Small auto parts makers feel credit pinch

By James B. Kelleher

DETROIT (Reuters) - The credit crunch that has sent the U.S. property market into a tailspin and generated a wave of billion-dollar bank write-downs is posing a fresh problem for smaller players in the auto parts sector, industry experts said this week at the Reuters Auto Summit.

Thomas Stallkamp, the former Chrysler president who is now a partner at private equity firm Ripplewood Holdings LLC, said the tightening in lending standards is especially bad news for smaller parts suppliers, which are already scrambling to diversify and expand abroad to reduce their reliance on the three struggling Detroit carmakers.

"The banks have gotten a lot more religion because they have their own set of issues," Stallkamp said.

Wilbur Ross, the billionaire investor who has been buying companies in the auto interiors sector, predicted the credit crunch would force marginal parts producers -- many of them fresh out of bankruptcy -- to once again seek protection from their creditors next year.

"I think what you're going to see in '08 is that some companies that came back out in the last couple of years but did so on a very leveraged basis ... some of those people will go back in what we, in our industry call, Chapter 22, a second-time Chapter 11," Ross said.

The pain may not be confined to the auto industry, where a massive restructuring has been causing distress for years.

An analysis of the finances of nearly two dozen privately held U.S. manufacturers conducted for Reuters found a pronounced deterioration in their ability to meet short-term obligations.

Although, on average, the companies are in no immediate danger of financial difficulties, according to the survey, it suggests the effects of the credit crunch are spreading.

The analysis of the manufacturers' balance sheets, performed by Sageworks Inc, a financial information firm that compiles data on closely held companies, found that the ratio between their short-term assets and short-term liabilities -- an indicator commonly known as the quick ratio or acid test -- narrowed markedly between the second and third quarters.

The Sageworks survey found the quick ratio at 23 private manufacturers, on average, slipped to 1.74-to-1 in the third quarter from 2.95-to-1 in the second period.

Any ratio above 1-to-1 is considered healthy. But the trend signals a potentially worrisome reversal in liquidity levels, which as recently as the second quarter were strengthening.

"If that trend line continues ... that would not be good," said Brian Hamilton, the Sageworks chief executive.

"You don't want to go too far because overall things are still OK," he said. "But it's a source of validation that the liquidity crunch is beginning to affect private companies."

But not everyone at the summit agreed that a tougher environment was roiling smaller producers -- or that it was even a bad thing.

Tenneco Inc (TEN.N: Quote, Profile, Research, Stock Buzz) Chief Executive Gregg Sherrill said that he was not hearing of any liquidity-related stress from his company's supplier base.  Continued...