DETROIT -- The auto industry has shown signs of recovery since early August.
The cash-for-clunkers program depleted inventories, and suppliers' factories have ramped up to fill new orders.
Some economists, including Federal Reserve Board Chairman Ben Bernanke, think the longest recession since World War II may technically be over.
But now is not a time for celebration in the supplier world. From a finance perspective, these are more dangerous times than the months following the credit freeze of last fall and the ensuing bankruptcy filings by General Motors and Chrysler. “Pent-up demand can do more harm than good,” said Michael Semanco, CEO of Hennessey Capital, a suburban Detroit asset-based lender who says he's been busy fielding calls from suppliers who are trying to ramp up production but can't get funding from traditional banks.
David Tull, CEO of Crestmark Bank, another major Detroit area asset-based lender, said if suppliers can't find reasonable financing, "they're going to have more trouble in the upturn than they did in the downturn.”
“More companies fail in an expansion, especially an expansion after a downturn,” he said. “In a downturn, they're collecting on receivables, but they're not buying new inventory. So their need for cash goes down. Now? Their cash needs are up.”
Still prudent not to lend
Experts say those in the industry can't expect financing to return to normal anytime soon. Funding operations will continue to be a major hurdle.
Even before the credit woes of last fall, many suppliers had been cut loose from longtime bankers or had seen working lines of credit cut.
Bankers, analysts and industry observers say it makes sense for banks to remain largely on the sidelines for now.
Even if local loan officers of national and large regional banks wanted to start lending more to suppliers, in some cases they remain under pressure to limit exposure to the auto industry.
For example, at a presentation this month, Comerica Inc. Chairman Ralph Babb showed a slide highlighting Comerica's sharply reduced exposure to auto manufacturers and suppliers: from $2.7 billion at the end of 2005 to $1.3 billion in May this year.
Tel-X Corp. is one of those caught in the Comerica squeeze.
The suburban Detroit supplier, a maker of prototype automotive parts that is diversifying into defense and alternative energy, continues to pick up work from General Dynamics Corp. and A123 Systems Inc., a Massachusetts battery company that has promised to build a big plant in southeastern Michigan.
Despite what company officials say was a good payment history, Tel-X was told by Comerica last year that the note on its $1.7 million mortgage for its building would not be renewed.
A seven-year note, which had followed an initial five-year note, was scheduled to be renewed last January, but the bank told owner Ron Cochell to pay off the note in full.
Comerica declined to comment.
Cochell said he has met with area regional banks, community banks and a credit-union consortium but has been told he'll need to show a year of profits first. Cochell said the company has been close to break-even, plus he has a handful of tenants in his 120,000-square-foot manufacturing facility, which is also the company headquarters, and collects rent on a cell phone tower on the property.
Cochell said Comerica gave him a six-month extension in January and another in June, raising his interest both times, and required him to put $100,000 into a low-interest-bearing account to cover possible shortfalls in his payments.
Terry McHugh, president and CEO of Commercial Alliance, a consortium of eight credit unions formed to do commercial lending, said he was impressed by Tel-X and its efforts to diversify and came very close to approving a loan that would have paid off Comerica.
‘We need profits'
But in the end, because of uncertainty in the auto sector, he decided to hold off.
“The message we sent them was: you're fighting a great fight, you're doing everything you can, but we need to have a year of profits,” he said.
Tel-X then turned to Hennessey Capital to fund equipment to help the company diversify. In its due diligence, Hennessey determined that the company's collateral exceeded what it owed Comerica. It asked Comerica to allow Hennessey to use some of Tel-X's assets to fund the equipment loan, but Comerica refused.
“Bankers are very selective in extending credit to auto, for good reason,” said Terry McEvoy, an analyst for Oppenheimer & Co. Inc. of New York.
“For public banks, shareholders want to see less exposure. And there's pressure from the investment community,” he said. “Because of the scarcity of capital today, banks don't want to be in a position of making bets on winners and losers. Do you want to make a bet on who will survive and who won't?”
Several major regional lenders -- PNC Financial Services of Pittsburgh, the parent company of National City Bank; Comerica Bank of Dallas; and Fifth Third Bank eastern Michigan, a unit of Fifth Third Bancorp. of Cincinnati, Ohio — declined to comment or didn't respond to requests to discuss how much they have reduced their lending to the auto sector and why it is considered prudent to do so.
Sarah McClelland, president of the Michigan market for JPMorgan Chase and head of its central middle market of Michigan, Ohio and Kentucky, said that while Chase doesn't have much auto exposure, it continues to support existing customers. In some cases, she said, it has approved increased funding as customers get new orders.
She said the bank is very careful about picking up new auto customers. “Clearly, we are being highly selective. There's a lot of volatility in the industry, but we're absolutely looking at adding new customers.”
She said Chase doesn't release figures on its auto exposure, but its exposure is less now than it has been in the past.
Julie Westermann, a spokeswoman in the Chicago office of Bank of America, said: “We continue to lend to this sector and work with our clients when we can within the boundaries of reasonable risk-taking parameters,”
Culling even the healthy
Some banks are culling even relatively healthy suppliers from their ranks -- companies that have paid their bills and serviced their debt on time and remained profitable. It's a pain-free way to cut auto exposure.
“I think it happens a lot, and the reason a bank can do that is because if the company is profitable, and they've maintained their borrowing base formulas and they're healthy, another financial institution might take them on,” said Pat O'Keefe, founder and managing director at O'Keefe & Associates, a suburban Detroit turnaround and corporate finance consultancy that works with many Tier 2 and Tier 3 suppliers. “Where you've got banks that are looking to reduce their loan portfolios -- and reduce them in auto -- by not renewing, they force the company to go out and find an alternative source of financing.”
Take Fori Automation Inc. A suburban Detroit supplier of automotive assembly, testing and welding equipment was on a roll. Or so it seemed, until company officials encountered what they thought was a no-brainer: getting working capital to fund a nearly $20 million contract for the new $790 million Volkswagen AG factory in Chattanooga, Tenn. It turned into a lack-of-financing nightmare that nearly killed the deal.
Fori's funding follies
And that's even though Fori had done everything recommended of those in the supply chain. It had diversified across geographies, across a broad spectrum of automakers and Tier 1 suppliers and across a wide range of vehicle models.
U.S. banks weren't moved.
“The banks didn't care if it was VW, GM, Ford or Chrysler. It was automotive,” said Paul Meloche, Fori's vice president of sales.
The initial payment terms from Volkswagen required Fori to carry the cost of the job until after installation in 2010. But Fori was able to get better payment terms, sourced the job through its German operation, and was able to secure German bank financing.
Workers at Fori's Michigan assembly plant are to build the lines, which will be disassembled, shipped to Chattanooga and reassembled.
“When we told the U.S. banks this was the arrangement we were able to make with the German banks, their comment was ‘we could never have done that,'” said Rein Roth, Fori's CFO.
Avon Plastic Products Inc., a suburban Detroit supplier of injection-molded plastic interior parts to automakers and Tier 1 suppliers, has been forced to switch to an alternative lender.
In 2006, the company, with about $5 million in annual sales, gradually moved from a traditional lender, with which it had done business for more than 20 years, to an asset and receivables lender in Milwaukee. More recently, it switched to Hennessey Capital, said Gene Gizzarelli, Avon's CEO.
While Gizzarelli concedes that borrowing from a traditional lender is typically preferable, its relationship with Hennessey is strong.
“At least it's allowed a company like Avon to continue to survive and have the opportunity to pick up business and diversify,” he said. “It's allowed us to stay in the game.”