The Wall Street Journal-20080131-Car-Industry Woes Push Key Supplier To Financial Brink

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Car-Industry Woes Push Key Supplier To Financial Brink

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Julie Nguyen Brown has always stayed one step ahead of trouble. The Vietnam native fled to the United States one week before the 1975 fall of Saigon. Later, after working as a waitress and then as an engineer at Ford Motor Co., she founded one of the country's largest minority- owned auto suppliers, continually sidestepping the bankruptcies and liquidations of her larger rivals in the auto-plastics business. Yet Ms. Brown, chief executive of Plastech Engineered Products Inc., can no longer elude the woes that have engulfed the domestic auto business. Her company, which makes door panels, floor consoles and engine covers, is on the financial brink. And Dearborn, Mich.,-based Plastech, which last year posted sales of $1.4 billion, has hired advisers to work on a restructuring or potential bankruptcy filing, said four people familiar with the matter. Ms. Brown declined to comment.

The Big Three auto makers and Johnson Controls Inc. are now contemplating a $200 million bailout package for the 8,000-employee company. But facing their own financial strain, they are loath to extend a hand to the company, which has 35 plants around the country. Ms. Brown had been able to get relief from Ford and other customers at least twice in two years, but the auto makers "want to fix this permanently and not be here again in six months," said one person involved in the talks. "Enough of the stop-gap measures."

Ms. Brown, a former high-school exchange student and now a trustee of Brown University, started Plastech with one small plant in 1988. The daughter of a petroleum engineer bought her first factory for $8 million with help from a Michigan minority-business loan. Running Plastech with her husband, Jim Brown, Ms. Brown was lauded as a "Motown Tycoon" by 1992. Scrupulously tough on controlling costs, Ms. Brown began rolling up rivals, even offering to buy imperiled parts supplier Collins & Aikman for $1 billion in 2005.

A bankruptcy filing by Plastech, a critical part of Detroit's supply chain, could disrupt the production of many key vehicles, including the F-150 pickup truck, the Ford Edge crossover or General Motors Corp.'s popular large crossovers, the Buick Enclave and GMC Acadia. Today, Ford represents about 26% of Plastech's sales. Ford declined to comment on discussions with suppliers. A GM spokeswoman said, "We continue to be supportive of Plastech as a long-term supplier," but declined to comment on specifics of the relationship.

But like virtually all parts suppliers in Detroit's automotive ecosystem, Plastech has been caught between rising production costs and falling demand for the products in which its parts are used. The cost of plastic, dependent on an oil-based resin, increases along with oil prices. Detroit's auto makers typically have resisted paying more for a part and have instead insisted on lower prices over the life of a supply contract.

These issues in part caused Plastech to trip a provision in its bank lending agreement for the fourth quarter of 2007, said people familiar with the matter. And it will likely do so again in the first quarter of 2008 without some aid from the auto makers, said these people. Plastech violated a "step-up clause" that required its operations to improve over time, said these people, without specifying. Its $265 million publicly traded bank loan traded at 64 cents on the dollar yesterday, down from 77 cents at the end of December, according to LSTA/LPC Mark-to-Market Pricing.

Ms. Brown has been fighting to squeeze concessions from Ford and others, such as increased product prices or promises of future business. Auto makers, in return, want some debt relief from Plastech's first-lien lenders, which include GE Capital and Elliott Advisors. The company's total balance-sheet debt was $488 million on Sept. 30, according to Standard & Poor's Ratings Services.

S&P cited concerns about Plastech's liquidity and its ties to Ford and GM, both of whom are predicting lower sales in 2008. The tight credit market, with lenders that are less accommodating than a year ago, is a problem for many struggling companies. S&P downgraded Plastech's credit rating to B-minus from B-plus this month.

"She needs 11th-hour help, as she's gotten in the past. But the Big Three are struggling so much, I think they are torn between propping up customers or allowing them to restructure," said Erich Merkle, vice president of forecasting at IRN Inc., an auto-research firm in Grand Rapids, Mich.

Mr. Merkle, like many forecasters, expects U.S. auto sales to tumble this year to about 15.5 million, compared with 16.1 million a year ago. Much of that fall is expected to come from Detroit.

There is some strong gamesmanship at play in these negotiations. With the auto industry practicing just-in-time manufacturing, any hiccup in the supply chain can shut down production, giving leverage to those who threaten bankruptcy. When Collins & Aikman filed for bankruptcy-court protection in May 2005, it briefly caused a shutdown at some of Ford's plants.

Yet Detroit's auto makers don't want to make a habit of paying higher prices or giving concessions to troubled suppliers, moves that are expensive and also encourage other suppliers to push for aid.

All sides are trying to strike a deal before Sunday, the deadline for Plastech "curing" the part of its business that violated the loan covenant. Plastech needs about $200 million in relief, said another person involved. This person added "this can maybe get done outside bankruptcy. If not, it would be in a very-controlled manner."

Reflecting the difficulties at Plastech, a number of outside restructuring advisers and bankruptcy lawyers have been hired. Among them are the banking firm Lazard Ltd., and law firms Jones Day and Skadden, Arps, Slate, Meagher & Flom, said people involved in the matter.

"The credit market has significantly tightened and precipitated a little bit quicker restructuring in the auto industry than would have been the case," said Randall Eisenberg, senior managing director at FTI Consulting, which has worked on several auto-parts turnarounds. "A year or year and a half ago a company could just refinance their way out of liquidity problems. That window has closed. Not just for the auto industry, but across most industries."