Being in the auto-parts business these days has a bit of a gerbil-on-a-treadmill quality to it. Companies are tasked with keeping up with the altered needs of consumers and the drastic production changes from the big auto makers, as well as the need to reduce costs.Investors are pessimistic about the future of a number of these companies, particularly after Tuesday's report on consumer confidence from the Conference Board showed that consumers who plan to buy cars in the next six months fell to 4.8 percent, one of its lowest readings in history.
The news was the latest in a series of factors causing investors to revalue the debt issued by some of the auto-parts makers. American Axle & Manufacturing Holdings Inc., which recently settled a labor dispute, has struggled mightily, as it is one of General Motors Corp.'s biggest suppliers of parts related to light trucks -- where GM and others are scaling back.
In the past month, American Axle's bonds, which carry a coupon of 7.875 percent and are due in 2017, have fallen by 11 cents to trade at 75 cents on the dollar, according to KDP Investment Advisors of Montpelier, Vt. They trade with a yield of 12.65 percent, or about 8.6 percentage points above comparable Treasurys.
The bonds have become quite expensive to insure, as well. The cost of insuring $10 million in bonds against default for five years rose to $900,000 Wednesday, compared with $730,000 on June 20, according to Phoenix Partners Group. The consumer-confidence data were responsible for part of the repricing of such risk.
Similarly, TRW Automotive Holdings Corp.'s credit-default swaps reflect a cost of $583,000 to insure a similar amount of debt, compared with $342,000 a month ago, according to Markit Group in London. That company's bonds trade at about 90 cents on the dollar, but the company's geographic diversity and its main product, automotive safety systems, "continue to enjoy favorable trends in demand and content per vehicle," according to KDP.
American Axle shares hit their lowest level since 2001 earlier in the week, but Wednesday, they ended up 42 cents, or 4.4 percent, at $10.08 after the company said it will be cutting white-collar jobs as well as blue-collar jobs.
"We're reaching a point with the price of oil where you are really changing the structure of industries," said Bruce McCain, chief investment strategist at Key Private Bank. "The automotive industry is under that sort of threat: a major shift in terms of what buyers of those products or services are going to do longer-term, and shrinkage in capacity and profitability."
By: David Gaffen
Wall Street Journal
