Supplier finance: the big freeze thaws
By: Colin Whitbread, Thursday, December 17, 2009, AutomotiveWorld.com
No sooner had the high tide of automotive supplier quarterly results ebbed at the end of October/early November than capital markets began to take a fresh look at, and reappraise, the sector. This reappraisal appears to have unfrozen, or at least partially thawed, what appeared to be glacier-like credit markets through the first nine months of 2009, to the extent that a regular flow of capital-raising exercises appears to be underway.
Suppliers viewed by investors as basket cases in the early months of 2009 now find themselves able to make a modest return to equity and bond markets, allowing at least some refurbishment of tarnished balance sheets. A number of these suppliers are even allowing themselves the luxury of at least whispering that some of the new funds raised might be used for something other than refinancing of existing debt or 'general corporate purposes'. Very quietly, the issue of new equity and/or high-yield (ie junk bond) debt for acquisition purposes might just be creeping back onto the agenda.
American Axle serves as a breathtaking example of an auto supplier that just a few months ago was widely touted as a bankruptcy candidate, on the verge of being dragged under by the sinking of General Motors, but which now appears to have regained favour with capital markets. The US supplier saw its shares hit just US$0.26 in March 2009 amidst fears that the company was poised to seek Chapter 11 protection. Credit and equity analysts queued to pick over the company's demise and to issue dire warnings about its ability to remain a viable corporate entity in the longer term. American Axle's Q1 results in early May were accompanied by management comments that survival was the name of the game. At the time, chief executive officer Richard E Dauch stressed that the "entire global management team was doing what is necessary to accelerate and expand reductions to our cost structure and other improvements to our overall market cost competitiveness".
Very quietly, the issue of new equity and/or high-yield (ie junk bond) debt for acquisition purposes might just be creeping back onto the agenda.
Turn the clock forward seven months and the picture changes dramatically. With the assistance of lenders and a generous financial helping hand from principal customer General Motors weeks after its emergence as 'New GM', the American Axle has staged an impressive comeback. Analysts have upgraded recommendations on the company's equity, citing the cash transfusion from GM and prospects for that company's GMT900 pick-up.
More significantly, in recent weeks the once written-off-for-dead supplier has managed to not only report its first quarterly net profit since Q3 2007, but it has also successfully tapped both equity and bond markets. The latter will be used to repay all amounts outstanding under its term loan agreement and certain outstanding loans under its revolving credit agreement, thereby reducing certain commitments under that agreement in the process.
With TRW having also recently raised just under US$500m through two bond offerings and Tenneco pulling in around US$190m from an equity issue, a trend appears to be emerging. Wheel and tyre supplier Titan International is the latest to access the capital markets with a US$150m bond issue, having doubled the size of the intended issue in the space of 24 hours in what is presumably a reflection of initial investor repsonse.
The obvious question is whether this rosier view of auto suppliers and their financial prospects by the capital markets is justified, especially at this point of what might prove to be a more unpredictable cycle than previous ones.
The obvious question is whether this rosier view of auto suppliers and their financial prospects by the capital markets is justified, especially at this point of what might prove to be a more unpredictable cycle than previous ones. Recent Q2 (Japanese) and Q3 (US and European) results and the trickle of Q4 upgrades currently emerging from some suppliers rest heavily on scrappage-scheme supported higher volumes, laced with some good old-fashioned cost savings from aggressive operational downsizing. But even suppliers currently upgrading Q4 2009 revenue and margin forecasts remain reluctant to venture anything resembling more than a vague view of 2010, reflecting the unpredictability of this cycle.
Recent auto supplier ratings upgrades by the likes of Moody's, S&P and Fitch are noticeably short on firm 2010 predictions. In a (fairly positive) review of US auto supplier prospects published in late November, Fitch Ratings noted it believed these suppliers have adequate liquidity after cutting costs in 2009 but has but also warned recently: "A number of suppliers have emerged from bankruptcy with untested business models and capital structures, which have and may result in double-dip bankruptcies."
Confusing relief that the majority of the auto supplier sector is still standing, with misplaced optimism that a return to the good times is just around the corner, may just remain a trap for the unwary.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Published on Thursday, December 17, 2009
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