Delphi pulls trigger - Bankruptcy!

[Wes Bucey]

Just in-

Auto Supplier Delphi Files for Bankruptcy
By DEE-ANN DURBIN, AP Auto Writer
DETROIT - Delphi Corp., the largest U.S. auto supplier, filed for bankruptcy Saturday, sending shock waves through the nation's auto industry, which already is weakened by high labor costs and falling market share.

The company's bankruptcy is one of the largest in the country's history.
Delphi filed to reorganize its U.S. operations in federal bankruptcy court in New York, where hearings are scheduled to begin next week. Delphi's non-U.S. operations were not included in the filing.

Delphi Chairman and CEO Robert S. Miller said the company hopes to emerge from Chapter 11 in early to mid-2007.

"We will make every effort to make this as quick as possible," Miller told The Associated Press on Saturday.

Miller, a restructuring expert who was hired in July, had threatened to take the company into bankruptcy if he failed to reach a restructuring agreement with Delphi's former parent, General Motors Corp., and its largest union, the United Auto Workers. Miller set a deadline of Oct. 17, when U.S. bankruptcy laws are scheduled to change.

Miller said Delphi will continue negotiating with GM and the UAW to lower its labor costs. Miller said the three parties agreed to continue their discussions after a bankruptcy filing.

"We mutually concluded there was still too much of the complex work yet to be done," Miller said. "It was not going to be efficient to work right up to the midnight deadline to the change in the law."

Miller said nothing will change immediately. Delphi will continue to pay its 50,000 U.S. employees and suppliers and will ship its products on schedule. Delphi has 31 plants in 13 states, including Michigan, Ohio, Alabama and California. The company has 185,000 employees worldwide.

"We are not going to adversely affect our customers," he said. "Our people will get their pay checks and will still have their health benefits. Retirees will continue to get their checks. Any changes to that will be dealt with in an orderly way."

Delphi will finance its operations with $4.5 billion in loans, including up to $2 billion in debtor-in-possession financing from a group of lenders led by JPMorgan Chase Bank and Citigroup Global Markets Inc.

Delphi, based in the Detroit suburb of Troy, has struggled to make a profit since GM spun it off in 1999. It lost $4.8 billion in 2004 and nearly $750 million in the first half of this year.

Delphi had $16.5 billion in total assets as of June 30, the most recent figure available, and has total debt of $6 billion, Standard & Poor's said Thursday. The company had $4.3 billion in unfunded pension liabilities at the end of 2004, according to a company filing with the U.S. Securities and Exchange Commission.

The largest corporate bankruptcy in the U.S. was WorldCom Inc., which had $103.9 billion in pre-bankruptcy assets.

Like Tower Automotive Inc. and other auto suppliers who have recently declared bankruptcy, Delphi has struggled with the high cost of steel and other raw materials as well as U.S. production cuts.

But Delphi also blamed its spinoff agreement with GM for saddling it with high labor costs. Under the agreement, Delphi is required to pay GM wages of $27 an hour to most of its 24,000 UAW-represented workers. That's double the level of competing suppliers, according to Standard & Poor's Ratings Services. Delphi also had to pay full wages and benefits to 4,000 laid-off workers in jobs banks, which cost it $400 million each year.
Delphi has a total of 30,000 U.S. hourly employees and 12,000 hourly retirees. About 6,000 hourly employees are represented by other unions, including the International Union of Electronic Workers/Communications Workers of America.

Under a bankruptcy filing, Delphi could shift at least some of its pension liabilities to the federal government's Pension Benefit Guaranty Corp. and could get the court to order lower wages and benefits for the UAW and higher costs for its parts.

Under the spinoff agreement, GM also is liable for some of Delphi's pension obligations if Delphi is in bankruptcy. In a note to investors, Merrill Lynch analyst John Casesa said GM could be liable for $4.4 billion to $6.7 billion worth of pension and health care benefits.

Delphi and GM have been tightlipped about the negotiations. But a letter sent from UAW leaders to union members in Kokomo, Ind., earlier this week said Delphi asked the UAW to accept wage cuts of more than 50 percent, to $10-$12 an hour, and eliminate the jobs bank. Delphi also called for a reduction in health care benefits and vacation time.

Delphi also has been plagued by an accounting scandal that the FBI and the SEC are now investigating. Six people have resigned because of the investigation, including Delphi's former Chief Financial Officer Alan Dawes.
___
On the Net:
Delphi Corp.: http://www.delphi.com
General Motors Corp.: http://www.gm.com
United Auto Workers: http://www.uaw.org

Looks like primary target for this are employees! Pretty much what most observers have been saying all along.

[Jennifer Kirley]

Originally Posted by Wes Bucey

Looks like primary target for this are employees! Pretty much what most observers have been saying all along.

I'm afraid so. And it's so typical too.

It would be nice if regulators would insist a bankrupting company's executives receive compensation cuts of similar proportions to those of employees. I know, I am dreaming.

