Delphi Creditors Approve Financing Deal, Company Might Emerge From Chapter 11 After All
By Chris Haak
09.26.2008
Bankrupt auto parts maker Delphi Corp., which has been in bankruptcy proceedings since 2005, and saw its last exit financing plan go up in flames a few months ago when Appaloosa Management LP abandoned deal to invest as much as $2.55 billion in the company to help fund its exit from Chapter 11. Subsequently Delphi sued Appaloosa for breaking the agreement, which was likely broken because Appaloosa was concerned about GM providing additional funding to Delphi, and what that meant for their own proposed equity holdings in the fresh-from-bankruptcy company. There have been valid questions posed over the past few months about whether Delphi really will, in fact, be able to emerge from Chapter 11, or whether the firm’s US operations (only Delphi’s US operations are in bankruptcy proceedings, not the entire global corporation) and would be liquidated via Chapter 7 of the US bankruptcy code.
Now, good news (or less-bad news) finally came for Delphi, and indeed GM (which depends on Delphi parts for continuing its vehicle production activities; a Delphi strike or shutdown would literally stop GM production cold in its tracks). The news: Delphi’s unsecured creditors have come to a tentative agreement with Delphi and GM on a revised financing deal that includes a total contribution from GM of $10.6 billion, which includes a $3.4 billion assumption of Delphi’s unfunded pension obligations. In return for this assistance, Delphi agreed to grant GM a $2.1 billion administrative claim that can be redeemed in preferred stock and, perhaps more importantly, waives all future claims stemming from Delphi’s 1999 spinoff from GM.
While the $10.6 billion is an enormous blow to GM’s turnaround efforts and cash burn (the latter of which is on par with what such late-1990s Internet Bubble luminaries such as Pets.com saw), the bulk of the settlement amount has already been accrued for and reflected in past financial statements. In fact, GM has taken more than $11 billion in charges related to Delphi since 2005. The point about absolving GM of any fuure claims stemming from the 1999 Delphi spinoff has the potential to be far bigger news. First, the way GM spun off Delphi, but left it with so many legacy costs and not enough resources to continue as a going concern in perpetuity (such as below-market parts contracts with GM), wasn’t the best way to conduct a spinoff, particularly one in which 1) GM was still hugely dependent upon Delphi parts to build its vehicles, and 2) GM was on the hook for so many retiree and pension obligations for Delphi employees (formerly GM employees pre-spinoff). I’m sure GM shareholders would appreciate not having to dip into their pockets continually to bail out Delphi, when GM itself is in need of a bailout and/or some sort of capital infusion.
If GM and Delphi can navigate past the current hurdles and get Delphi out of bankruptcy protection, it’s still possible that GM would have to financially support Delphi at another point in the future, though it wouldn’t be legally required to do so. However, the same way GM wasn’t required to chip in a few hundred million to help settle the American Axle strike earlier this year but did because its production had nearly ground to a halt, any Delphi shutdown would have the same potential impact to GM, unless GM was able to better diversify its parts sourcing – or source more from overseas suppliers. I’m completely in favor of supporting US workers and US-based suppliers, but it’s also imperative that GM wean itself from its enormous dependency on Delphi parts. It seems to me as if it’s another case of being asleep at the managerial wheel for GM management to allow their company to become so dependent on the success or failure of another firm, while having no say in how that other firm is managed.
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