American Axle Manufacturing Holdings is at high risk of filing for bankruptcy in the next year as declining vehicle production further pressures earnings, a research firm has said.
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“The outlook for 2009 continues to darken and we believe odds are increasing that a number of auto suppliers, including American Axle, may be forced to file for bankruptcy protection within the next 12 months,” KDP Investment Advisors analyst Kip Penniman wrote in a report cited by the Reuters news agency.
North American parts suppliers are being increasingly seen at risk as vehicle production slumps – GM yesterday axed a further 2,000 workers at two assembly plants in Michigan and Ohio and said it would temporarily idle another nine North American assembly plants in response to weak demand. The automaker is American Axle’s largest customer.
“At today’s projected rate of capacity utilisation, despite management’s efforts to remain upbeat at recent conferences, we believe Axle’s days outside of Chapter 11 [US bankruptcy] protection are numbered,” Penniman added.
US light vehicle sales this year are expected to be around 10m, the lowest since the early 1980s.
“We expect [American Axle] management’s best efforts to be overwhelmed by dire economic trends that appear to be intensifying in the first and second quarters of this year,” Penniman said.
The firm is likely to report negative earnings before interest, taxes, depreciation and amortisation in the first half of 2009, which will cause it break terms in its credit facilities, he added, according to Reuters.
American Axle spokeswoman Renee Rogers declined to comment on the report.
Penniman said if American Axle filed for bankruptcy it was likely to be able to secure debtor-in-possession (DIP) financing as only US$742m of its debt was secured against its assets as of the end of 2008.
This was relatively small relative to American Axle’s potential enterprise value, he said.
Any government support for the auto parts sector may also come in providing DIP loans, Penniman said.
“We believe the government’s primary goal is to stabilise the domestic auto industry in at attempt to prevent massive job losses,” he said.
“By providing DIP financing the government would enable distressed suppliers to continue to manufacture parts for the original equipment manufacturer’s under bankruptcy protection and avoid a domino-like collapse of the industry,” Penniman reportedly added.
The Wall Street Journal on Monday said key Ford supplier Visteon had hired legal and financial advisers to prepare for possible bankruptcy proceedings though that didn’t mean a filing was imminent.
Visteon retorted later on Monday it had been advised by Kirkland & Ellis and Rothschild since 2003 but a would not comment on the “speculation.”
The WSJ said parts makers in better financial shape, like Lear, were working with restructuring specialists and stepping up lobbying in an effort to cushion the effect of a possible industry meltdown.
Reports said uncertainty over the new Barack Obama administration’s willingness to increase a $17.4bn bailout plan for the Big Three Detroit-based automakers had prompted some of the biggest US component suppliers to either plan for potential bankruptcy filings or scramble to avoid them.
Production cuts are burning into the earnings and cash balances of their suppliers and, as the consumer slump deepens, some may not survive, the WSJ said.
