For the unvarnished truth about the health of U.S. auto parts suppliers, you need only check the biggest players' credit ratings.
It's not a pretty picture. Of the 29 largest North American suppliers with public debt, 20 are rated noninvestment grade, or ``junk,'' by Standard & Poor's, the New York ratings agency.
Junk status warns investors and customers about the elevated risk of doing business with a firm. These days it applies to suppliers such as Delphi Corp., Tenneco Automotive Inc., TRW Automotive Inc. and ArvinMeritor Inc.
U.S. automotive parts makers are in the throes of a cash crunch, the result of declining demand from General Motors Corp. and Ford Motor Co.; the high cost of steel and other materials; and the aftermath of the supplier industry's acquisition binge in the 1990s.
Credit ratings inform potential bond investors about a company's ability to repay its debt. A junk rating means a company is vulnerable.
Suppliers tagged as junk see their cost of borrowing skyrocket. Sometimes they can't get any credit. Lenders apply tougher standards, and their own suppliers and customers become harder to deal with. And many companies are in that boat.
``This is about as bad as it has been in recent memory,'' said S&P analyst Martin King, who expects the next 18 months to be even tougher.
A junk rating pushed Citation Corp. over the brink last year.
Ed Buker, CEO of the casting and machining company, said last year's spike in steel prices made Citation's suppliers nervous.
The company's junk standing-the result of several acquisitions-led its suppliers to slap on credit limits and tight terms, Mr. Buker said. The normal 60 days for repayment changed to cash-on-delivery.
The Birmingham, Ala., firm ran out of cash last September, though it emerged from Chapter 11 reorganization in May.
Firms with junk ratings pay 1 to 3 percentage points more than an investment-grade competitor, said Tom Kelly, S&P's managing director for U.S. basic industries and transportation.
``The more important cost to these companies often is the increased constraints that banks and bondholders place on their lending arrangements-if they agree to lend at all,'' he said.
He said lenders ``can place limits on these companies, making it more difficult for management to execute business and operating strategies when times are tough.''
S&P's outlook for the sector is grim. Fifteen of 50 suppliers the agency tracks-which includes aftermarket auto parts suppliers-have a ``negative'' outlook. Just three have ``positive'' outlooks.
In last year's ranking of North America's largest OEM suppliers by Automotive News, a sister publication of Tire Business, 20 of the top 29 companies with public debt have junk ratings.
Delphi is a fallen angel-a company that this year has tumbled from investment grade into junk status. S&P cited Delphi's dependence on General Motors, as well as its poor profitability and heavy legacy costs.
Analysts say Visteon Corp. avoided a Chapter 11 filing when former parent Ford offered a bailout in May. Visteon retained its junk B- rating and remains on S&P's CreditWatch. But the outlook was revised last month to positive.
Junk ratings make auto makers nervous, said Ken Trammel, CFO of Tenneco Automotive, the Lake Forest, Ill., supplier of suspensions and exhaust systems.
In 2001 and 2002, Mr. Trammel was forced to react when two customers fretted about Tenneco's $1.71 billion in debt, a vestige of its 1999 spinoff from the former Tenneco Inc. conglomerate. He said he then had to reassure the customers by laying out Tenneco's debt-reduction plan, which cut debt to $1.42 billion as of last month.
Since last September, five companies have sought protection in bankruptcy court after running out of cash: Collins & Aikman Corp., Tower Automotive Inc., Intermet Corp., Meridian Automotive Systems Inc. and Citation.
The companies had combined North American sales last year of $7.22 billion.
Some parts makers are on the junk heap because they leveraged their balance sheet to join the merger-and-acquisition frenzy of the 1990s. S&P's Mr. King said Tower grew quickly, but it failed to integrate its acquisitions and did not generate enough cash to pay down the debt.
Escaping the junkyard isn't easy. Dana Corp. spent three years chopping workers and closing plants to rid itself of junk status. Proceeds from the $1.10 billion sale of its aftermarket business last year lifted Dana's rating last November to BBB-, which is one notch above junk.
But on June 15, S&P revised its outlook on the Toledo, Ohio, supplier to ``negative,'' from ``stable.'' And that leaves Dana vulnerable to the winds of distress in the industry.