U.S. Treasury's Financial Stability Plan - Auto Supplier Support Program: Stabilizing the Auto Industry at a Time of Crisis
On March 19, 2009 the Obama Administration announced a new program to help stabilize the auto supply base. America’s auto parts suppliers employ more than 500,000 workers across the nation. Yet because of the credit crisis and the rapid decline in auto sales, many of the nation’s auto parts suppliers are unable to access credit and are facing growing uncertainty about the prospects for their businesses. Supplier instability creates greater uncertainty for the auto companies that rely on the parts they ship. This cycle of frozen credit markets, growing supplier uncertainty and growing auto company uncertainty has the potential to unravel the industry and short-circuit restructuring efforts at companies like GM and Chrysler.
The Obama Administration’s new Supplier Support Program will help break this cycle by providing suppliers with the confidence they need to continue shipping their parts and the support they need to help access loans to pay their employees and continue their operations.
- The program will provide suppliers with access to government-backed protection that money owed to them for the products they ship will be paid no matter what happens to the recipient car company.
- Participating suppliers will also be able to sell their receivables into the program at a modest discount. This will provide suppliers with needed funding to operate their businesses and help unlock credit more broadly in the supplier industry.
- The program will be run through American auto companies that agree to participate in the program. Suppliers to those companies that agree to maintain qualifying commercial terms will have the opportunity to request this government backed protection. If granted, the supplier will pay a small fee for the right to participate in the program.
- The Treasury Department has made available up to $5 billion in financing under this program.
Suppliers that ship to auto companies generally receive payment for those shipments about 45 – 60 days later. In a normal credit environment, suppliers can either sell or borrow against those receivables in the interim period to pay their workers and fund their on-going operations. However, in the current environment, due to the uncertainty about the ability of the auto companies to honor their obligations, banks are unwilling to extend credit against these receivables. To help address this problem, the Supplier Support Program will provide selected suppliers with financial protection on monies they are owed by domestic auto companies and the opportunity to access immediate liquidity against those obligations.
Eligible Auto Companies
Any domestic auto company is eligible to participate in the program. If a company decides to participate, they will request an allocation from the U.S. Treasury to provide government-backing and then work with a third-party servicer to establish a receivables purchase program. Auto companies will be required to make a financial commitment in connection with the support received from the Treasury. General Motors and Chrysler have already agreed to participate in the program, and will have fully operational purchase programs established shortly.
Any U.S. based supplier that ships to a participating auto manufacturer on qualifying commercial terms may be eligible to participate in the program. Decisions about which suppliers and which receivables will receive protection will be made by the participating auto companies.
Suppliers interested in the program should contact their lenders to determine whether they can obtain requisite consents to sell their receivables. Once they have done so they should contact the procurement officer at their customer/auto company. Once approved by the auto company, suppliers will be able to receive the protection for a modest fee, which will have the backing of government funds. These suppliers will also be able to sell their receivables into the program for a modest discount, which will provide them with immediate liquidity.
Any receivable created with respect to goods shipped after March 19, 2009 that is made on qualifying commercial terms between a supplier and a participating auto company will be eligible for the program.