UK: Collins & Aikman’s Chapter 11
An old business maxim surfaced once again during the recent demise of the UK MG Rover Group that has increasing relevance for a number of North American suppliers - "You can lose money in business, but never run out of cash".
The subject of short-term liquidity, defined roughly as cash or near-cash resources available to meet immediate payment demands from creditors, is featuring increasingly prominently in the North American supplier sector. Tower Automotive's recent demise, although owing much to a host of factors including past leveraged acquisitions, recent commodity price hikes and lower-than-forecast program demand from GM and Ford, was finally triggered by a liquidity crunch.
The vehicle structures supplier simply couldn't meet day-today cash demands in order to continue to run its business.
Despite having passed on a $US4.4 million dividend payment due at the end of 2004 and obtaining a $50 million accounts receivable securitisation facility through GE Commercial Finance, these weren't enough to stop the liquidity rot.
The company's subsequent Chapter 11 filing was accompanied by $725 million in debtor-in-possession financing from JP Morgan, an indication of the cash needed to support the ongoing survival of a business while more radical reorganisation and recovery plans are formulated.
In CEO Ligocki's words: "The financing, combined with our normal cash flow, should be more than adequate to enable Tower to continue normal business operations throughout this [Chapter 11] process."
Collins & Aikman has now gone down a similar road. Standard & Poors Rating Services has lowered its corporate credit rating on the company to a lowly CCC- from CCC+. C &A disclosed it faced "significant near-term liquidity challenges" and removed its chairman and CEO, David Stockman as it wrestled with accounting problems that had delayed filing of the 2004 annual report and Q1 2005 earnings. C&A's liquidity position was as complex at it is serious.
Essentially, the company admitted $15 million or less of daily liquidity but had two interest payments of around $27 million due at the end of June and mid August.
Being fully drawn under its senior credit facility, C&A had to depend on a receivables facility backed by customers' payment commitments, a precarious hand-to-mouth, day-to-day existence.
The recent downgrading of Ford and GM debt to junk levels resulted in a detrimental change in the terms of the receivables facility, putting increased pressure on the supplier.
The C&A downgrade surfaced just two days after Visteon announced a delay in its 1oQ report for the first quarter of 2005, pending the independent review of recent accounting glitches. More importantly, the diversified supplier noted that in certain circumstances cash flow from operations will not be sufficient to fund capital spending, debt maturities and other cash obligations in 2005 and therefore it will need to incur additional debt.
According to Visteon, "Liquidity from internal or external sources to meet these obligations is dependent on a number of factors, including availability of cash balances and access to borrowing facilities and/or capital markets. Visteon can provide no assurance that such liquidity will be available at the times or in the amounts needed or on terms and conditions acceptable to Visteon."
While no where near as pressing as the cash problems at Tower and C&A, Visteon's position is still a concern, especially as the existing 364-day revolving credit facility expires in June 2005. S&P has responded by lowering some Visteon ratings and keeping them under review for a possible further downgrade. The speculative grade liquidity rating was reduced to SGL-4 from SGL-3. In S&P's words: "Should Visteon be unable to resolve the accounting matters in a timely fashion and sustain adequate sources of external funding, near term cash requirements could result in a significant erosion of liquidity, even if a successful restructuring arrangement is negotiated with Ford."
On a slightly brighter note, Delphi is losing money but appears better placed on the liquidity front. Q1 2005 financial results showed a net loss of $409 million, including restructuring charges of $31 million. Revenue declined 7% to $6.9 billion. Operating cash flow was $112 million and a further $100 million-150 million is forecast for Q2. The 31 March cash balance was $1.15 billion, helped in part by the recent major cut in the company's dividend. Prior to announcing the Q1 loss, Delphi revealed it was amending and increasing its $1.5 billion credit facility, a refinancing that will supersede the supplier's one- and five-year credit facilities totalling $3 billion. Last month S&P lowered Delphi's credit rating to BB from BB+, reflecting an ongoing accounting investigation and operating pressures, and on May 17th S&P further lowered the rating to B+ because of "the company's weak business position, characterised by high customer concentration, an uncompetitive cost structure in its North American operations and the cyclical and competitive challenges facing automotive suppliers" says S&P analyst Martin King.
The company has total debt of about $4 billion said S&P and a total unfunded pension and other post-retirement employee benefit (OPEB) liabilities of about $14 billion.
Analysts at Deutsche Bank reiterated their sell recommendation and commented that "barring an accelerated cost reduction effort or help from GM, we believe there remains a moderate degree of bankruptcy risk at Delphi"
According to the company: "Delphi is committed to executing our business transformation and believes that this financing plan will provide us the liquidity and flexibility to continue our transformation."
Recent developments will only strengthen efforts by the North American supplier industry to lobby for changes that will enable it to shed some of its onerous commitments to current and former employees.
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