obtain bank loans to re-finance debt this year.

Auto makers also aren't baking off their aggressive price cuts for parts made by suppliers.

''I see nothing on the horizon that's going to make it any easier,'' Koch said.''

One thing that could make it easier for suppliers and auto makers is a reduction in gasoline prices. That would help SUV sales, which would help auto maker profits and production volume for suppliers.

The performance of the new line of SUVs and pickup trucks being rolled out by GM this year also will play a big role in what kind of year many suppliers will have, Koch said.

Suppliers also would be helped if GM and Ford stabilize their market share, he said.

A resolution of the Delphi labor situation also could help continue the flow of capital available to auto suppliers, he said. Delphi is seeking concessions from its unions, which have threatened to strike if the company gains court approval on its motion to throw out labor contracts. GM, the unions and Delphi are trying to reach an out-of-court agreement.

A prolonged strike at Delphi would cripple production at GM and other suppliers.

''A successful resolution of the Delphi issue would create a lot of relief in the industry,'' Koch said during an interview on the sidelines of the conference. ''People would say, 'We don't have an immediate crisis on our hands.'''

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