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Auto Supplier Support Program

Financial Services Task Force Update James D. Friedman, Faye B. Feinstein

On March 19, 2009, the United States Department of the Treasury ("Treasury") announced the creation of a new Auto Supplier Support Program (the "Program"), which is designed to help stabilize the auto supply base and restore credit flow to the auto supply sector. The Treasury will provide up to $5 billion for the Program, which is part of the previously announced Troubled Assets Relief Program ("TARP"), in order to help qualifying U.S.-based auto suppliers in two ways: (i) ensuring that auto suppliers get the money owed to them for their products and (ii) allowing the auto suppliers to sell their receivables into the Program at a modest discount.

The government recognizes that the American auto industry relies on a stable network of auto parts suppliers, but in the recent credit crisis, many U.S. auto suppliers have lost their access to credit, and uncertainty about business prospects within the industry has been growing - at the end of the fourth quarter of 2008, for example, General Motors Corp. owed its suppliers approximately $22 billion. Because supplier instability creates an uncertainty for the auto companies that rely on them, and a significant amount of jobs are at risk (auto suppliers employ about 500,000 U.S. workers), the government considers it necessary to step in and provide suppliers with the confidence they need to continue manufacturing and shipping parts, and to facilitate access to loans to pay their employees and continue operations.

In order to participate in the Program, the supplier must ship parts directly to auto manufacturers that have agreed to participate in the Program. The auto manufacturers will be required to make a financial commitment in connection with the Program. The suppliers will have to pay a modest fee and maintain qualifying commercial terms in order to participate in the Program. Details of the Program are described below.

Eligible Auto Companies

All domestic auto manufacturers are eligible to participate in the Program. Once an auto company commits to participating, it will ask the government to provide financial backing. The auto manufacturer will then request an allocation from the Treasury to provide government-backing and work with a third-party servicer to establish a receivables purchase program. General Motors and Chrysler have agreed to participate in the Program; however, Ford Motor Company has said that it will not be participating in the Program because it continues to remain viable and does not expect to have issues with continuing to pay suppliers.

Eligible Suppliers

Although the program is designed to benefit U.S.-based auto suppliers, most of the control over the Program resides with the participating auto manufacturer. All U.S.-based suppliers that ship directly to any participating auto manufacturer may be eligible to participate in the Program. However, all decisions regarding which suppliers will receive protection may be made by the participating auto manufacturers. Therefore, even if an auto supplier ships products to a participating auto manufacturer, it is not guaranteed that the supplier will be eligible to participate in the Program.

Eligible Receivables

Any receivable created with respect to goods shipped after March 19, 2009, made on qualifying commercial terms between a supplier and a participating auto manufacturer, will be eligible for the Program. However, the participating auto manufacturers also have control over deciding which receivables are eligible for protection.

Steps for Participating in the Program

Any eligible suppliers interested in participating in the Program should first contact their lenders to determine whether they can get requisite consents to sell their receivables. Once consent has been given by their lenders, the suppliers should contact a procurement officer at any of the participating auto companies to which they supply parts in order to obtain approval. Once approved by the respective auto manufacturer, the suppliers will be eligible to receive the protection, which includes the backing of government funds, for a modest fee, and sell their eligible receivables. Suppliers will also be able to sell their receivables at a discount.

Conclusion

The $5 billion provided by the Treasury for the Program may afford drastically needed support for the auto supply sector, at least in the short term. Widespread bankruptcies have been expected in the auto supply sector in coming weeks, but the Program may help to stabilize the sector and prevent unnecessary job losses during the short term while the Obama administration continues to work on restructuring the auto industry as a whole. Further clarification regarding the Program will be necessary, including the following elements: (i) the qualifying commercial terms, (ii) the modest fee required for eligible suppliers, (iii) the modest fee that applies to receivables being sold by eligible suppliers and (iv) the eligible receivables, and specifically whether an eligible receivable can include the cost of goods or supplies, including tooling manufactured or purchased by the supplier but which are not shipped to the auto manufacturer. The Quarles & Brady Financial Services Task Force will continue to monitor the Program and will provide updates as they become available.

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For more details, or if you have any questions, please contact Jim Friedman at 414-277-5735 / jim.friedman@quarles.com, Faye Feinstein at 312-715-5069 / faye.feinstein@quarles.com or your Quarles & Brady LLP attorney.