Fitch Ratings has placed seven US auto industry suppliers on ‘ratings watch’ because of the threat of the potential bankruptcy filing by General Motors. Fitch said it thought a GM bankruptcy would be followed by a similar filing at Ford.

“In 2009, auto suppliers are already facing a steep global downturn in auto production, including a deeply depressed production forecast in the US and Europe. In the event of a General Motors bankruptcy, Fitch believes that the resulting contraction in auto production, the supply chain, trade credit and capital-access would cause widespread shutdowns and bankruptcies throughout the supply chain,” the ratings agency said in a statement.

Fitch added that even if the OEMs avoid bankruptcy, major restructurings of their operations will occur, causing material changes in the operations of their Tier 1 suppliers. These restructurings could also lead to ratings actions, providing further rationale for placing these suppliers on Rating Watch Negative, the statement said.

The action affects American Axle & Manufacturing Holdings, ArvinMeritor, Hayes Lemmerz International, Johnson Controls, Tenneco, TRW Automotive Holdings and Visteon.

“Despite improved diversification by most Tier 1 suppliers – across manufacturers, geographies and product lines – the decline in supplier revenues and operating cash flow through 2009 resulting from a GM bankruptcy would likely produce covenant violations across the vast majority of suppliers,” Fitch said.

“Of equal concern, Tier 2 and 3 suppliers are likely to experience widespread bankruptcies through loss of volume, lack of receivables financing, and restricted financial and trade credit. Fitch expects that a collapse of trade credit throughout the supply chain would put at risk the domestic operations of these suppliers, as well as their financial viability.”

Fitch added that TRW and Tenneco remain better positioned given their global operations, but that it expects that these two companies, at a minimum, would require renegotiations with their bank group.