NEW YORK -- Wilbur Ross dismisses many of the private equity financiers who made earlier efforts to buy up the North American auto parts supply chain.
They loaded the industry with debt through debt financing and leveraged buyouts -- deals that allowed them to buy companies using large amounts of borrowed money.
The 1980s and 1990s were the decades of corporate debt financing. Many warned that bankruptcies would follow this decade.
"It's a fundamental error," Ross, CEO of WL Ross & Co. LLC, says of cyclical companies such as auto parts makers having heavily leveraged balance sheets. An economic shock, such as spiking steel prices, can then sink a company.
Auto parts maker Gentex Corp. has no debt on its book -- and for good reason, says CFO Enoch Jen.
"Our success has been due to the introduction of new technology and products and we recognize that we are taking a risk so we want to take financial risk off the table," he said in an interview with Automotive News.
The toll of auto parts Chapter 11 filings this year included four whose annual sales were in excess of $3.2 billion, according to Bankruptcydata.com. Delphi Corp., North America's largest auto supplier, filed Oct. 8 in New York.
Auto parts makers attracted the attention of buyout specialists because of the industry's robust cash flows and low values. Many parts makers can be bought for four to five times their annual cash flow, well below many industries.
A lucky few financial sponsors scored big. The Blackstone Group, of New York, successfully financed airbag and brake supplier TRW Automotive Inc. and American Axle & Manufacturing Holdings Inc.
But many others have taken a bath. That's because they were bought almost entirely with debt, and interest payments were so large that the company's operating cash flows weren't able to meet the obligation.
One of the biggest losers was David Stockman, the former Reagan administration budget czar turned corporate financier. He and Heartland Industrial Partners, which he co-founded, poured half their investment fund's $1.4 billion into supplier Collins & Aikman Corp., only to have it file for Chapter 11 this past May.
Stockman's other major investment -- chassis, engine and transmission parts maker Metaldyne Corp., of Plymouth, Mich. -- has been losing money. It posted an $18 million loss through the first nine months of 2005, compared with a $25 million loss for the same period last year. Standard & Poor's in March downgraded the company's debt rating to "B," with a negative outlook.
Says Ross, "The day of the (leveraged buyout) is over."
You may e-mail Robert Sherefkin at [email protected]