Another bankruptcy or two from Tier 1 suppliers that provide systems directly to the automakers could put some smaller suppliers under, executives and analysts say.
Collins & Aikman Corp. of Troy, Mich., is among the large Tier 1 suppliers that are struggling. The maker of interior plastic parts and fabrics had its debt downgraded on March 3 from B-plus to B by bond rating agency Standard & Poor's. That is five notches below investment grade.
A $2 million hole or more in receivables is something few mid-sized suppliers, even strong ones, can bear, says Craig Fitzgerald, partner and auto analyst at Plante & Moran PLLC, a consulting firm in Southfield, Mich. Not only will most of that receivable be lost in bankruptcy, but the supplier can't borrow against that amount on its revolving line of credit.
"You keep hearing, 'It'll take weak guys under.' But it will also take some strong guys under," Fitzgerald says. "That is a consequence that hasn't been talked about. These are hard times.
"Now $2 million might not sound like a lot, but they're struggling to make their own payments, and now there's $2 million not coming in."
One Tower creditor, who asked not to be named, says he's worried about more bankruptcies.
"The shame of it is, I think, this is only one of many to come," he says. "Everybody in this industry is so related in that we do business together."
While he says the Tower bankruptcy isn't going to put him out of business, it reduced the value of the company quickly. "We're pretty strong, but it's going to hurt us," he says. "When you take a hit like that, it takes a chunk out of your equity."
Suppliers that are owed money from a customer in Chapter 11 also will find it harder to borrow money, says Chuck Moore, director at Conway MacKenzie & Dunleavy PC, a turnaround firm in Southfield, Mich.
That's because banks use a formula for revolving credit lines based on receivables and inventory. If a supplier to a bankrupt company has a $3 million claim in that case, then that's $3 million that can't be borrowed against.
"That's often one of the quickest reasons lower-tier supplies are thrown into financial distress," Moore says.