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Collins & Aikman Seen As Highly Vulnerable

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A pair of high-yield analysts say Collins & Aikman, an auto parts maker with $900 million outstanding in high-yield debt, could face bankruptcy if it does not resolve a dispute with DaimlerChrysler, its top customer. Recent reports that Collins & Aikman lost a contract worth up to $90 million and is embroiled in a dispute over $16 million with Daimler may be more serious than they appear, says Nate Hudson, analyst at Banc of America Securities. "While the specific amounts are not immaterial, they're not that big a deal; but if the Daimler relationship really unwinds it's a very major problem. You're talking about 30% of their overall sales," he says. Collins & Aikman had total sales of $4 billion in 2002. Hudson has not worked out what recovery levels would be on the bonds, but he sees severe downside risk.

Calls to David Youngman, a spokesman for Collins & Aikman, were not returned by press time last Friday morning. Ed Saenz, a spokesman for DaimlerChrysler, says the company does not comment on its relationship with individual suppliers, but has a history of resolving any issues that may exist.

The dispute involves a $16 million refund Chrysler says it is owed due to cost savings that accumulate over product life cycles, according to a recent New York Times article. Investors do not appear fazed by the news, however. Collins & Aikman's 10 3/4% senior notes of '11 (B2/B-) dropped about four points to 84, but quickly recouped most of that, and were quoted at 87 last Thursday. One investor believes it is impossible to short the bonds any further, as those who own the paper will not lend any more out.

Bryan Krug, buy-side analyst at Waddell & Reed, says he is particularly disturbed by Collins & Aikman's poor earnings given the fact that Detroit is turning out autos at a rapid pace. "It could prove to be a penny-wise pound-foolish move," he says of Collins & Aikman's refusal to pay the disputed $16 million. Waddell & Reed does not own Collins & Aikman's bonds.

Collins & Aikman is a prime candidate to take a beating as car companies slash costs, says Stephen Smart, buy-side analyst at ABN AMRO Asset Management. Collins & Aikman makes seat fabrics and door handles which contribute perhaps $150 to a car's total cost, while competitors such as Lear Corp design whole interiors that can add $4000 to the price of a car. "If you're just producing a little door fastener for 12 bucks you can't do much when they say it's $7 instead of $12," he says. "In five years, a lot of these auto parts companies won't exist," he predicts.

At least one analyst is not prepared to put out a sell recommendation just yet. "It probably is a one-time issue, but it is still a concern, especially coming on top of all the other problems they've had lately," says Adrienne Dale, analyst at CIBC World Markets. She points to a severe cut to earnings guidance in the first quarter, three ceos in roughly a year, and uncertainty over an audit committee inquiry.

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