Unfunded pension obligations since 2004...this is the consequence of relying on the stock market to fund pension plans. The market isn't designed to maintain the rate of returns necessary to ensure such schemes work. But the top management blames this problem on employees and their so-called entitlement mentality, without acknowledging that top management's compensation inflation is based on its own entitlement mentality.

[gpainter]

Look at the unfunded pension liability!!!! I was told by a good source that with the rising interest rates (Mr. Greenspan) that we will see a lot of auto related business go belly up as well as the possibility of some of the top three. Now coupled with rising gas prices makes it worse on profits with many investing heavy in the SUV market, go by the lots and see what is there and then see what they will give you if you have an SUV!?><<:. Although by March of next year gas should be below $2.00 a gallon for most of us.

[Wes Bucey]

FWIW - News on October 10.

Worries about GM rise after Delphi bankruptcy
One brokerage says risk of automaker filing for bankruptcy now heightened

• The Delphi effect
Oct. 10: The Wall Street Journal’s Detroit Bureau Chief Joe White discusses the implications of Delphi’s bankruptcy.
CNBC

LIVE QUOTE
SYMBOL LAST CHANGE % CHANGE
• DPH 0.33 -0.79 -70.54%
• GM 25.48 -2.81 -9.93%

Updated: 4:01 p.m. ET Oct. 10, 2005
DETROIT - General Motors Corp. shares fell sharply early on Monday on worries about heightened risks for the world’s largest automaker after auto parts maker Delphi Corp. filed for bankruptcy over the weekend.

Delphi is GM’s largest supplier, and the automaker warned that it faced an increased risk of costly supply disruptions after Delphi filed for Chapter 11 protection in U.S. Bankruptcy Court in New York on Saturday.

One brokerage said the Delphi bankruptcy increased the chances that GM might take the same step, dealers said.

Delphi bonds were quoted 6 percentage points lower in over-the-counter dealings, a trader said, sending ripples through the debt markets . GM shares fell 4 percent.

GM said a Delphi restructuring could “create operating and financial risks for GM,” but added that the bankruptcy filing did not necessarily make it liable for post-retirement health-care and pension benefits for employees at Delphi, which it spun off in 1999.

The range of exposure extends from potentially no material impact to up to $11 billion at the high end, with amounts closer to the midpoint more possible than either end, GM said.

Citing fallout from the bankruptcy, dealers said on Monday that Bank of America had downgraded its rating on GM to “sell” from “neutral” and cut its price target on GM shares to $18 from $32.
Bank of America also increased its estimate of the likelihood that GM itself would file for bankruptcy to 30 percent, the dealers said.
A spokesman for GM, which posted a loss of $2.5 billion in its North American operations in the first half of 2005, was not immediately available for comment.

GM faces many of the same problems, centering on high wage and benefit costs, that drove Delphi into bankruptcy.

Troy, Michigan-based Delphi has struggled since its spinoff, posting net losses of $741 million in the first half of 2005 alone. It had sought financing from GM and sharp cuts in wages and benefits from the United Auto Workers union to restructure unprofitable U.S. operations.

The Chapter 11 filing for reorganization potentially allows steep cuts in wages, benefits and jobs to go forward without the UAW’s approval, marking a big setback for the traditionally militant trade union.

In court papers filed over the weekend, Delphi said it would ask a judge to void its labor contracts if it cannot reach a restructuring agreement with its unions by mid-December.

Delphi, the largest U.S. auto parts supplier, said it would file motions on Dec. 16 to avoid the contracts and eliminate retiree health and life insurance benefits. It proposed starting a court hearing on these matters on Jan. 17.

The company said it plans to submit written proposed contract changes to the unions on or before Oct. 21.

Delphi Chief Executive Steve Miller told Reuters on Saturday to expect a significant reduction in U.S. employment and manufacturing operations, including dropping 4,000 idle UAW workers the company pays under its contract, and others as a reduction in operations makes them unnecessary.

The company aims to eliminate underperforming U.S. plants, which potentially includes about a dozen previously identified as unprofitable.
The start of trading in Delphi shares was delayed on the New York Stock Exchange pending news. The shares fell by nearly half in pre-market trading on the Inet electronic brokerage system, to 60 cents from a Friday NYSE close at $1.12.

Copyright 2005 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters.

(copied under "fair use" to illustrate an education point: "Now that Delphi has filed for bankruptcy, GM feels free to disclose it had escape clauses to allow it to avoid picking up the obligation when Delphi uses the bankruptcy court to void employment contracts and pension obligations. This also shows the variance in the story told by GM and Delphi as the bankruptcy progresses - here was Saturday's story [the day of the bankruptcy filing.])

Under a bankruptcy filing, Delphi could shift at least some of its pension liabilities to the federal government's Pension Benefit Guaranty Corp. and could get the court to order lower wages and benefits for the UAW and higher costs for its parts.

Under the spinoff agreement, GM also is liable for some of Delphi's pension obligations if Delphi is in bankruptcy. In a note to investors, Merrill Lynch analyst John Casesa said GM could be liable for $4.4 billion to $6.7 billion worth of pension and health care benefits.

