Markets & Finance

Another Downshift for Delphi


Because of its increased concerns that automotive supplier Delphi (DPH) may file for bankruptcy in the next few days if it is unable to negotiate a bailout package from General Motors (GM) and the United Auto Workers (UAW), Standard & Poor's Ratings Services said on Oct. 6 that it lowered its corporate credit rating on the company to CCC- from CCC+. The outlook is developing.

Troy (Mich.)-based Delphi has total debt of about $6 billion and total unfunded pension and other postretirement employee benefit (OPEB) liabilities of about $14.5 billion.

LOOMING DEADLINE. For the past several months, Delphi has been engaged in discussions with GM, its largest customer and former parent, and with the UAW, its largest union, to restructure its unprofitable U.S. operations, says Standard & Poor's credit analyst Martin King. "While we believe all three parties are motivated to complete a deal outside of bankruptcy court, the time frame for doing so has become very limited," he says.

Delphi has indicated that it may place its U.S. operations in Chapter 11 bankruptcy if a deal is not reached by Oct. 17, 2005, when changes to U.S. bankruptcy law will put greater constraints on companies that file for this type of protection.

NO WORK, FULL PAY. Delphi suffers from an uncompetitive business structure with high fixed costs, primarily because of the rich wages and benefits given to its U.S. hourly workforce. GM, which contributes 50% of Delphi's sales, recently lost market share and has reduced production. At the same time, Delphi faces higher material and employee-benefits costs, which have caused 2005 earnings and cash flow to fall sharply.

The company's inflexible labor agreements with the UAW and other unions prevent it from reducing headcount, shutting plants, selling unprofitable operations, or completing other restructuring actions that might improve profitability.

Delphi is seeking improved flexibility from the union to address its high fixed costs. It has 35,000 hourly U.S. employees, but close to 4,000 are redundant and continue to receive close to full pay and benefits. The compensation of Delphi's domestic union employees is consistent with that of GM's, but about twice the typical compensation provided by competing auto suppliers.

TIME IS TIGHT. Any restructuring of Delphi is likely to be very costly and would require significant funding from GM because of Delphi's relatively limited financial resources. BB-rated GM may be willing to provide some financial support to Delphi because it buys $14 billion in parts from the supplier and would be exposed to potential operating disruptions if Delphi declared bankruptcy.

In addition, GM guarantees certain pension benefits, retiree medical benefits, and other benefits for Delphi employees and retirees. Although a potential deal is still possible, it now appears less likely because of the complexity of the issues involved and the very limited time remaining to reach an agreement.

From Standard & Poor's Ratings Services


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