On March 19, 2009, the United States Department of Treasury (“Treasury Department”) announced a new Auto Supplier Support Program (“Program”) with the goal of stabilizing the auto supplier base in the United States, in light of certain auto suppliers’ inability and difficulty to access needed credit and the significant decline in auto industry sales. The Treasury Department has recognized that assistance to auto suppliers is a key to restructuring domestic auto manufacturers, such as General Motors and Chrysler, and that supplier instability creates greater uncertainty for auto manufacturers who rely on parts sold by their suppliers.
The Auto Supplier Support Program will specifically provide auto suppliers with the following benefits:
- Access to government-backed protection that money owed to them for the products they ship to certain manufacturers will be paid no matter what happens to those auto manufacturers. The Treasury Department will protect up to $5 billion of receivables.
- Sales of receivables will be at a modest discount. The intent is to provide suppliers with required funding to operate their businesses and help unlock credit more broadly.
The Program will run through auto manufacturers that agree to participate in the Program. At this moment, only General Motors and Chrysler have decided to participate, while Ford has stated that it does not intend to participate. Because the Treasury Department has specifically excluded foreign auto manufacturers, suppliers who supply parts to foreign auto manufacturers, such as Toyota, BMW, Mercedes-Benz, Nissan and Honda, will not be covered by the Program.
Eligible suppliers under this Program are “U.S.-based suppliers” that ship to participating auto manufacturers on qualifying commercial terms. As of now, it is not clear if suppliers who are subsidiaries of foreign corporations are considered a “U.S.-based supplier.” However, at least one news source has reported that suppliers that are foreign-owned but are U.S.-based subsidiaries can participate. The participating auto manufacturers are provided discretion to determine which suppliers and receivables will be granted protection under the Program. If granted, the suppliers will be required to pay a small fee for participation in the Program. One news source has reported that the fee charged will be 2% of the face value of the receivable guaranteed, and an additional percent if the receivable is converted to cash before the normal payment term.
Receivables eligible under the Program are any receivables created with respect to parts shipped after March 19, 2009, that are made on qualifying commercial terms between a supplier and a participating auto manufacturer.
HOW TO PARTICIPATE
If suppliers have questions with regard to the Program, they should contact the auto manufacturer’s procurement department. Suppliers interested in participating in the Program should also contact their lenders to determine whether they can obtain consent to sell their receivables. If so, the suppliers should contact the auto manufacturer’s procurement department, and the manufacturer will then either approve or reject such requests by the suppliers. Because participation is not automatically granted to suppliers, it is necessary for them to express to auto manufacturers that they wish to participate in the Program.
Suppliers’ Sales Covered by the Program:
- Suppliers’ sales of auto parts to U.S. OEMs participating in the Program (at this point, only General Motors and Chrysler). Subsidiaries of foreign corporations appear to be considered U.S.-based suppliers.
- Receivables created with respect to parts shipped after March 19, 2009 made on qualifying commercial terms. Suppliers’ Sales Not Covered by the Program:
- Suppliers’ sales of auto parts to U.S. OEMs not participating in the Program (at this point, Ford).
- Suppliers’ sales of auto parts to foreign auto manufacturers, such as Toyota, BMW, Mercedes-Benz, Nissan and Honda.
- Sales to Tier 1, Tier 2 and Tier 3 suppliers.
- Suppliers’ sales of non-auto parts.
- Receivables created with respect to parts shipped on or before March 18, 2009.