Will auto parts firm bankruptcies derail Detroit restructuring?

Two large auto parts companies have filed for Chapter 11. The bigger, Visteon (VSTN), will have financial support from Ford (F) to get through the process. The other one, Metaldyne Corp, is part of Japan's Asahi Tec private equity firm. Carlyle Group and RHJ International will buy most of the Metaldyne assets.

As Chrysler has found and General Motors (GM) may find, Chapter 11 is not always a smooth process. Creditors petition the court for payments and workers make motions to keep jobs and benefits. A prolonged bankruptcy can end up with a simple liquidation -- a sales of assets to pay off obligations, but in which none of the parties owed money ever gets much of a return.

A drawn-out bankruptcy of Visteon could cause an interruption in the supply of parts to the Big Three and other car companies with operation in the U.S., especially if several more parts companies go into Chapter 11. Given the financial structure of the industry and its falling revenue, most of the firms in the parts operations are in some financial trouble.

If the flow of components begins to undermine the federal government's rescue of Detroit, the government may decide that a second rescue involving the parts companies is necessary.

Douglas A. McIntyre is an editor at 24/7 Wall St.


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