Auto Bankruptcy 'Babies' About To Be Born

Empty GM Dealership
Photo: Jane Wells
Empty GM Dealership

For months we've all heard the warnings. If GM and Chrysler go bankrupt it will trigger a host of other bankruptcies from suppliers to dealers.

So far, Chrysler has not dragged the supplier base down and I think the Treasury Department's supplier support program should keep most of "at-risk" companies from sliding into Chapter 11. The same can not be said for dealerships.

This week, Chrysler and GM will notify about 3,400 dealerships they are being dropped. For some dealers it will mean closing distribution points while keeping another store or stores that sell Chevy, GMC, Chrysler, Jeep, etc.

Those guys will survive being dropped. Their bottom line will take a hit, but they should have the resources to weather this storm. On top of that, their remaining dealer points should strengthen with less competition cannibalizing profits.

The dealers who are worried, and for good reason, are those who will be completely dropped by GM and Chrysler. That in itself will mean a loss of revenue, access to captive financing, and marketing support that could push those dealers to the brink of bankruptcy.

What could push many over the edge is the inability to service their debt payments. For them, this economic storm will turn into disaster if they can't pay loans they've taken out for their dealerships.

This is the part of the dealer story that hasn't received much attention. Those close to the industry estimate up to 20 percent of the dealers are over-leveraged. They've borrowed heavily over the years to expand their businesses.

When industry sales were running at 15 or 16 million a year, there was enough volume to make a profit and service the debt. But with sales running below 10 million those dealers are getting squeezed. Take away their relationship with GM or Chrysler, many of these dealers will have no choice but to go bankrupt.

As a friend of mine who specializes in bankruptcy law told me, "Chrysler and GM, if it files, are the mother bankruptcies. Now they will spawn smaller, baby bankruptcies."

For many, the offspring will be downright ugly. Thousands of dealers, who have long been a big part of the American business landscape, are about to disappear.

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