The Big Three could soon become the Big Two. Is even that too many?

The question of whether all three Detroit auto makers will survive is out there, based largely on the inability of the debt-laden companies to get access to funding. General Motors is desperate enough for cash to consider merging with Chrysler. On Oct. 6, Fitch downgraded Ford Motor and Ford Motor Credit to CCC, the lowest junk rating. Deutsche Bank’s Rod Lache wrote Sunday that the auto industry may survive because of federal bailouts and restructuring. But, he wrote, “based on our belief that at least two of the U.S. Big Three automakers could reach minimum cash levels within the next 12 months, we continue to assess the risks to our universe.”

How close are we to an “Omega Man” scenario? Lache, who expects that in the event of a serious cash crunch “sales among the Big Three will decline virtually overnight,” provides a nice overview of what would happen to the Big Three-dependent businesses: auto-parts suppliers and retailers including American Axle, Autoliv, BorgWarner, Johnson Controls, Lear, Asbury and AutoNation.

Debt covenants blown: Lache expects American Axle, Lear, Asbury and AutoNation to all blow their debt covenants if the Big Three U.S. auto makers continue to struggle for cash. That will hit the retailers’ and suppliers’ shares hard. “In the current credit environment, the shares of any company potentially needing to negotiate credit facility amendments have been penalized severely,” Lache said.

Potential supplier bankruptcies: In an Oct. 6 report, credit rater Fitch wrote that production declines, lack of access to capital and higher commodity prices will conspire to spur bankruptcy filings among auto suppliers. “The potential contraction of trade credit throughout the industry, and the critical nature of trade credit to the capital structure of the supply industry and the Detroit Three, poses a high degree of risk in the event that capital market conditions continue to contract,” Fitch analysts said.

Who would suffer the most?: A tie between American Axle and Magna International. American Axle rakes in 78% of its sales from GM North America–by far the largest concentration of any of the suppliers to any of the auto makers. American Axle would see $832 million in lost sales from GM, according to Lache’s analysis. Magna International would suffer $1.2 billion in lost sales if GM went bankrupt, another $1.3 billion from a Ford bankruptcy and $1.5 billion from Chrysler.

Brands will be cut. No matter what: Credit Suisse analysts say the Big Three are simply stuck with too much stock. Lache noted, “outside observers have long questioned GM’s ability to sustain 8 distinct brands in North America. Those questions have only intensified as GM’s market share has drifted down towards 20%. And those questions would get stronger still if GM’s brands are increased from 8 to 11. In a worst case scenario, the cannibalization of GM and Chrysler products could negate cost savings, leaving GM with $16 billion more debt, 3 more brands, and 3,500 more dealers.”

Source - Wall Street Journal