ArvinMeritor‘s declining earnings may lead the supplier to break terms in its bank credit agreement, which would then need to be renegotiated at a higher cost and a smaller size, KDP Investment Advisors has said.

ArvinMeritor on Wednesday said it burned through nearly US$390m in cash in the fourth quarter and posted a net loss of $991m, Reuters noted.

A spokeswoman referred the news agency to the company’s presentation to analysts, in which it said it expects to have enough cash to remain in compliance with debt covenants even if North American light vehicle sales drop by a third this year.

But KDP analyst Kip Penniman said in a report cited by Reuters that he estimated losses at ArvinMeritor’s light vehicle systems business would result in a covenant violation of the company’s secured credit facility during the June quarter.

The company has been working to sell that business since last year, but abandoned plans when credit markets tightened and prospects for an initial public offering became remote.

“We believe ArvinMeritor could have avoided a covenant violation had the divestiture proceeded,” Penniman was quoted as saying.

“Ultimately, we believe the banks will consent to an amendment that will provide temporary relief from the financial covenants governing the facility, although the consent will likely prove costly, potentially resulting in a higher coupon, a consent fee, and – most concerning – a further reduction in the facility’s size,” he added.

The loan facility currently has an interest expense of 225 basis points over the London interbank offered rate, he said, according to the report.