The Rescue of the US Auto Industry, Module F: Auto Supplier Support Program

The Global Financial Crisis that began in 2007 with the decline in the United States subprime mortgage markets quickly spread beyond the financial sector and eventually reached the US automotive industry as credit markets tightened. Consequently, the financial crisis intensified a decades-long decline of two of the largest US auto manufacturers, General Motors Company (GM) and Chrysler Group LLC (Chrysler), leading to a massive restructuring and bankruptcy for both (Klier and Rubenstein 2012). At the time, GM and Chrysler’s possible collapse was considered “a potentially crippling blow to the American economy that the Treasury estimated would eliminate nearly 1.1 million jobs” (COP 2009). Due to the interdependent nature of the US auto industry, there was a significant risk of contagion beyond GM and Chrysler to the vast and interconnected network of parts suppliers that also supported other manufacturers. For example, the Motor and Equipment Manufacturers Association (MEMA) released data in 2009 showing that 66 percent of Chrysler suppliers were also suppliers to GM and 54 percent were suppliers to Ford, the second-largest US auto manufacturer.^FNWhile Ford Motor Company also experienced distress during the financial crisis, it was considered to be significantly more prepared and did not receive support from the Treasury through the Automotive Industry Financing Program (Klier and Rubenstein 2012). Furthermore, many of the largest auto suppliers such as Lear, American Axle, and Visteon were in dire financial shape, and hundreds of suppliers were known to be teetering on the edge (Goolsbee and Kruger 2015). The ongoing crisis placed unprecedented stress on the US automotive parts suppliers and consequently, the overall restructuring process of GM and Chrysler that was being overseen by the US Department of Treasury (Treasury 2009b).^FNRefer to other YPFS cases on the US Automotive Industry Financing Program for more information at https://elischolar.library.yale.edu/journal-of-financial-crises/.

In normal times, the manufacturer purchased goods and services from suppliers and promised to pay 45 to 60 days after the shipment (see Figure 1, step 1). In the interim, suppliers used the receivables from their transactions with the manufacturers as collateral for supplier bank loans, repaying the loans once the manufacturers paid the receivables (see Figure 1, step 2) (Klier and Rubenstein 2012). The transactions between manufacturers and suppliers were typically managed by supply chain servicers, such as Citibank (see Figure 1, step 3) (SIGTARP 2009a).

Sources: Klier and Rubenstein 2012; SIGTARP 2009a.

However, the crisis threatened this fundamental relationship between manufacturers and suppliers in three main ways: it tightened receivables payment terms, disrupted manufacturer operations, and decreased credit for suppliers. First, suppliers tightened receivables payment terms because of uncertainty surrounding the ability of GM and Chrysler to pay. The typical payment terms of 45 to 60 days after shipment were shortened by suppliers, at times requiring cash on delivery, or even advance payment. This negatively affected the restructuring processes of GM and Chrysler, as it meant the manufacturers needed to hold significantly more cash on hand (SIGTARP 2009a).

Second, the tightening receivables terms by suppliers disrupted the ability of GM and Chrysler to produce automobiles on a normal schedule. GM and Chrysler were already experiencing constricted credit markets and numerous other legacy problems, such as production overcapacity. This came in addition to their facing massively complex restructurings and possibly bankruptcy at the time. The manufacturers’ inability to maintain normal production schedules potentially endangered the suppliers due to their high concentration in supplying the manufacturers and their very interconnected cycle (SIGTARP 2009a).

Last, banks were less willing to extend credit based on the suppliers’ receivables due to the uncertainty surrounding GM and Chrysler. Supplier banks/lenders were not certain that the suppliers would be able to collect the funds owed in the event GM and Chrysler were unable to honor obligations. Moreover, the general tightening of standards and adverse lender risk appetite for commercial and industrial loans (see Figure 2) during the crisis, meant suppliers faced significant difficulties accessing credit (Federal Reserve n.d.1; Federal Reserve n.d.2).

Source: Bizologie 2011.

On March 19, 2009, the Treasury announced a $5 billion commitment ($3.5 billion for GM, $1.5 billion for Chrysler) to a new Auto Supplier Support Program (ASSP), to “help stabilize the auto supply base and restore credit flows in a critical sector of the American economy” (Treasury 2009b; SIGTARP 2010). The ASSP was intended to provide credit for eligible suppliers and “contemplates the guarantee, or early payment, of qualified automotive receivables through [a manufacturer’s] establishment of a bankruptcy-remote special purpose vehicle funded with loans from the US Treasury and capital contributions from the [manufacturer]” (Chrysler 2009a).

