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Rising debt costs crimp cash flow at automotive suppliers
<p>Just as the <strong><a href="http://autonews.com/topic/suppliers" target="_blank">supply chain</a></strong> is smoothing out and the cadence of production improves, automotive suppliers are now seeing red where balance sheets had long been stable.</p>
<p>The soaring cost of money and tightening credit conditions are hurting liquidity, and in some cases, tipping financially distressed companies into insolvency.</p>
<p>Small- and mid-size suppliers that are heavily leveraged with a large amount of variable interest debt are the most vulnerable. That applies to many manufacturers in Michigan, said Steven Wybo, senior restructuring and management consultant at Detroit area firm Riveron.</p><p>"For the first time in over a decade, we're actually talking about interest rates significantly impacting businesses' ability to grow and survive," he said.</p>
<p>While automakers took in record profits over the past couple of years, their suppliers absorbed most of the impact of <strong><a href="http://autonews.com/topic/microchips" target="_blank">supply chain snarls</a></strong> by cutting costs, trying to renegotiate contracts and often taking on more debt — a decision that has proved to be costly.</p>
<p>When North Carolina-based Stanadyne LLC, whose creditors include <strong><a href="http://autonews.com/topic/ford" target="_blank">Ford Motor Co</a></strong>. and Autocam Corp., filed for <strong><a href="http://autonews.com/topic/bankruptcy" target="_blank">Chapter 11 bankruptcy</a></strong> protection in February, it cited interest rates as the driving force.</p>
<p>"The debtors filed these Chapter 11 cases because they will not be able to outrun their current interest rates, which have crippled the debtors and drained liquidity since the rapid rise in their variable rates," according to the bankruptcy declaration from the company.</p>
<p>Others are facing a similar liquidity crunch. Plastics, rubber and foam supplier Unique Fabricating Inc. <strong><a href="https://www.autonews.com/suppliers/rivian-bosch-supplier-unique-fabricating-faces-insolvency" target="_blank">is running low on cash</a></strong> while its lender runs short on patience.</p>
<p>After more than half a dozen forbearance agreements and a default last month, Citizens Bank NA notched up the interest rate on its loan to the company and stopped automatic advances under its revolving line of credit, according to a filing with the U.S. Securities and Exchange Commission.</p><img alt="headshot of Steve Wybo" data-align="left" data-caption="Steve Wybo" data-entity-type="file" data-entity-uuid="de939fe5-71ae-4aed-bc66-2d6839e69d25" src="http://s3-rd-prod.crainsdetroit.com/s3fs-public/inline-images/Steve%20Wybo_headshot.jpg" />
<p>"The days of kicking the can on covenants or waivers on defaults and being friendly, I think, are mostly over for now," Wybo said of lending practices in general. "The banks can't afford to be too lenient. They were very lenient during COVID."</p>
<p>Unique Fabricating's predicament is not unusual. The profile of the company, which had an estimated revenue of $136 million last year, mirrors many other small and mid-size suppliers. But its publicly traded status in a space dominated by private companies offers a glimpse into the financial turmoil that turnaround experts have said is prevalent at this part of the supply chain.</p>
<p>Wybo said he has a couple dozen financially distressed clients, and most of them have pointed to rising interest rates as a major factor. While bankruptcy is the result only in the most severe cases, daunting debt service levels are impacting nearly all companies with variable debt on the books.</p>
<p>Cooper-Standard Automotive Inc.'s debt increased just slightly year-over-year to about $1 billion in 2022, as detailed in its annual earnings report in February. At the same time, its net interest expense jumped $6 million due to higher interest rates.</p>
<p>The elevated debt service level, it warned investors, is burning cash that could otherwise be used for working capital, capital expenditures or research and development.</p>
<p>The same dynamic is at play with Stoneridge Inc. The supplier's interest expenses increased about $2 million from 2021 to 2022 primarily because of higher credit facility interest rates, it said in its annual financial report filed last month.</p><img alt="headshot of Sean Pattison" data-align="left" data-caption="Sean Pattison" data-entity-type="file" data-entity-uuid="47e90d28-b1c4-4d4a-aa17-0d4966369be4" src="http://s3-rd-prod.crainsdetroit.com/s3fs-public/inline-images/Sean%20Pattison_headshot.jpg" />
<p>"It can be a major hurdle for suppliers," said Sean Pattison, principal at Plante Moran who specializes in restructuring. "When you have less cash, then every decision becomes that much more important."</p>
<p>At Superior Industries International Inc., most of its $647 million of debt was at a floating rate at the end of 2022, though it did execute a swap for fixed rate debt to hedge against volatility in the future, the company said in its annual report filed last month.</p>
<p>The interest rate on its $400 million term loan facility jumped more than 8 points to 12.3 percent, amounting to an annual interest expense of $46.3 million, or $4.5 million more than what it paid the previous year.</p>
<p>"A significant portion of our cash flow from operations will be used to pay our interest expense and will not be available for other business purposes," the company said in the filing.</p>
<p>Auto suppliers are starting to look to customers for recoveries related to elevated interest expenses, Pattison said. But those negotiations differ from the price increases many customers have <a href="https://www.crainsdetroit.com/manufacturing/supply-chain-crisis-shifts-power-balance-between-automakers-and-suppliers" target="_blank">reluctantly given to help suppliers weather rising costs</a> for material and labor, as well as production shutdowns.</p>
<p>"The OEMs view that separately from operational challenges," Pattison said of rising interest rates. "They would view it as outside of their control or outside of their effect on the suppliers, so I think they're trying to avoid having to compensate or reimburse suppliers for that increase in cost."</p>
<p>However, for many companies, <a href="https://www.crainsdetroit.com/auto-suppliers/inflation-supply-chain-kinks-keep-pressure-automotive-suppliers" target="_blank">the turbulent financial situation</a> has only worsened.</p>
<p>"Suppliers, more so now than even 24 months ago or 12 months ago, are trying to include any cost increase they can that's making their contribution and profit margin erode away," Pattison said.</p>
<p>Suppliers have only two options to mitigate losses: cut costs and improve efficiencies, Wybo added. After that, they fall back on their customers for help.</p>
<p>"For a lot of these distressed companies, it's been a buildup of three years of depressed volumes, volatility in releases, increased labor, etcetera," he said. "This massive rise in interest rates hit these borrowers quickly."</p>
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