The bankruptcy of Collins & Aikman Corp. will trigger a series of financial crises among its vendors that could bring down even some of the stronger ones, suppliers and analysts say.
Suppliers who have dealt with big customer Chapter 11 filings before say the loss of receivables, the inability to borrow against them and resulting payment terms in bankruptcy could put several smaller companies under.
``No matter how prepared anybody is, somebody might end up being in a boat where they can't continue next week,'' said a Collins & Aikman vendor who didn't want to be named. ``That's where the drama would come in, probably in a few weeks.''
The vendor said his firm should survive, but others won't.
``When you hear their top man on the public airwaves and he says, `None of this is happening, it's under control,' and then a month later ...'' he said, his voice trailing off. ``You're never prepared for that, no matter how prepared you try to be.''
Troy, Mich.-based Collins & Aikman, which has parts on nearly every vehicle sold in North America, will continue to operate as it reorganizes under Chapter 11 bankruptcy protection. During that time, it will build its interior, plastic trim and fabric components and pay its suppliers. It struck a deal with J.P. Morgan Chase & Co. for up to $300 million in debtor-in-possession financing.
But the trade debt it carried before its May 17 filing is frozen, which could trigger write-offs, bank covenant violations and cash-flow crises at some of its vendors, said Craig Fitzgerald, a partner and auto analyst at Southfield, Mich.-based Plante & Moran PLLC.
It's enough to sink even a well-run, profitable company, he said.
When a company's customer files for bankruptcy, all outstanding amounts owed are frozen. Any payments the customer made 90 days before the filing also have to be returned.
The vendor also can't borrow against any of the bankrupt company's receivables. Borrowing against receivables is common in manufacturing, Fitzgerald said.
Then the court will determine a payment schedule for vendors of the bankruptcy company. That's a long time to fund operations without payment, Fitzgerald said.
``If you are a supplier to a customer that goes bankrupt, and they represented a substantial portion of sales, [and] you have a typical debt-to-equity ratio of 3-to-1, are borrowing meaningfully off credit facilities with the bank and you're of average profitability, it's probable that bankruptcy will force you into bankruptcy,'' he said. ``It's a common situation.''
Steve Craprotta, president of Clinton Township, Mich.-based Eclipse Mold Inc., had a close call when Breed Technologies Inc. filed for bankruptcy in 2000. The company is based near Detroit.
``They stuck us for $750,000,'' Craprotta said. ``We're not a big company. The bank won't loan you money on their receivables and cash gets tight. ... We took pay cuts, we didn't get bonuses for years and had to cut jobs and sell machinery. It took us a good year to get out of it. I write that off as my $750,000 MBA. I'm careful now about how long the rope is. When we see things get rough, we tighten up the chain.''
Belleville, Mich.-based Wellington Industries Inc., in fact, dropped Collins & Aikman as a supplier six months ago, after a six-month transition before that. The problem is many small businesses are attracted to the large volume a customer such as Collins & Aikman offers.
But it's critical for a small business to read the signs, said John Brodowsky, Wellington's president and chief operating officer.
``You could see this train wreck coming right down the tracks,'' he said. ``When you're smaller, you have no room to make a mistake. When you get a $4 billion customer, you wouldn't mind having it. But it's like that siren song. When she starts yodeling, you have to go away.''
The Collins & Aikman supplier who did not want to be named said production disruptions could result if vendors go out of business. It's hard to re-source automotive component production quickly, the vendor said.
``You cannot overnight a job from one place and move it somewhere else the next morning,'' the vendor said. ``You have to calibrate machinery, take on tools, drawings, get used to making a new part and find someone who can squeeze it into their schedule.''
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C&A in time
1999: Collins & Aikman Corp., a Charlotte, N.C.-based auto supplier best known for its fabrics, announces plans to become an interior auto powerhouse under new Chief Executive Officer Tom Evans.
June 2000: Collins & Aikman officially relocates its headquarters to the heart of the North American auto industry with a new office in Troy, Mich. The move is part of the company's continued effort to raise its focus with automakers as it targets growth.
Aug. 2001: C&A and Textron Inc. announce an agreement to sell the Textron Automotive Co.'s trim unit to C&A for $1 billion in cash and assumed debt, 18 million shares of common stock and $245 million in preferred stock. The joining will create a company worth nearly $4 billion.
Aug. 2002: Evans leaves the firm's top jobs in a shakeout and plastics operations expert Jerry Mosingo - a former Textron executive - takes over as CEO.
Nov. 2002: Mosingo announces the start of a major restructuring aimed at bringing money-losing plants into the black and improving production globally. Collins & Aikman will close sites in the United States, Canada, Sweden, Belgium and England.
Aug. 2003: Another shake-up ousts Mosingo, and Stockman - who lacks experience running a manufacturing business - takes over as CEO to personally oversee the business. Company watchers said he and Mosingo disagreed about the need for 750 job cuts within the engineering and white-collar ranks at C&A.
May 2005: C&A enters Chapter 11 bankruptcy protection. David Stockman steps down as chairman.