European automakers have shut down their factories due to the COVID-19 outbreak. The virus has already caused a lot of damage to the European automotive industry, and the situation is only becoming more tenuous by the day. The major industry players, like Volkswagen AG (OTC:VWAGY), Peugeot S.A. (OTC:PUGOY), Renault SA (OTC:RNLSY) have all closed plants in order to protect the health of their workers.

Losses Are Mounting

Volkswagen, the world's biggest automaker, recently announced it is burning approximately $2.2 billion per week, approximately 40% of its last year's average weekly revenues. Those losses should increase the longer this crisis lasts.

Volkswagen's chief financial officer said recently that passenger car sales are expected to drop approximately 40% in March. Considering the not-so-optimistic outlook by the World Health Organization, what will happen as this health crisis continues? How big will those cash drains be? It is hard to even predict what the long-term financial consequences will be at this point.

The automotive industry is a classic example of a highly capital intensive and cyclical industry. Fixed costs are relatively high compared to other industries. Thus, capacity utilization is one of the key performance indicators. But in these times, with plants at a standstill, losses are growing every day.

The new concern for CFO's is fortifying the company's balance sheets via cash reserves and credit lines. But that can only help for so long. 

Additionally, lenders and investors are growing more fearful only getting more worried and afraid too, creating elevated stress in equity and credit markets. Everyone is wondering how the automotive industry will continue to drive without any "cash fuel."

In Europe, it's time for central banks and investment banks, and governments to jump in. The European Central Bank (ECB), European Investment Bank (EIB) and European Commission (EC) all recently announced that they are ready to support the automotive industry and protect their employees.

The Financial Injection Is Coming – ECB

The ECB has launched a 750 billion euro Pandemic Emergency Purchase Programme (PEPP). Asset purchases will last until the end of 2020. The bank will inject money into the European financial system to provide liquidity, and corporate bonds are also eligible for purchasing. This is a chance for all carmakers to secure funding until the situation settles down. According to ECB President Christine Lagarde, the bank will be even willing to increase this monetary package should this be considered necessary.

The EIB Also Jumped In

The European Investment Bank (EIB), the lending arm of the European Union, also decided to help. It will finance companies with approximately 40 billion euros. The money will be used for working capital and overall liquidity maintenance financing. Fiat Chrysler (NYSE:FCAU) already made some arrangements with the EIB last week, agreeing to a new 3.5 billion euro credit facility. With most Fiat Chrysler factories around the globe currently locked down, this kind of strong support is needed now more than ever, as it not only fortify the company's cash position, but it also sends a clear "don't be afraid" message to the financial market, investors and creditors.

The EC Went A Step Further

The post Don't Worry European Automotive Industry – The Government and Banks Have Got Your Back! appeared first on IAM Newswire.

Photo by Jaromír Kavan on Unsplash