The colossal rise in raw material costs, particularly scrap steel, is causing pain for a raft of auto-parts makers. Intermet Corp.'s bank debt and bonds took a pounding last week, while Kelso & Company's Citation Corp. filed for Chapter 11 with the metal-casting company's $210 million "B" loan trading down to the 78-80 context. Rising input prices are also hitting Tower Automotive's $425 million first-lien loan, which traded in the 98 3/8- 98 7/8 range falling from above par. Meanwhile, Metaldyne's "D" loan has fallen from above par to 98 1/2-99 1/2. "All the auto companies are facing increased raw material costs and bad numbers," one trader said.
"The impact of rising costs, particularly scrap prices has been enormous. It's like you've tripled your mortgage and your income stays the same," said a Citation spokesman. "The difference between Citation and other companies that have filed for bankruptcy is that the company did not have a lot of operational problems." Jim Connors, v.p. and general counsel at Kelso, declined comment.
The spike in scrap steel prices to $395 from $210 per ton has caused margins to collapse and has now raised the prospect of a bankruptcy filing for Intermet. Joseph von Meister, senior analyst of distressed and special situations at Jefferies & Co., commenting on Intermet, said these scrap prices are "unbelievably high" relative to historical levels. He views this as a short-term event and the earnings power of the business can be restored.
But in the interim, these companies are getting squeezed by the rising raw material prices, a trader stated, adding that the auto-part makers have fixed priced contracts with original equipment manufacturers (OEM), so the costs cannot be passed along immediately. "The main issue Intermet is dealing with is steel prices and so they need to get through this period and buy some time for customer surcharges to flow through," added Lisa Matalon, a v.p. and senior credit officer with Moody's Investors Service. "Bankruptcy is absolutely a worst-case scenario."
Intermet's $120 million "B" loan and the $90 million revolver dropped from par to trade in the upper 80s levels before climbing slightly to the 90-92 range. The $175 million of 9 3/4% bonds were quoted at 40 by Mark-It Partners/LoanX, a drop of over 30 points. The debt fell when Intermet announced losses of up to $38 million and said it expects to be in default on the leverage and interest covenants in its credit agreement at Sept. 30. If negotiations with bank lenders to get a waiver are unsuccessful the company may have file to for bankruptcy, according to a company release. An Intermet spokesman said the company is working with its advisors to develop a comprehensive restructuring plan that will address its current and longer-term debt and equity structure.
A Tower spokeswoman responding to the debt levels said, "A lot has to do with the perception of the automotive supplier market, which we are a part of. However, we are not in the same financial situation as those other players."
Birmingham, Ala.-based Citation has a $100 million revolver and a $50 million "A" loan. The facility is led by J.P. Morgan. Intermet's debt is led by Scotia Capital. The revolver is priced at LIBOR plus 3 3/4% and the "B" loan is priced at LIBOR plus 4 1/4%. According to Bloomberg, other banks on the revolver include Deutsche Bank, Fifth Third Bank and Comerica Bank. Bloomberg also cites lenders on the term loan at the time of signing last January including American Express Asset Management, Angelo Gordon & Co., The Alcentra Group, The Blackstone Group, Callidus Capital Management, Highland Capital Management and Stanfield Capital Management.