JEREMY M. DOWNS
While three manufacturers in Detroit receive all the attention, hundreds
of automotive suppliers are facing a crisis of their own. How carefully
have you considered the issues and options for secured lenders to this
specialized industry?
These days, representing lenders to
middle-market automotive suppliers
may be the closest lawyers ever come
to practicing emergency medicine.
Currently, the number and condition of
distressed automotive supply credits
require the skills of a field surgeon. The
key is acting aggressively to stabilize
matters until resources arrive.
There are several tools in a lender’s
automotive supply first-aid kit. Some
have a use in every case, and others
are only needed in extreme or rare
situations. It is immediately critical,
however, to take an inventory of some of
these potentially loan-saving rights and
options. Under current circumstances,
failing to spot an issue or opportunity
could crash a lender’s recovery.
The top-down automotive industry
restructuring has, and will continue
to have, its greatest impact on the
bottom of the supply chain. The base
of this pyramid is rapidly narrowing as
the original equipment manufacturers
(OEMs) cut capacity. Your favorite industry
analyst can tell you how many scores of
automotive suppliers will be phased out
in a matter of months. Even as this article
is being submitted, several large supplier
organizations are pleading with the
Treasury for a dose of bailout dollars (and
appear to be having some success). Any
such relief will be a band-aid; too much
of the long-term viability of the OEMs is
tied to wringing costs and inefficiencies
from their supply model and further
consolidating part sources. Government
dollars may soften the blow, but the
prognosis is bleak for a large number
of companies that directly or indirectly
supply the OEMs.
Assuming we can’t (and don’t want
to) turn back the clock 40 years, a magic
pill for lenders to automotive suppliers
does not exist. Treating a distressed
automotive credit facility requires a
“cocktail” approach. In practice, this
feels like trying to cover all of the bases,
all of the time. It can be a tremendously
time-intensive treatment, even for
small loans. The most common side
effect for any loan officer involved in
an active automotive supply workout
or bankruptcy is total loss of time for
anything else. However, a strategy
that is continuously mindful of several
threats stands the best chance of
producing favorable results against
significant odds.
Each week in the life of a troubled
automotive supplier often presents
a new symptom for its lender to
battle (e.g., a key vendor won’t ship,
a major customer won’t pay, no one
can determine who owns the tooling).
Sometimes a lender can predict when
certain problems are likely to present
themselves, but most turns for the
worse seem to occur at random.
The large number of parties actively
involved in middle-market automotive
supply situations (lender, borrower,
direct customers, indirect customers,
vendors and, if you’re lucky, buyers)
creates a large number of competing
agendas and, therefore, a high potential
for spontaneous flare-ups. It takes a
consistently applied, multifaceted
treatment for a lender’s recovery to
avoid being irreparably harmed at any
given moment.
Following are some of the main
ingredients for such a prescription.
Mixing them into your deals may not
save you from insurmountable business
challenges (e.g., elimination of the
programs that your borrower supplies),
but they should help you manage and
identify the critical components of
success from a lender’s perspective.
Know Your Tooling
In substantially all automotive supply
operations, specialized molds, tools and
dies (collectively, “tooling”) are required
to produce and assemble component
parts. Large machinery and equipment
drive them with great force, but these
relatively small items bring finesse
to the manufacturing process. Like a
scalpel, they work steel, plastic and
other materials with precision. If they
are not built to exact specifications or
are not in perfect working condition, the
parts they produce can be scrap.
Developing a tool to produce the
exact part needed for production takes
time, testing and (quite often) significant
capital. Suppliers tend not to have
multiple sets of the same tools on hand,
and often there is only a single supplier
for a particular part. If a problem
develops with the supplier using a given
tool, its customers cannot quickly turn
to other suppliers that have the same
tool. Likewise, it takes significant time to
place a new tool into production. It must
undergo rigorous testing even after
being delivered by the toolmaker. After
all, the parts it will create are going into
the vehicles to which we entrust our
lives on a daily basis.
Tools are also special for automotive
suppliers and their lenders because
they carry legal leverage. In most states,
suppliers have statutory or common-law liens on tools in their possession
to secure unpaid receivables generated
through their use. This even applies to
tools delivered to them by or on behalf
of their customers — i.e., customer-
