July 5, 2020

Volume X, Number 187

July 03, 2020

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Challenges and Potential Remedies for Auto Suppliers in the Wake of COVID-19

Manufacturing Interruption

For the past several weeks, in Michigan as well as other states, OEM production temporarily halted, presenting challenges to automotive suppliers, as well as their lenders and investors, to accurately project available liquidity and required capital in the near and medium term. While governmental restrictions on manufacturing are slowly easing, the future is still uncertain. In Michigan, manufacturing facilities are restarting operations on May 11, including automotive suppliers, and the Big 3 have agreed not to restart until May 18 (and only at 25 percent capacity initially). Additionally, manufacturing in Michigan may not restart until the facility has been prepared to follow enhanced safeguards. Such facilities are required to adopt special safety measures, including conducting entry screening protocols for workers and anyone entering the facility each day, requiring a questionnaire covering symptoms and exposure to people with possible COVID-19 infections, and temperature screening as soon as no-touch thermometers may be obtained. Such facilities must also create dedicated entry points and prohibit entry to all non-essential in-person visits, including tours, as well as train employees on COVID-19-related issues like how the virus spreads, signs and symptoms, steps workers must take to notify the business of suspected or confirmed diagnoses, and the use of personal protective equipment. Additionally, all manufacturing workers in Michigan must wear masks when they cannot consistently maintain six feet of separation. These requirements create additional variability and uncertainty as to the timing of  the manufacturing restart for the OEMs and their suppliers. 

Access to CARES Act Lending Programs

While lenders are generally taking a pause regarding enforcement of loan covenants and remedies, suppliers are under internal and external pressure to project future sales, manage cash flow and liquidity, and plan for required capital expenditures. Accessing short-term liquidity is among the highest priorities. The federal stimulus package known as the CARES Act authorized funding for certain liquidity programs, including the Small Business Association’s Paycheck Protection Program (PPP).

While the PPP has provided much-needed, short-term liquidity to small businesses with favorable loan terms (including the potential to qualify for loan forgiveness), automotive suppliers have faced challenges accessing this program due to eligibility requirements. An entity generally is eligible for the PPP if it, combined with its affiliates, (i) is a small business concern as defined in Section 3 of the Small Business Act and meets the SBA employee-based or revenue-based size standard corresponding to its primary industry or the SBA's alternative size standard, or (ii) has 500 or fewer employees. Due to these somewhat restrictive eligibility requirements, many automotive suppliers do not qualify for the PPP.

An additional source of financing on the horizon is the Federal Reserve’s Main Street Lending Program (Main Street Program), which utilizes CARES Act funding and will provide up to $600 billion in liquidity to lenders that make direct loans to eligible businesses. Compared to the PPP, the Main Street Program will be open to a more expansive pool of businesses. As announced by the Federal Reserve on April 30, the Main Street Program is available to for-profit businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. While the Main Street Program does not have a loan forgiveness component, it could be an attractive liquidity option for automotive suppliers that were in sound financial condition before the pandemic and remain bankable in the eyes of their lenders. As of May 9, the Main Street Program is not operational and the Federal Reserve has not confirmed a start date. 

Mexico’s Shut-Down Order

The global automotive industry inextricably links Mexico to the rest of the North American automotive supply chain, including American companies. Hard on the heels of the ratification of the United States-Mexico-Canada Agreement , in 2020 the automotive supply chain faces a new problem when it comes to Mexico: the COVID-19 pandemic. Mexico, a major supplier of auto parts for U.S. automotive companies, has temporarily shut down non-essential trade and shuttered non-essential business until May 30. This order was originally set to expire on April 30 but was extended for another month. In the U.S., automotive manufacturing is beginning to restart as noted above. To date, Mexico has not provided any indication that it deems suppliers of automotive companies to be essential businesses, creating even more uncertainty for automotive suppliers in the U.S.

© 2020 Varnum LLPNational Law Review, Volume X, Number 132

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About this Author

Seth W. Ashby, Varnum Law Firm, Grand Rapids, Corporate Planning Attorney, Private Equity Lawyer
Partner

Seth is a partner and member of the firm’s Business and Corporate Services Team. He is experienced in business representation, planning and counseling. He focuses on mergers and acquisitions, as well as private equity, securities, distressed asset and restructuring, and commercial transactions. Seth also advises clients with respect to corporate governance, regulatory and other general corporate matters.

616/336-6726
Brendan G. Best, Varnum, Chapter 11 Bankruptcy Lawyer, Manufacturing Industry Attorney
Partner

Brendan focuses his practice on restructuring, workouts and bankruptcies, representing creditors, debtors and other parties in Chapter 11 bankruptcy cases, out-of-court workouts and restructurings, distressed transactions and general insolvencies. Brendan has a national insolvency practice, serving clients in diverse industries including manufacturing, automotive, building supply and service, energy, oil and gas, health care, food service, gaming, hospitality, construction and real estate.

Brendan serves as outside bankruptcy counsel for clients, advising them on commercial issues with troubled customers and suppliers, and he also frequently serves as counsel to official unsecured creditors’ committees in Chapter 11 cases.

Brendan is an experienced federal and state court litigator and has successfully represented clients in bench trials over issues including adequate protection, plan confirmation, valuation and other matters, as well as non-dischargeability actions, avoidance actions, and other debtor-creditor matters in state and federal courts. He is a frequent writer and speaker on restructuring, workouts and bankruptcy.

313-481-7326
Katie K. Roskam, Michigan, tax attorne
Associate

Katie is an associate in the firm’s tax practice team. She focuses on federal income tax matters for both foreign and domestic clients and issues pertaining to employee benefits and executive compensation. Katie's previous work experience includes researching and writing appellate briefs while clerking at Even & Franks PLLC in Muskegon for several summers. She also worked as a tax research assistant at Loyola University School of Law. She served as an extern for Judge Ronald A. Guzman in U.S. District Court for the Northern District of Illinois and has worked as an...

616 -336- 6494
Ashleigh E. Draft Associate Grand Rapids Labor & Employment
Associate

Ashleigh is an associate attorney currently working with the labor and employment group. She also works with higher education clients and provides support on a variety of litigation matters.

Ashleigh’s experience includes serving as a legal extern for the Michigan Court of Appeals Research Division. She also clerked for Michigan Appeals Court Judge Jane Beckering. Prior to law school, Ashleigh served organizations in the higher education and nonprofit sectors in various development and communications roles. 

616-336-6627
Justin L. Fitzgerald Associate Grand Rapids Banking and Finance Business and Corporate
Associate

Justin is a member of the Banking, Finance and Restructuring Practice team. He has worked with a wide array of clients, including banks and other financial institutions, insurance companies, developers, nonprofit organizations, private equity investors and borrowers on transactional matters.

His primary practice focuses on a variety of commercial finance transactions, including real estate, construction and acquisition financing, asset-based lending and other secured transactions. He has negotiated and documented numerous transactions involving revolving credit facilities and term...

616-336-6395