The bankruptcies of Chrysler and GM may have completed relatively quickly, but the pain in the auto parts industry is still a long way from being healed. Private equity auto parts investors say that the restructuring of the two big auto companies has removed a lot of uncertainty from the equation.
Analysis by SupplierBusiness.com shows that plenty of consolidation has already taken place, judging by the bankruptcies in this sector in recent months. Recent large-scale bankruptcies, both private equity-backed and not, include Lear, Delphi, TPG Capital LP's Aleris International Inc., LyondellBasell Industries, Sun Capital Partners Inc.'s Mark IV Industries Inc., Visteon, and Hayes Lemmerz.
Just last week, another buyout-backed auto parts company, Cooper-Standard Holdings, entered bankruptcy. Backed by Cypress Group LLC and Goldman Sachs Capital Partners, the company had about US$1.1 billion in bank and bond debt that it is looking to shrink to US$350 million.
This has caused a fair amount of pain for the private equity industry, in terms of equity lost. In a recent study, restructuring firm AlixPartners found that 41% of the auto parts bankruptcies that have taken place since the first quarter of 2008 had private equity involvement.
The numbers lost by Private Equity runs into billions of dollars. TPG, for instance, had US$800 million in equity in Aleris, while Sun Capital injected US$60 million into Mark IV. Ripplewood Holdings listed affiliate RHJ International put US$60 million into Metaldyne Corp., which recently filed for bankruptcy, last year after its portfolio company Asahi Tec acquired it. Goldman Sachs and Cypress Group have also sunk US$318 million of equity into their 2007 purchase of Cooper-Standard.
However, this has not deterred PE firms from continuing to invest in the industry, with some deals taking place even in the current adverse business environment. Most recently, Platinum Equity acquired the wiring harness and electrical distribution business of Alcoa. The acquired business has operations in 13 countries and employs 17,500 people.
Platinum Equity has also reached an agreement with Delphi and GM to acquire the supplier's majority of business. However, some creditors, who funded Delphi's debtor in possession (DIP) financing, have challenged the supplier's decision and are vying for the same business.
Generally, automotive industry is not very attractive for PE firms due to the cyclical nature of business and the low rate of return. PE-owned suppliers are not popular among automakers as they are less willing to capitulate to increasing pricing pressure by OEMs and will fight vehemently for price rises in components supplied to the customers. They are viewed suspiciously by the worker unions as most of the time they implement ruthless restructuring processes, resulting in huge job losses.
Most of all, these private equity firms add on OEM's uncertainty as they are more likely to leave the industry, at the very first knock of opportunity. More critical is the PE-owned business to an OEM supply chain, with a greater tie to the customer about any possible disruptions. However, there is no denying the fact that private equity firms have emerged as one of the major sources of funding. They have provided much needed help to a supplier, preventing it from going out of the business and thus saving thousands of jobs.
As long as global liquidity crisis prevails, PE activity will remain at low level. However other form of PE funding, including venture capital and growth capital, may grow, especially in new lines of business that have high growth potential.
This is expected to revive the global credit market and PE activity my increase in coming months. However, the absence of additional bailout packages to the struggling supplier industry in the US means more suppliers filing bankruptcies, selling assets and going out of business. This will provide further opportunities to PE firms to buy such distressed assets in future.
This article was supplied to just-auto by SupplierBusiness, an IHS Global Insight company.