American credit market outlook

Production cuts at US automakers are burning into the earnings and cash balances of their suppliers and as the consumer slump deepens at least some auto suppliers may not survive. Analysts view Visteon Corp and American Axle & Manufacturing Holdings as the most vulnerable to failure.
General Motors Corp, Ford Motor Co and Chrysler have slashed production as they strive to turn around their business, though government aid has removed some of their default risk, at least temporarily.
Auto suppliers, by contrast, are more numerous and less critical to the economy. As such they are unlikely to receive similar support, analysts said. Credit research firm KDP Investment Advisors said on Thursday that it expects Visteon to skip an $8.5 million interest payment due on its bonds on February 1, and said the firm is likely to file for bankruptcy protection or undertake a distressed debt exchange.
"Given the dire outlook for automotive demand over the next several quarters, we believe Visteon will default on its financial obligations," KDP analyst Kip Penniman said in a report. A debt exchange where bondholders are repaid less than par is considered a technical default on the debt. Visteon spokesman Jim Fisher said the company continues to pay its obligations.
GM said on Thursday it expects this year's US auto sales to drop to near 10.5 million units in 2009, compared with 13.5 million vehicles in 2008 and 16.2 million in 2007. "Somebody like Visteon cannot afford to lose that volume," said Shelly Lombard, analyst at credit research firm Gimme Credit.
"Even though Visteon has a fair amount of liquidity, the deeper the downturn the more free cash flow negative they'll be and the longer the downturn then the more cash they're going to burn through," she said.
Visteon on Tuesday forecast a steep drop in fourth-quarter sales and said it is freezing salaries and implementing other cost-cutting actions in response to lower production. In October the company reported a $188 million net loss for the third quarter and KDP's Penniman expects fourth-quarter results could be substantially worse.
"We now believe fourth-quarter earnings before interest, taxes, depreciation and amortisation (EBITDA) is in the negative $315 million range," he said. In the first nine months of 2008 Visteon generated EBITDA of $361 million, Penniman said. "Results in the fourth quarter may nearly wipe out EBITDA for the full year," he said.
American Axle, meanwhile, is vulnerable to further deterioration as the majority of its supplies are used to fit GM's sports utility vehicles and pickup trucks, which have seen among the largest drops in consumer demand.