Private equity and Hedge Funds risk suffering massive losses from a binge of investments in the troubled North American automotive industry. Many of them saw turnaround opportunities in the sector in 2005-06 when suppliers were squeezed between rising commodity prices, cutbacks by the three Detroit carmakers, and customers' demands for lower prices. HFs, with their short-term trading mentality and willingness to extend rescue financing, generally face heavier losses than PE firms. Moreover, many HFs which specialize in lending to ailing companies take big concentrated positions of up to 15% of their funds. Most of the funds invested in the sector when US car sales were over 16m annually, interest rates were low and it was easy to buy cars with borrowed money.

"HFs thought they were buying into these firms at depressed levels," says Henry Miller, co-founder of restructuring firm Miller Buckfire, which has presided over restructurings of automobile parts companies. "They thought they could weather the storm." But with oil at around USD 140 a barrel, credit tight and unemployment rising, vehicle sales tumbled to an annual rate of just 13.6m in June, the lowest in 15 years. Suppliers are again having difficulty passing on higher plastics, steel and other raw material costs. He says that, although tougher times may lie ahead, the sector remains attractive in the long term. Carmakers increasingly moving towards global platforms will be an important competitive factor.

 

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