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Parts firms stay in hard place

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Parts firms stay in hard place



'Another storm is coming, I'm afraid," said Sheldon Stone, talking about the hundreds of automotive parts suppliers that are still teetering on the edge of survival.

Head of the restructuring practice of Birmingham-based turnaround advisory firm Amherst Partners, Stone said the good news is that most suppliers have cut labor and other costs so they can break even or make money at much-lower volume levels, just as General Motors and Chrysler have done after government-aided bankruptcies.

"But about 65% or 70% of those suppliers have balance sheets that are still upside-down," he told me last week. "They are still overextended, they have too much debt, they haven't been able to make capital expenditures on new equipment."

So, as production levels rise at GM, Ford, Chrysler and other automakers, many suppliers have insufficient collateral to borrow the working capital they need to boost output, because their real estate and old equipment have been drastically devalued by the economic slump.

They are stuck in a Catch-22 situation where they can limp along and eke out small profits while the overall new-car market is still sluggish -- but if vehicle demand surges, they will fail, unable to ramp up production because banks refuse to extend more credit to cover their costs of doing so.

David Andrea, senior vice president of the Original Equipment Suppliers Association, says credit availability remains a big issue for smaller firms. "Suppliers with less than $100 million of annual revenue still have difficulty getting lines of credit approved. They are still at risk of violating their loan covenants," he said.

There are a couple of reasons for optimism, though, Andrea said.

"I think we've already gotten through the roughest part of the ramp-up," he says, noting the biggest escalation of auto output by the Detroit carmakers was in the first quarter of 2010, and has since leveled out.

Secondly, Andrea is encouraged by signals coming from the Federal Reserve and the U.S. Congress that they will push the nation's nervous banks to do more lending to small and midsize businesses.

Take another look, lenders

Fed Chairman Ben Bernanke, in Detroit last month as part of a round of 40 Fed forums nationwide on credit issues, urged lenders to look at the operational strength of businesses, instead of relying too heavily on old formulas about collateral and asset value.

"Often we see small businesses being excluded in a new form of redlining," Bernanke said in Detroit. "They're in a distressed area or a distressed industry and lenders say 'We don't want to look at you.'

"We want every borrower evaluated on their potential and ability to repay the loan," Bernanke said.

The Fed is expected to issue a capstone report on lending issues this month.

Meanwhile, the U.S. House of Representatives is considering a bill (HR 5297) called the Small Business Lending Fund Act of 2010, that would include the possibility of government guarantees to backstop bank loans, modeled in part on a $13-million program created and piloted last year by the Michigan Economic Development Corp.

In a political world where there is little appetite left for more big stimulus spending or further direct rescue of auto-related companies, a powerful nudge from the Fed and Congress to get more bank credit flowing to small job-creating firms may be the best potential lifeline for strapped auto suppliers.



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