March 26 (Bloomberg) -- Citigroup Inc., recipient of $45 billion in government rescue funds, may be the “third-party servicer” chosen by the U.S. Treasury to manage $5 billion in aid for U.S.-based auto-parts suppliers.

Citigroup will probably work with General Motors Corp. and Chrysler LLC to decide how to disperse the funds, said Neil De Koker, president of the Original Equipment Suppliers Association, an auto-parts maker trade group. The program may start sooner than an initial estimate of three to four weeks after a U.S. Treasury announcement March 19, he said today.

Suppliers face a cash shortfall as automakers reduce production after sales fell last year to the lowest since 1992. The delay in the program may mean some suppliers will go bankrupt before the aid begins to take effect, said Laura Marcero, a partner in consulting firm Grant Thornton LLP.

“It’s not going to be in place quick enough to prevent some of the failures that are already starting to happen,” said Marcero, who is based in Southfield, Michigan.

Citigroup is probably the only third-party servicer, and is working with the Treasury on the terms of the supplier aid, De Koker said. Citigroup spokeswoman Andrea Hurst declined to comment on the matter. The third-party role was outlined in the Treasury’s initial description of the program.

Portions of the aid plan are still being decided, such as the definition of “U.S.-based” supplier, De Koker said. Companies with a U.S.-based subsidiary, including suppliers such as Kariya, Aichi-based Denso Corp., are eligible, he said.

‘Ragged Edge’

The 14-stock Bloomberg U.S. Auto Parts/Equipment Index rose 4.2 percent to $23.34 at 4:15 p.m., the highest since Feb. 13. The index has fallen 67 percent in the past 12 months.

Citigroup slid 14 cents to $2.81 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 87 percent in the past 12 months.

Some auto suppliers are “still on the ragged edge” because of reduced auto production, De Koker said. “There still will be more help required if the credit markets don’t improve soon,” he said.

OESA will work with the Treasury for programs such as a commercial loan guarantees for auto suppliers, he said. The group represents some of the industry’s biggest suppliers, including Delphi Corp., TRW Automotive Holdings Corp. and American Axle & Manufacturing Inc.

The Treasury said its program will provide guarantees or money against suppliers’ accounts receivable “no matter what happens” to the automaker that promised to pay for the parts.

Government Fees

Only billings, also called receivables, for goods shipped after March 19 will be eligible for the program, the Treasury said. Automaker payments generally come 45 to 60 days after parts are shipped.

Ford Motor Co. declined to participate in the program.

Smaller, so-called Tier 2 suppliers who may not receive direct government aid may be eligible for an expanded loan- guarantee program run by the U.S. Small Business Administration, according to an OESA letter dated March 24 and obtained by Bloomberg. The Washington-based group, an independent agency of the federal government, wasn’t prepared to comment, spokesman Mike Stamler said today.

Suppliers will pay a fee of 2 percent of the amount of a receivable or billing for a government guarantee, the document said. The amount will be 3 percent of the total for cash from the government immediately. That matched what an Obama auto task force member told reporters March 19.

Lear, American Axle

The charges may mean some suppliers won’t want to participate, said analyst Marcero.

“It’s a fairly expensive program,” she said.

De Koker said the details of the fee terms are still being decided.

Marcero said the program may help suppliers if GM or Chrysler were to go into Chapter 11 bankruptcy, because participating partsmakers would have government support in place for payments promised by the automakers.

U.S. auto suppliers’ credit ratings won’t get a boost from the $5 billion federal aid program, Standard & Poor’s said in a report yesterday. Almost half of the partsmakers rated by S&P are at B- or lower, or at least six levels below investment quality, with one third at CCC, or eight grades below.

American Axle and Lear Corp., both ranked CCC+ by S&P in January, have received “going concern” notices from auditors that the companies may have difficulty remaining viable. Visteon Corp., ranked CCC in January, has said it will probably get such a statement when it files its annual report.

GM and Chrysler are operating with $17.4 billion in U.S. aid and have requested as much as $21.6 billion more.

To contact the reporters on this story: Alex Ortolani in Southfield, Michigan, at aortolani1@bloomberg.net

Last Updated: March 26, 2009 17:56 EDT