Fears that a major US automaker could seek bankruptcy protection are causing auto parts suppliers to demand quicker payments from the manufacturers, exacerbating problems for the already hard pressed carmakers, a media report said.
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General Motors and Chrysler are racing to restructure their money-losing operations, and GM has warned there is a rising chance it could file for bankruptcy by June, so the uncertainty is rattling auto parts suppliers since once a company files for bankruptcy, many vendors are considered ‘unsecured creditors’ who may or may not be paid what they are owed, Reuters reported. To protect them from such an event, some suppliers are rushing to protect themselves, restructuring advisers and lawyers told the news agency.
“Many suppliers are sending letters to the auto manufacturers saying ‘We deem ourselves to be insecure and you need to provide adequate assurance that you’re going to pay us … and if you don’t, we reserve the right to stop shipping you,'” Roger Frankel, head of the restructuring group at law firm Orrick, Herrington & Sutcliffe, who is advising auto suppliers, told Reuters.
The Uniform Commercial Code, which helps govern commercial transactions, allows suppliers to demand assurance of payment if it appears their customers will have trouble coming up with the cash to pay them.
Assurances currently being demanded by auto suppliers include cash-on-delivery requirements, or shortening payment terms to 10 to 30 days, Frankel told the news agency.
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By GlobalData“Those negotiations are going on up and down the supply chain in automotive right now,” a source familiar with the negotiations between the automakers and their suppliers told Reuters.
Faster payment terms can be challenging for a company that is already struggling to pay its bills. But the consequences of not meeting vendor demands can be even more serious.
“One supplier not wanting to continue (shipping) products that are mission critical, and with no alternative vendor stepping up, well, that one little supplier could shake everything,” restructuring expert Jerry Mozian at executive services firm Tatum said.
Chrysler said on Wednesday it was forced to idle its minivan plant in Windsor, Ontario, because of a parts shortage and warned that the issue, if unresolved, could disrupt production at its other North American plants.
The reason for the parts shortage was not immediately clear and Chrysler declined to comment.
“It’s a very delicate issue,” said Frankel. “The automakers need the suppliers but on the other hand, they don’t have enough cash to start paying COD for everything. And the auto suppliers obviously don’t want to put them into bankruptcy.”
If an automaker does file for Chapter 11, it will probably ask the court to consider some vendors “critical,” meaning those vendors would continue getting paid. This can provide some assurance to suppliers. However, not all vendors will be given this coveted critical vendor status.
“There’s been a run on the bank from some suppliers,” a source familiar with the US automakers’ operations told Reuters.
Auto parts suppliers do not want to break contracts since they rely on the automakers’ business, but they do want to protect themselves in the case of disruption caused by a potential bankruptcy, the source added.