The ASSP was auxiliary to the government’s overall effort to support the US auto industry under the Automotive Industry Financing Program (AIFP) and was authorized under the Emergency Economic Stabilization Act of 2008 (EESA) (Treasury n.d.).^FNRefer to other YPFS cases on the US Automotive Industry Financing Program for more information about the other elements of support at https://elischolar.library.yale.edu/journal-of-financial-crises/.

ASSP Structure and Operation

Although aimed at the specific difficulties being experienced by suppliers, the ASSP was structured to be implemented by, and at the option of, participating manufacturers. This meant that decisions about which suppliers and which receivables would receive financing were made by the participating manufacturers (SIGTARP 2009a).

Any domestic auto manufacturer was eligible to participate in the ASSP, although it should be noted that GM and Chrysler were the only participants (COP 2009). A manufacturer that chose to participate would first request a funding allocation from the Treasury (Department of the Treasury 2009a). If accepted, the participating manufacturer was required to establish the receivables purchase program through a special purpose vehicle (SPV) (namely Chrysler Receivables SPV, LLC and GM Receivables SPV LLC) that was a bankruptcy-remote, wholly owned subsidiary of the participating manufacturer (see step 1 in Figure 3) (SIGTARP 2009a).

Sources: Chrysler and Treasury 2009b; COP 2009; Treasury 2009a; SIGTARP 2009a.

The Treasury’s assistance came in the form of a loan commitment to the SPV at an annual interest rate equal to the greater of LIBOR or 2 percent, plus 3.5 percent (see Figure 3, step 2). Interest was payable monthly or at the repayment of the loan principal. Unpaid interest would continue to accrue interest thereon until paid (Chrysler and Treasury 2009b).

The participating manufacturer was required to provide an up-front cash commitment of 5 percent of the Treasury’s total commitment to the SPV prior to, or concurrent with, any Treasury loan (SIGTARP 2009a). Based on that requirement, Chrysler injected $50 million in cash into its SPV and GM injected $125 million (Chrysler 2009a; GM 2009).

The Treasury loans were due, with any accrued interest, on the maturity date, which was set at one year from the date of closing, although the Treasury could extend this date (Chrysler and Treasury 2009b).

Funding

On April 3, 2009, Chrysler Receivables SPV, LLC and GM Supplier Receivables LLC, were formed as bankruptcy-remote, wholly-owned subsidiaries to facilitate the ASSP. To fund the purchases of receivables and operate the ASSP, the Treasury made loans of $123 million to the Chrysler SPV and $290 million to the GM SPV on April 9, 2009. The initial total commitment of $5 billion was reduced to $3.5 billion on July 8, 2009—$2.5 billion for GM and $1 billion for Chrysler (SIGTARP 2010). By this date, most suppliers had been paid during the course of the manufacturers’ bankruptcies, and a diminished amount of activity was expected under the program going forward. See Figure 4 for an overview of funding.

Source: SIGTARP 2010.

New Chrysler

Treasury and Chrysler Receivables SPV, LLC entered into a Credit Agreement dated as of April 7, 2009, under which the ASSP loan was extended (Chrysler and Treasury 2009b).^FNReference is made in the Amended and Restated Credit Agreement to a Security Agreement entered into seemingly concurrently with the original Credit Agreement, but we have not been able to locate this document.

During the bankruptcy process of Chrysler, a Section 363 Transaction of the US Bankruptcy Code was executed to allow the corporations that would come out of the processes as the new operating companies—known as New Chrysler—to purchase all equity interests in their respective SPVs and assume all obligations under the original Credit Agreement.^FNRefer to our other YPFS cases on the US Automotive Industry Financing Program for more information about the other elements of support at https://elischolar.library.yale.edu/journal-of-financial-crises/. Therefore, New Chrysler, Treasury, and Citibank entered into an Amended and Restated Credit Agreement superseding the original Credit Agreement of April 7, 2009 (Chrysler and Treasury 2009b).

