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GM early payments: Another bankruptcy signal

Automaker agrees to about $2 billion in early payments to suppliers, ahead of deadline for possible bankruptcy.

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By Chris Isidore, CNNMoney.com senior writer

GM agreed to make early payments to its suppliers ahead of a  June 1 bankruptcy deadline, a move that should help keep its own assembly lines running until then.
GM agreed to make early payments to its suppliers ahead of a June 1 bankruptcy deadline, a move that should help keep its own assembly lines running until then.
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NEW YORK (CNNMoney.com) -- In another sign the company is preparing for a possible bankruptcy filing within the next two weeks, General Motors has agreed to speed up payments to 1,500 suppliers who provide it with the parts it needs to make cars in North America.

The company typically pays its suppliers during the first week of every month. The next payment was originally scheduled for June 2. But GM spokesman Dan Flores said the June payment has been moved up to May 28 to help its suppliers in the face of current "market uncertainty."

That uncertainty is due to the fact that under bankruptcy law, once a company has filed for bankruptcy court protection, it is not allowed to make payments to people or entities it owes money while a judge sorts out how much to pay each creditor.

Thus the five-day difference in payment could make a great deal of difference to the suppliers, since GM (GM, Fortune 500) faces a June 1 deadline from the Treasury Department to win concessions from its bondholders and unions, and to make other structural changes.

If it can't win agreement from those groups, the company may file bankruptcy on June 1, an option that CEO Fritz Henderson said is "probable" given the difficulty in getting agreements from the various groups, particularly its bondholders.

GM is paying its North American direct material suppliers -- those that will get the early payment -- about $25 billion a year for auto parts, steel and other commodities that go into a vehicle. That works out to a bit more than $2 billion a month.

The exact amount that will be paid on May 28 was not immediately available.

Flores said the early payments were approved by the Treasury Department.

Kimberly Rodriguez, head of the auto practice at accounting firm Grant Thornton who works with many auto parts makers, said that GM needed to agree to the early payments now to make sure that suppliers kept shipping parts ahead of the June 1 deadline.

She said with suppliers already suffering from a bankruptcy at Chrysler LLC and its 60 day shutdown that started May 4, they didn't have the cash to risk continued shipments to GM if they couldn't be sure of being paid what they are owed in June.

"Cash and timing of payments is everything right now," she said.

The promise of early payment ahead of the bankruptcy deadline is crucial for GM's current plans to keep making vehicles in the coming weeks. It has already announced an extended shutdown of up to 11 weeks at 12 of its 15 U.S. assembly lines. While four of those lines have already started their extended shutdown, the rest aren't due to be idled until June.

Since the auto industry operates on a "just-in-time" basis without a backlog of auto parts at the assembly plants, even a brief disruption of supply can shut down production. On the day it filed for bankruptcy, Chrysler LLC had to shut several of its plants within hours of the filing due to suppliers cutting off shipments.

"There's very specific production plans going into the bankruptcy. If it happens a couple of weeks too soon, it's very problematic," said Rodriguez. "If they're trying to have a controlled bankruptcy, they can't afford a production disruption. Surprises don't work very well in this industry. This is money well spent for GM."

There is a good chance that most of these suppliers would eventually have gotten the full amount of money they were due on June 2, even if there was a bankruptcy before then. If a bankruptcy judge judges a creditor to be a critical supplier, payments to that company can be made. Few of the parts being sold to GM by these suppliers can be purchased elsewhere.

But that is still a relatively slow process that could have delayed payments to the already cash-strapped supplier industry. Rodriguez said even a two week delay in the payment could have forced some auto parts companies out of business.

In addition to the "critical supplier" designation by the bankruptcy court, the Treasury Department announced a payment guarantee program in March to help GM and Chrysler suppliers weather the current crisis.

That program charges suppliers who are worried about being paid 2% of what they are owed by the automakers to guarantee payments - like an insurance policy. Suppliers can also pay 3% to get nearly-immediate payment from Treasury rather than waiting for the automaker..

Flores said about 120 of its suppliers, representing about a quarter of GM's parts purchases, have signed up for the government program, and another 110 have applied to be part of the program. To top of page

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