Support program kicking in
Auto parts suppliers have often received payment for their goods about 45 to 60 days after shipment. Under normal conditions, suppliers had been able to sell or borrow against these receivables to generate cash flow. However, banks have become increasingly reluctant to purchase these receivables or to lend to auto-parts suppliers because of the financial uncertainty of the automakers.
On March 19, the U.S. Department of Treasury announced an Auto Supplier Support Program to provide up to $5 billion in financial assistance to certain suppliers of any domestic automakers that elect to participate in the program.
The funding is available through the government's Troubled Asset Relief Program.
The program is intended to ensure that auto-parts suppliers will continue shipping goods and maintaining a level of cash flow to pay employees and continue operations. However, the size of the program is smaller than the $25 billion in assistance previously requested by suppliers.
Gov. Jennifer Granholm has stated that this program will benefit Michigan's auto-parts suppliers and workers and "will minimize unnecessary job losses as the administration continues to work with the entire auto industry to ensure an orderly restructuring."
In a March 19 press release, the Treasury indicated that General Motors and Chrysler have already agreed to participate in the program. Ford has indicated that it does not intend to participate.
The program will provide eligible suppliers who are selected by participating automakers with (1) access to government-backed guarantees of certain receivables from the participating automakers for a fee; and (2) the ability to sell certain of their receivables into the program at a discount.
Decisions about which suppliers and which receivables will receive protection under the program will be made by General Motors and Chrysler.
Under the program, any U.S.-based auto supplier who agrees to ship to a participating automaker may be eligible to receive benefits with respect to receivables created from goods shipped after March 19, 2009.
In order for an auto supplier to be eligible, the supplier must also agree to maintain "qualifying commercial terms," which will be determined.
In an Open Letter, dated March 24, the Original Equipment Suppliers Association indicated that it was working directly with the Treasury, General Motors and Chrysler to clarify certain parameters of the program. In its Open Letter, OESA indicated that selected auto-parts suppliers will likely be required to pay a participation fee equal to 2 percent of the guaranteed receivables. Additionally, an incremental 1 percent fee — for a total 3 percent fee — will likely be charged for selling receivables in the program.
It is anticipated that the Treasury, General Motors and Chrysler will prepare term sheets to provide complete details regarding the program.
The Treasury's press release suggests that only Tier 1 auto-parts suppliers — that is, suppliers selling directly to automakers — will be eligible to participate in the program. Indirect auto suppliers will apparently have to rely on the trickle-down effects of the financial benefits received by the direct suppliers, although this issue may be further addressed in the upcoming term sheets.
The Treasury recommended that auto suppliers contact the procurement officer at their customers who agree to participate in the program for information about the process for enrollment that those automakers will establish.
Those suppliers who wish to consider selling receivables into the program should also contact any relevant lenders to determine whether any lender consents may be required.
Eric Bredemeier is an attorney with the Varnum LLP law firm.