The US Treasury on Thursday announced aid of up to US$5 billion for auto supply firms hurt by a credit squeeze and the collapse in vehicle sales.
The program is aimed at US-based suppliers to auto manufacturers General Motors (GM) and Chrysler LLC, which have received a separate aid package worth some US$25 billion to help stave off their collapse.
The new effort “will help stabilize a critical component of the American auto industry during the difficult period of restructuring that lies ahead,” US Treasury Secretary Timothy Geithner said in announcing the plan. “The program will provide supply companies with much-needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need.”
The program will provide suppliers with access to government-backed guarantees that money owed to them for the products they ship will be paid no matter what happens to the automakers that ordered the products.
Suppliers will also be able to sell their receivables into the program at a modest discount, giving them access to needed liquidity.
The aid package came after warnings that dozens of automotive suppliers could lose their credit lines or end up in default because of problems with auto manufacturers, notably GM.
GM is currently funding its operation with the help of US$13.4 billion in emergency government loans and has asked for another US$22.6 billion in aid.
Suppliers generally receive payment about 45 days to 60 days after shipping their products. In a normal credit environment, suppliers can either sell or borrow against those so-called “receivables” to pay their workers and fund their operations.
However, credit lines have been tightened because of the uncertainty about the ability of the auto companies to honor their obligations, adding to the pressure on suppliers.
Neil De Koker, president of the Michigan-based Original Equipment Suppliers Association (OESA), said that approval was good news for the entire auto industry.
“This program comes at a very critical time and will help suppliers as they struggle to continue operations,” De Koker said.
Last month, the OESA, which has a membership roster that includes some of the largest automotive suppliers in the US, submitted a request for US$25.5 billion in assistance.
The request also had been supported by foreign carmakers such as Toyota.
The OESA had warned that as many as one-third of the roughly 4,000 suppliers in the US faced “imminent financial distress.” Auto suppliers also represent roughly a quarter of the US industrial base.
Although the US$5 billion is less than the group had requested, it corresponds to the amount suppliers are currently owed by GM and Chrysler, De Koker said.
GM welcomed the new Treasury program as a key step to keep the US auto industry running.
“This action can help reduce the risk of vehicle production disruptions that would occur if auto suppliers were unable to produce due to lack of access to working capital liquidity,” the leading US automaker said in a statement.
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