Thursday, May 12, 2005


The Snowball Starts Rolling

The chairman of Tier 1 automotive supplier Collins and Aikman stepped down today, but more interesting was a piece of news buried within Automotive News' coverage:

The company also said it has received waivers on several financial covenants tied to its accounts receivables. The waivers were needed in the wake of Standard & Poor's downgrades of credit ratings for Ford Motor Co. and General Motors to junk status last week. The downgrades triggered a requirement for Collins & Aikman to pay down a portion of its receivables.

I'm assuming that C&A was using its account receivables (the money owed to them by their customers that hasn't come in yet, due to the long "net" terms used by OEMs) to secure credit. If the credit-worthiness of the OEMs comes into question, then that will have far-reaching impact throughout the supply chain. In other words, this would be the first sign of the predicted "snowball effect" that many saw coming after the junk-bond news of last week.

Don't expect this to be the last news of this type.

UPDATE: Hope no one reading this bought C&A stock before 2Q2002. Ouch! It must hurt to shed 98% of the company's value in less than 3 years. I wonder if the automakers have a contingency plan in place, seeing as how a disruption at C&A would pretty much shut down auto production in North America.

UPDATE 2: Their stock is now suspended from trading on the NYSE, and analyists are predicting bankrupcty.

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When you see a manufacturing company factoring their AR you should expect trouble.
Factoring is like building a house of cards, one hiccup and it all comes tumbling down.
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