Specter of bankruptcy court hovers

Hit hard
Major auto suppliers that have filed for bankruptcy protection



A.G. Simpson

Mexican Industries

Talon Automotive


Breed Technologies

Key Plastics

Cambridge Industries

DETROIT - The scent of fear in the automotive supply world - both real and perceived - is growing more pungent.

Federal-Mogul Corp.'s filing for federal bankruptcy protection last week made it the biggest auto supplier to seek help this year.

But other suppliers, even without the asbestos liabilities that plague Federal-Mogul, are provoking new concerns throughout stock and credit markets. Heavy debt, low stock prices, nonexistent or razor-thin profit margins and now lower automaker production schedules have left the industry ill prepared for a recession. At least two suppliers have quelled speculation about bankruptcy filings.

Tip of the iceberg

The problems at highly visible suppliers such as Federal-Mogul "are just the tip of the iceberg," said consultant John Groustra. Many suppliers, particularly smaller, privately held companies, reorganize or restructure on an out-of-court basis; they never make the bankruptcy process and aren't public record, said Groustra, a partner with corporate turnaround firm Conway McKenzie & Dunleavy of Birmingham, Mich.

The day after Federal-Mogul's filing, Toronto supplier A.G. Simpson Automotive Inc. filed for Canadian court protection from creditors, and its U.S. operations filed for Chapter 11 protection. Simpson, a privately held maker of stamped metal parts, calls itself Canada's sixth largest supplier. The company ranks No. 100 on the Automotive News list of the largest suppliers of original equipment parts to North America.

Simpson once was the biggest independent maker of bumpers in North America. But automaker preferences for chrome steel bumpers moved to plastic bumpers or fascia because of their lighter weight and design flexibility.

A 'troubling time'

Federal-Mogul, which is the 20th largest supplier, and Simpson Industries join Mexican Industries of Michigan Inc. and the Talon Automotive Group among major suppliers to file for bankruptcy protection this year. Last year, Breed Technologies Inc., Key Plastics LLC and Cambridge Industries Inc. were among the big companies that filed.

"This is a real troubling time for suppliers," said investment banker David Eberly, managing director of GMA Capital in Farmington Hills, Mich. "There are pressures across all fronts - from a stagnant market for cars, cost pressures up and down the supply chain, and shifts in the traditional operating markets because of online auctions."

Underlying investor concerns, he said, is the credit quality of these companies.

Interest payments are eating large portions of cash flows, the equivalent of a corporate checking account. Federal-Mogul blamed asbestos liabilities for its ills, but the 102-year-old company piled up more than $3 billion in debt during an acquisition spree under former CEO Richard Snell.

And the current climate - darkened by the Sept. 11 terrorist attacks - is raising doubts about the health of other suppliers.

Calming employee fears

Exide Technologies felt compelled to ease employee fears after a trade journal asserted that the world's largest lead-acid battery maker was planning a Chapter 11 filing. CFO Kevin Morano said Exide's bond and share prices have been under additional pressure since Sept. 11, "but we believe we are fine; there is no cause for concern.''

Tenneco Automotive Inc., a leader in ride-control and exhaust system products, also is fighting speculation that it is headed for bankruptcy court. Company CFO Mark McCollum has denied statements by some analysts that his company faces a 50-50 chance of filing Chapter 11 next year.

McCollum said Tenneco bond prices fell after Ford Motor Co. announced lower production schedules this year. McCollum called the market's reaction a "knee-jerk response" to industry cycle problems. But he conceded that the market thinks Tenneco is carrying too much debt.

Tenneco's $500 million of senior debt, or bonds, has fallen in price from a high in June of 56 percent of par, or face value, to just 43 percent of par. Bonds are sold in lots of $1,000 each; 43 percent of par means they are worth $430.

Tenneco has more than enough liquidity to cover expenses because of its $500 million line of revolving bank credit. Moreover, McCollum said much of the company's heavy capital expenditures for model launches are behind it for the year.

Its operations have been hurt by depressed conditions in its North American original equipment and heavy-duty market and in the global aftermarket. Its share price fell nearly 60 percent last month to $2.10, compared with a 10 percent fall in the S&P 500 Average. At the close of the business day on Thursday, Oct. 4, the price was $1.75.

In early September, Hayes Lemmerz International Inc. said it would restate its fiscal 2000 and first quarter 2001 earnings to "correct errors." The world's largest wheel maker saw the value of its bonds cut in half in early September.

Its total debt stands at 89 percent of total capitalization as of Aug. 31. A spokeswoman declined comment because the company is in the midst of its earnings restatement.

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