Could it be Merrill Lynch was trying to push the GM stock lower to take advantage of short positions? or to drive it lower to pick up some stock cheap?

[Wes Bucey]

Latest news - some GM top brass are losing confidence from press, in-house employees, outside vendors and cutsomers.

GM's CEO feels the heat as troubles mount By Tom Brown
DETROIT (Reuters) - It's autumn in Detroit but General Motors Corp. Chairman and Chief Executive Rick Wagoner is feeling searing summer heat.

The pressure is mounting on Wagoner with its main auto parts supplier in bankruptcy, GM's share price near multiyear lows and its once-robust sales of gas-guzzling SUVs stalled.

And now he has legendary corporate financier Kirk Kerkorian breathing down his neck and demanding a seat on the GM board. Kerkorian got some help from the U.S. government on Tuesday, when it said he could increase his ownership stake in GM from the 9.5 percent he now holds.

"The heat is excruciatingly high," said Gerald Meyers, a former Detroit auto executive who now teaches business at the University of Michigan.
While GM remains the world's largest automaker -- though, it seems likely to slip behind Toyota Motor Corp. (7203.T) within the next few years -- it remains mired in red ink and rating agencies are taking an increasingly dim view of its prospects, with Standard & Poor's cutting its debt further into high-yield or "junk" status on Monday.

Lately, there seems to be no end to the obstacles blocking its return to profitability.

Among other problems, GM's September U.S. vehicle sales fell 24 percent, as high gasoline prices slammed the sales of giant sport utility vehicles. And months of talks with the United Auto Workers over GM's demand for cuts in union health care and other benefits -- costs identified by Wagoner as the company's biggest single challenge -- appear to have led nowhere.

In more bad news, it said a bankruptcy filing by auto parts supplier Delphi Corp. (Other OTCPHIQ - news) could put it on the hook for as much as $11 billion in additional health-care, pension and life-insurance liabilities.
Delphi's Chief Executive Steve Miller warned in an interview published in the Financial Times on Tuesday that a collapse of Delphi could "fatally wound" its former parent.

GM, which spun Delphi off in 1999, remains its biggest customer. S&P cited that as a reason for its latest downgrade of GM, saying it would likely confront the automaker with demands from Delphi for price relief and possible supply disruptions.

KIRK JOINS THE FRAY
Despite the steady stream of grim tidings, GM shares rebounded on Tuesday, after this weekend's Delphi bankruptcy filing slapped them down by 10 percent on Monday.

On Tuesday, the shares ended up 3.7 percent, to $26.42, following the news that Kerkorian was looking to play a larger role at GM.
In remarks last month, GM Vice Chairman Bob Lutz said Kerkorian "smells turnarounds" and that may be why he has built his stake in GM, becoming its biggest individual investor.

But analysts have said Kerkorian may seek to capitalize on his investment in GM, which is currently under water, by pushing for something like a spinoff of core parts of its profitable finance arm, General Motors Acceptance Corp.

At the very least, Kerkorian, whose interest in GM has been described by his spokesman as a "passive investment," could put pressure on GM to ratchet up its stock price.

As someone who has made a long career of maximizing shareholder value, Kerkorian might also demand that GM stop paying a $2.00 dividend that costs it about $1 billion per year in cash flow.
Some analysts see the dividend as totally out of line with a company facing its worst crisis since it nearly went bankrupt in 1992.
HOT SPOT

GM, which lost $1.4 billion in the first half of the year, including $2.5 billion in North America alone, is expected to post another dismal quarter when it reports its third-quarter results next week.
Analysts on average are expecting a third-quarter loss of 68 cents per share, according to Reuters Estimates. But Burnham Securities analyst David Healy said on Tuesday he sees GM posting a much larger loss, between $1.50 and $1.75 per share.

"I would be surprised if they show a third quarter that's better than my numbers, and I'd be interested in finding out why," Healy said.
So far, investors and GM's board have shown little or no sign of exasperation with the slow pace of GM's turnaround, or with Wagoner, who has headed the automaker since 2000. But that could soon change.
"The pressure on GM management is greater than ever ... to adopt a more aggressive turnaround strategy," said Merrill Lynch analyst John Casesa.
GM's chief spokesman Tom Kowaleski declined to comment on Kerkorian's interest in GM or on "speculation" about investor confidence in Wagoner's leadership.

"There's nothing really for us to say ... We know what the issues are. We know what the challenges are. Rick and the entire senior management team is hard at work on every single one of them," Kowaleski said.

Bottom line:
How will this affect OUR guys [quality practitioners] working in the trenches in the automotive supply chain?

[Valeri]

Wes,

Delphi has already hit us hard and we're still watching the Ford/Visteon separation of business very carefully - particularly the "holding" company. Thankfully, we don't supply directly to GM.

[Jim Wynne]

Originally Posted by Valeri

Delphi has already hit us hard

How so?
(This parenthetical statement added to satisfy the software's refusal to accept a post of < 8 characters)

[Valeri]

I really can't get into the financials or contracts/agreements, just suffice it to say it's big bucks.