Delphi Faces a Deadline on G.M. Aid
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LinkedinDiggFacebookMixxMy SpaceYahoo! BuzzPermalinkBy MICHAEL J. de la MERCED
Published: April 15, 2009
When Delphi filed for bankruptcy in the fall of 2005, a management team led by the seasoned turnaround executive Robert S. Miller Jr., set a goal to shepherd the auto parts maker out of the courts by the middle of 2007.
Now, after more than three years of clashes with unions and bondholders, Delphi is teetering on the brink of collapse.
Its prolonged and tortuous route through the courts provides a stark counterpoint to the widespread hope that if General Motors itself is forced to file, its bankruptcy will be quick.
Delphi faces a deadline on Friday to deliver a term sheet outlining the future of its continued support from G.M., which spun off Delphi a decade ago but still has ties to the company, one of its largest suppliers.
If it fails to reach agreements with G.M., the Treasury Department and its lenders by April 24, Delphi could lose its bankruptcy financing. That could mean a liquidation, something the Obama administration’s task force is preparing for, according to a person briefed on the negotiations.
In that event, the government hopes that a slimmed-down G.M., created through a structured bankruptcy, would acquire the Delphi plants and equipment necessary to make the parts it needs. The rest would most likely be sold at fire-sale prices, leading to little recovery for creditors.
Talks have been continuing among Delphi and its lenders, G.M. and the auto task force, and meetings are scheduled for Thursday and Friday. But little consensus has emerged, said people with knowledge of the talks, who spoke on the condition that they not be named because the talks were fluid.
A liquidation would represent a dismal end. Except for 2002, Delphi has reported a net operating loss every year since it was spun off. Since it filed for bankruptcy, it has been kept alive largely through $11 billion in support payments from G.M.
Even though Delphi has shuttered domestic factories and shed thousands of unionized workers, it faces continuing pension obligations, some of which have already been transferred to G.M.; a drastic downturn in car sales; and the battered credit markets, making financing for its operations difficult to obtain.
Based in Troy, Mich., Delphi had about 148,000 employees as of Dec. 31. In its annual report, filed last month, Delphi disclosed a $1.48 billion operating loss for 2008.
“Our focus remains on change, and we continue to focus our efforts on restructuring within our Chapter 11 case,” said Lindsey Williams, a Delphi spokesman.
Representatives for JPMorgan Chase and Citigroup, Delphi’s chief lenders, declined to comment.
The news from Delphi in recent days has been largely gloomy. In an interview with The Wall Street Journal on Tuesday, Kent Kresa, G.M.’s new chairman, raised the specter of a Delphi liquidation.
On Monday, Delphi requested that the judge in its bankruptcy case disband its equity holders’ committee, a cost-cutting move that also indicates how poor the expected recovery rates for its stakeholders are.
The Obama task force has largely been consumed with finding reorganization solutions for G.M. and Chrysler. But the universe of auto parts makers, ranging from giants like Delphi to tiny suppliers, is equally troubled and just as starved for cash.
G.M., Chrysler and Ford Motor together buy about $5 billion in parts a month, the Motor and Equipment Manufacturers Association, a trade group representing hundreds of suppliers, says.
For years, Delphi has produced a variety of parts for G.M. cars, like steering components, heating systems and electronics. While G.M. has diversified its supply base to a degree in recent years, it still largely needs what Delphi produces.
“Given the amount of components it sources from Delphi, it’s not likely that G.M. would be able to re-source to other companies in a timely fashion,” said Jim Gillette, an analyst with CSM Worldwide, an auto research firm.
This year, G.M. planned to take back several assets from Delphi, including factories and its steering business. The proposal was similar to what Ford had done with Visteon, its former parts supplier.
Since G.M. took $13.4 billion in federal aid, however, the Obama task force has exerted greater control over the carmaker’s support of Delphi.
This month, lawyers for the administration persuaded Delphi’s bankruptcy court judge to delay G.M.’s purchase of its steering business, a transaction G.M. undertook because a previous deal with another buyer fell apart. Through its loan, the government gained the ability to reject G.M. transactions larger than $100 million.
The auto task force has said that it will allow G.M. to help pay for Delphi’s survival only in conjunction with a broader reorganization plan.
It is not the first time that a rescue for Delphi has collapsed at the last minute. In March 2008, a group of investors led by Appaloosa Management backed out of a deal to invest $2.55 billion in the supplier. That scuttled a $6.1 billion financing package meant to pay for Delphi’s exit from bankruptcy.
As that deal fell apart, so too did the credit markets, making so-called debtor-in-possession financing largely unavailable and extremely expensive when offered. -----------
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