From Milwaukee Journal Sentinel

SHEBOYGAN, WI -- French Automotive Castings could emerge from bankruptcy this summer, the Sheboygan, WI, company said Monday.

The auto parts supplier filed for Chapter 11 bankruptcy protection Friday in federal court in Wilmington, DE, along with eight affiliates. Combined, the companies listed $741.6 million in debt.

A company executive said he expects a quick turnaround under a debt restructuring agreement with bondholders.

"We are expecting to surface from bankruptcy by the end of June," said Tim Kellner, vice president of human resources. "That's extremely short, but we have had great cooperation with our lien holders and customers."

J.L. French makes oil pans, engine blocks, transmission cases and other aluminum die-cast parts for automakers. The company employs more than 1,800 people worldwide.

The company's troubles are typical of the North American automotive industry, which has been hammered by low sales and high costs. About one-third of the auto parts suppliers are probably headed for bankruptcy, according to economists at the Center for Automotive Research in Ann Arbor, MI.

Already in bankruptcy are Tower Automotive, which is closing its sprawling plant on Milwaukee's north side; Delphi Corp., which operates two plants in Oak Creek, WI; and Federal-Mogul Corp., which has four factories in Wisconsin and has said it will close 25 of them worldwide.

J.L. French said it plans to continue operating during its Chapter 11 case, with no disruption to the Sheboygan operations. The company said it will close factories in Benton Harbor, MI, and Saltillo, Mexico.

Under the debt restructuring plan, first-lien bondholders will be paid in full. Second-lien bondholders, owed about $170 million, will trade debt for an 8 percent to 22 percent equity stake in the reorganized company.

GE Capital Corp. and other lenders have agreed to provide J.L. French a $50 million debtor-in-possession loan to fund business during the restructuring. J.L. French will reduce its debt by $300 million, under an agreement with some of the debt holders.

"Our lien holders and customers realize that restructuring some of this debt is going to make us a much more attractive company," Kellner said.

The bankruptcy filing did not come as a surprise, given the turbulence in the auto parts industry, said David Cole, chairman of the Center for Automotive Research.

"It's just part of the deal with the industry now," he said.

Ford Motor Co. plans to winnow the number of suppliers from which it buys parts by two-thirds. Many small suppliers could lose their Ford contracts and go out of business.

"It's the perfect storm for suppliers," Cole said. "They are getting pushed on their raw material costs, their customers are not easy to deal with in terms of granting price increases, plus there's a softer market and more competition."

J.L. French is promising to pay its vendors in full. But vendors for other automotive suppliers might not be so lucky if they're caught in bankruptcy's web.

"It's one of the unfortunate spin-off effects that has a way of gaining momentum," Cole said. "It can be a real problem as it telegraphs down through the system."

The North American automotive industry is undergoing fundamental changes. When it's settled, there will be fewer but healthier suppliers, said David Andrea, vice president of business development at Original Equipment Suppliers Association, a Troy, MI, trade group.

The bulk of the changes will occur through 2008, partly in conjunction with a shakeup at Ford and General Motors Corp.

"Those guys are going to drive a lot of what happens with the supply base. So it's a minimum of two more years, if not three years," Andrea said.

Suppliers in top market positions can invest in next-generation technologies and strategies, solidifying their leadership. Successful suppliers will do some of their manufacturing here and some of it overseas, said Jack Plunkett, an industry analyst with Plunkett Research in Houston.

"They aren't going to survive if they don't adapt to that kind of business model," he said.

Some suppliers have the ability to switch gears and make products such as castings for the truck or construction-equipment industries. Others are getting more business from foreign automakers such as Hyundai and Kia.

"The fast-growing automakers are where the suppliers are really looking to diversify," said Michael Wall, an analyst with CSM Worldwide, an automotive industry forecaster in Farmington Hills, MI.

Through the first nine months of 2005, J.L. French saw sales decline by about 10 percent, or $39 million, to $366 million, according to financial reports released by its parent company, Toronto-based Onex Corp.

Operating earnings at J.L. French fell even more dramatically, to $23 million from $44 million in the first nine months of 2004.

The company saw costs climb as the price of aluminum and natural gas used to melt aluminum both shot up at a rate faster than the company could pass along to its customers.

About 85 percent of the company's 2005 sales were for cars and trucks sold by Ford and GM, which both are in the midst of massive restructuring initiatives to make their North American automotive businesses profitable.

Ford and GM sport utility vehicles were a "cash cow" for companies such as J.L. French, Wall said.

"They could afford to be part of other, less-than-winning car programs because they had the SUVs to fall back on," he said. "Now they can't go back to that well to shore up other business."

Onex said it has written off its investment in J.L. French and "will have little or no ownership interest in the company following its restructuring."

In papers filed with the federal bankruptcy court in Delaware, J.L. French said it's forecasting 2006 results to be "relatively flat compared to 2005," with sales projected at $408 million and earnings before interest, taxes, depreciation and amortization projected at $63 million.

But the company, formed in Sheboygan in 1968, is committed to the automotive industry, Kellner said.

"That's what we are good at. It's the environment we are most comfortable in," he said.

Copyright 2006 Milwaukee Journal Sentinel. All Rights Reserved.

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