In an effort to restore the confidence among the beleaguered auto suppliers, The US Department of Treasury announced a $5 billion Auto supplier support program on Wednesday. The money for the program is funded from the Troubled Asset Relief Program, or TARP.
The major worries of the US based auto suppliers:
America’s auto parts suppliers, which employ more than 500,000 workers across the nation, have already suffered from significant loses and a weakening demand for auto sales. In addition, these companies are unable to access credit markets to finance their day to day operations and are facing growing uncertainty about the prospects for carrying out their business operations. This in turn may result in greater uncertainty for the auto manufacturers, which are already in trouble. This vicious cycle of frozen credit markets, growing supplier uncertainty, and growing auto market uncertainty has the potential to unravel the industry and short-circuit restructuring efforts at companies like GM and Chrysler.
The Obama Administration’s new Supplier Support Program is expected to help break this vicious cycle by providing suppliers with the support they need and help access loans to pay their employees and continue their operations.
Auto Supplier Support Program:
As a part of this program, the government provides guarantee for the products they ship to auto manufacturers, no matter what happens to the recipient car company. The program will be run through American auto companies that agree to participate in the program. Suppliers to those companies that agree to maintain qualifying commercial terms will have the opportunity to request this government backed protection. If granted, the supplier will pay a small fee for the right to participate in the program
The participating suppliers will also be able to sell their receivables into the program at a modest discount. This will provide suppliers with desperately needed funding to operate their businesses and help unlock credit more broadly in the supplier industry. In addition, the auto-supplier industry will receive up to $5 billion in financing under the new program by the Treasury Department that’s part of a large effort to save the entire automotive sector amid a major downturn.
The program is not available to foreign auto makers with operations in US, according to sources. There’s a requirement that eligible parts being shipped must be sold by a domestic company and come from domestic operations of that company, and the part must be manufactured or assembled at a domestic facility.
This plan comes at a critical time for suppliers:
The plan has come at a time when widespread bankruptcies are expected in the sector in the coming weeks without government help. Shares of Visteon (VSTN), the major supplier for Ford Motor (F, Fortune 500), fell to a price of below 10 cents this month on reports it was nearly out of cash. In addition, auditors for American Axle (AXL) have said there is doubt about its ability to stay in business in the current environment.
Troubled Asset Relief Program (TARP), the fund set up to bailout banks and financial institutions, will provide $5 billion for the Auto Supplier Support Program. GM and Chrysler have already received $17.4 billion in loans from TARP and they are asking for up to $21.6 billion more in loans. Treasury also said in its statement that the auto industry task force is still considering those requests.
As a result of this plan, the shares of auto-parts manufacturers that might benefit from the program jumped significantly on Wednesday. For instance, Lear (LEA: 1.4499, 0.1124, 8.4%) jumped 85%, American Axle & Manufacturing (AXL: 1.6099, 0.0499, 3.2%) gained 45%, while Tenneco (TEN: 2.42, -0.28, -10.37%) leapt 28%, and ArvinMeritor (ARM: 0.99, 0, 0%) added 21%. This indicates that the US government is committed to help stabilize the industry, protect American jobs, and give consumers the confidence and the means to purchase cars.
