The federal government's Export Development Canada is refusing any new requests by auto parts makers to insure receivables due from Chrysler LLC, a sign that fears of a potential bankruptcy are growing.
"Obviously the risks are higher," EDC spokesman Phil Taylor said, so the Crown corporation is no longer providing receivables insurance to new clients or increasing such insurance with existing Chrysler suppliers.
It's still business as usual with suppliers wanting to insure receivables with Ford Motor Co. and General Motors Corp., Mr. Taylor said.
The EDC's move is a sign that fears are growing even among groups that aren't directly involved in the auto industry.
It comes amid a growing cash crunch at the Detroit Three auto makers that has led the companies to seek at least $25-billion (U.S.) in emergency aid from the U.S. government and sparked fears of a bankruptcy filing by one or all of them that would also cause a cascading collapse among auto parts makers.
"This cascading effect is very real," said Patrick Dreisig, a lawyer who leads the automotive practice at Butzel Long, a law firm in Bloomfield Hills, Mich.
When insurers "begin to lose confidence in the receivables that really are forming the basis for the credit lines, it can be considered maybe the first crack in the dike as to how this industry is going to be able to function."
Ed Saenz, a spokesman for Chrysler, would not discuss the EDC's move because arrangements between the company and its suppliers are confidential.
The danger for parts makers is that if a customer goes into bankruptcy protection under Chapter 11 of the U.S. bankruptcy code or the Companies' Creditors Arrangement Act in Canada, their receivables turn them into unsecured creditors.
EDC backstops mainly small and medium-sized Canadian exports with insurance, financing and risk management services that enable them to develop and expand in export markets.
"Accounts receivable insurance covers your full book of business for up to 90 per cent of your losses against such commercial risks as your customer refusing to pay," the Crown corporation says on its website, noting other risk coverage includes bankruptcy or insolvency, cancellation of export or import permits or cancellation of contracts.
Receivable insurance is generally carried by suppliers that depend on perhaps one or two customers or are in peril themselves, said Mr. Dreisig.
Two of the largest Canadian parts makers, Magna International Inc. and Martinrea International Inc., said their receivables are not insured.
Magna is carrying an estimated $1.6-billion in receivables from Chrysler, Ford and GM on its books, Standard & Poor's rating services said last week. It noted Magna has the financial resources to withstand the effects of a bankruptcy filing by one or more of the Detroit Three.
Vince Galifi, Magna's chief financial officer, said earlier this month during a conference call on Magna's third-quarter financial results that the company has contract terms with its customers for parts that are produced, and the customers are paying based on the terms of the contracts.
Payments for engineering and tooling vary by customer, he said, and Magna is working with customers to track where the payments are within each auto maker.
"We have not seen any change in [auto maker] practices with respect to paying either production or tooling or engineering receivables to us," he said.
There have been no interruptions of deliveries from suppliers, Chrysler's Mr. Saenz added.
Martinrea's receivables with all customers stood at $236.5-million (Canadian) as of Sept. 30. Linamar Corp. and Wescast Industries Inc., two other large publicly traded Canadian parts companies, held receivables of $419.3-million and $56-million with all their customers as of Sept. 30, securities filings show.
The Financial Times reported last week that three European credit insurers have stopped insuring suppliers to Ford and GM. In normal times, risk withdrawals affect smaller companies, Reuters news agency quoted Fabrice Desnos, chief executive officer of Euler Hermes UK, as saying. His company was identified by the Financial Times as one that has withdrawn insurance. Although Mr. Desnos would not discuss specific cases, "We have to realize that nothing is too big to fail," he told Reuters.
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"This idea that you just go into Chapter 11 and hang around for three months ... this is a fantasy."
Rick Wagoner, GM CEO
"A restructured, competitive American automobile industry will continue to play a crucial role in our national economy."
Nancy Pelosi, Speaker of the House of Representatives
"Companies fail every day and others take their place. I think this is a road we should not go down."
Republican Senator Richard Shelby, in saying Wall Street rescue money should not prop up the auto makers
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