Troubled supplier Collins & Aikman Corp. is playing a high-stakes game of chicken with its customers. And it's not the first time.
The company said U.S. automakers must provide profitable new business to a reorganized C&A if they hope to be repaid $82.5 million that they lent the supplier last year while it was in reorganization.
The terms, laid out last week in C&A's reorganization plan, mean customer help will continue to be critical to the supplier's hoped-for turnaround.
The car companies - especially the Big Three - were forced to bail out C&A last May when the supplier entered Chapter 11 without cash or a plan to continue operating.
The Southfield, Mich., company's fall into Chapter 11 bankruptcy protection under former Chief Executive Officer David Stockman was one of the most chaotic among several auto supplier reorganizations in recent years. Under Stockman, C&A expanded rapidly but agreed to unprofitable contracts to win the new business.
To keep the flow of parts from being interrupted, C&A's customers last year lent the supplier $112.5 million - $82.5 million of it in loans that will be repaid only if money is left after higher-priority creditors are satisfied. Customers also granted C&A $222.5 million in annual price increases.
They had little choice. C&A, a maker of cockpits, carpet and interiors, puts parts on virtually every vehicle manufactured in North America. Sales last year totaled $2.8 billion.
Now, to get repaid, customers will have to do future business with a company whose long-term health prospects remain at risk.
C&A's reorganization plan failed to disclose its current financial condition or whether it has lined up future financing sources. And C&A recently received approval from U.S. Bankruptcy Court in Detroit to defer $7.2 million in monthly interest payments until January so it can preserve cash.
Company spokesman David Youngman said if customer agreements are not reached, an amended plan of reorganization will be necessary. But the prospects of recovery on the $82.5 million loan are poor otherwise; there would be little cash left to cover it once higher-priority debts are paid.
In fact, secured lenders are being asked to take equity in a reorganized C&A in lieu of payment for their debt. The reorganization plan is subject to creditor and court approval.
Time will tell whether the desire for the loan payment will influence customers' willingness to contract new business with C&A. The supplier hopes to emerge from Chapter 11 by February.
General Motors Corp. spokeswoman Deborah Silverman said the automaker is in discussions with C&A: ``It is important we support them through the restructuring process, but we cannot discuss business going forward.''
C&A sent a letter last month to at least one customer seeking promises of future programs and price increases on current programs to help it become healthy, said a highly placed source at one of the Big Three.
But C&A's automaker customers are in a quandary. Before they can award new contracts, they need to determine whether the giant supplier has the financial wherewithal to handle the business. What they found when C&A filed its proposed Chapter 11 exit plan was a limited operational plan.
The automakers are uncomfortable with that, said the industry source: ``Why invest in a company that said, `Trust me'?''
C&A needs big new programs, and a lot of them. But there is no guarantee that all six of its biggest customers will agree to a bailout package to support the ailing supplier.
DaimlerChrysler has the biggest exposure on the loans, followed by Ford Motor Co. and GM. DaimlerChrysler accounted for 31 percent of C&A's business in 2004, while Ford accounted for 26 percent and GM for 20 percent.