The parties also entered into a pledge agreement (effective as of the date of the bankruptcy sale, June 10, 2009, but executed on September 24, 2009) whereby the obligations of Chrysler SPV obligations to the Treasury and Citibank were secured with a pledge from New Chrysler (see Figure 3, step 4). In the pledge agreement, Citibank, acting as a collateral agent and custodian on behalf of itself and Treasury, continued to hold the first priority security interest in the following property of the manufacturers: (1) all investment property, capital stock, etc.; (2) all cash, interest, dividends, etc.; (3) all right, title, and interest of the manufacturer in the receivables, and associated proceeds as part of the pledgor.^FNFor a full list of pledged collateral used to secure the SPVs obligations, please refer to the Exhibit N Pledge Agreement document in the Credit Agreement, under the Implementation Documents. Also see Exhibit I: Program Terms for a full list of supplier eligibility requirements (Chrysler and Treasury 2009b). Despite the pledge to Citibank, Treasury retained ultimate authority with respect to management of the pledged collateral (Chrysler and Treasury 2009b).

The ASSP was serviced by a third-party servicer, Citibank, which was designated by the manufacturers. Under the Servicing Agreement between Citibank and Chrysler (also amended and restated in September 2009), Citibank’s role was to manage, service, administer, and collect on receivables, and to act as the collateral agent (see Figure 3, step 3). The SPVs were required to pay administrative “Servicer Fees,” which was the product of the Servicing Fee Rate (1/12 of 0.25 percent) and the average daily aggregate outstanding principal balance of all receivables held by the SPV each month (Chrysler and Treasury 2009b).

Payment Terms Available to Participating Suppliers

In the operation of the ASSP, suppliers had two options for funding receivables: Payment Option 1, immediate payment, or Payment Option 2, payment on maturity (see Figure 5). If the suppliers opted for Payment Option 1, or immediate payment, they could sell the receivable before a normal payment term to the SPV at a 3 percent (notional value) discount from face value. The SPV would then seek payment from the manufacturer for the full amount originally due to the supplier at maturity (SIGTARP 2009a).

If the supplier opted for Payment Option 2, or payment on maturity, the supplier received the payment, less a 2 percent discount (notional), from the SPV upon maturity of the normal payment term of 45 to 60 days. If the manufacturer failed to pay the receivable, the SPV would fund the payment to the supplier. The SPV would then seek payment of the receivable from the manufacturer (SIGTARP 2009a). The manufacturer was required to remit all payments in respect of purchased receivables to the collateral account controlled by the collateral agent, Citibank, on behalf of the SPV (Chrysler and Treasury 2009b).

Source: SIGTARP 2009a.

Termination

At the termination of the program (in other words, the Final Distribution Date), all proceeds available in the collateral account were required to be distributed by the collateral agent, Citibank, at the direction of the Treasury (see Figure 3, step 6). The distribution of proceeds in the collateral account was mandated by the Treasury in order of priority, “the Waterfall,” agreed to by the manufacturers. As part of the Waterfall, the manufacturers were required to pay an “Exit Fee” and “Contingent Interest.” The Exit Fee was equal to 4 percent of the amount of the total commitment, and the Contingent Interest was 50 percent of the amount remaining in the collateral account. As per the Waterfall order, the SPV was the first to take any losses from the ASSP (GM Co. and Treasury 2009).^FNFor more details on the Waterfall, please refer to Section 5, “Collateral Account and Application of Proceeds,” in the Security Agreement under the Implementation Documents (GM Co. and Treasury 2009).

The terms of the credit agreement between the Treasury and the SPVs established by GM and Chrysler also contained provisions related to compliance and accountability mechanisms, as was required for all EESA programs utilizing TARP funds. Inspection rights were given to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), Government Accountability Office (GAO), and the Treasury (GM Co. and Treasury 2009). Last, the ASSP was expected to operate for up to one year, with an extension possible at the Treasury’s direction (SIGTARP 2009a).

Overall, more than 370 tier-1 suppliers (providing direct material) for GM and about 60 suppliers for Chrysler participated in the program (Roland 2009). The Treasury received back the full principal it had lent, a total of $413 million, as well as $116.4 million in fees and interest payments, $65.6 million from GM and $50.7 million from Chrysler. The ASSP was terminated on April 5, 2010, for GM and on April 7, 2010, for Chrysler. All loans made under this program were repaid with interest and fees (SIGTARP 2010).

A Congressional Oversight Panel (COP) report found that by 2011 the automotive supplier industry had consolidated considerably (COP 2011).

Furthermore, the auto supplier industry’s capacity utilization rate, an indicator of the degree to which an enterprise uses its ability to produce, is currently 60.5 percent. While this figure is significantly higher than it was at its trough of 45.9 percent during the crisis, it remains notably lower than the pre-crisis level, when it was typically above 70 percent. This has led to ongoing consolidation of the supplier industry. Ford, GM, and Chrysler have announced reductions of 53, 30, and 50 percent, respectively, in their direct supply bases.