Denali Capital has reduced its loan investments in auto suppliers because of the poor market conditions. Declining vehicle production at General Motors and Ford Motor is hurting auto suppliers, many of which rely heavily on the big auto makers for their business. The default rate of auto suppliers has increased, prompting investors to cut their exposure to the sector.
John Thacker, chief credit officer at the asset management firm that manages a $2 billion portfolio of leveraged commercial loans, said Denali has divested roughly half of its investments in the auto supplier sector over the past 12 months. Approximately 6% of its portfolio was invested in auto suppliers. This is now down to 3%. "We have recently avoided investing in companies that are disproportionately tied to GM and Ford," said Thacker. "We have downsized our exposure to the auto sector across the board." Thacker said the company is redeploying the capital it divested in these companies into industrial and service sector credits.
Almost every U.S. auto supplier has exposure to General Motors and Ford Motor, which have been hit hard by plummeting sales of sport utility vehicles. Demand for these vehicles has fallen as the rise in gas prices and car crossover vehicles have become more fashionable. Sales of sport utility vehicles were down 16% in September compared to a year ago, according to Autodata. Last week, Standard & Poor's placed its BB+ long-term and B-1 short-term ratings on Ford Motor on CreditWatch negative, reflecting its deteriorating product mix and sales volume as well as poor market pricing.
Some auto suppliers rely on the big auto makers for more than half their business. Others have managed to diversify their sales base. But a large portion of the market is still heavily influenced by the performance of Ford Motor and General Motors. The biggest auto maker to be affected is Delphi, which is teetering on the verge of bankruptcy. Delphi has told General Motors, its former parent, that it may file for bankruptcy by Oct. 17 if it is unable to gain financial relief from the company and its union, the United Auto Workers.
"There have been several defaults in the sector, mostly related to the decline in production volume and company specific issues. If production levels continue to decline, there will be more defaults," warned Thacker.
