NEWS ANALYSIS: Delphi fate: Chapter 11 or settlement?

By David Barkholz, Automotive New

Delphi CEO Steve Miller says he wants assurances of a bailout by Oct. 17, or the supplier will seek bankruptcy protection.

DETROIT -- Within a week, Delphi Corp. could take the North American auto industry into uncharted territory.

Delphi, the continent's largest automotive parts supplier, threatens to file Chapter 11 bankruptcy protection for its US operations by Monday, Oct. 17, if it can't at least get assurances of a multibillion dollar bailout from General Motors and the UAW.

A Delphi bankruptcy filing would be the largest ever in the auto industry, dwarfing Federal-Mogul Corp.'s 2001 filing.

Delphi's U.S. operations alone generated sales of $11.18 billion last year. The company employs 185,000 people worldwide.

Delphi CEO Steve Miller says Delphi must undergo restructuring either in bankruptcy court or out.

Delphi's hourly wage of $65 an hour including benefits is uncompetitive, and a jobs bank that pays idled workers 95 percent of their wages is costing Delphi, in Troy, Michigan, about $400 million this year.

The company posted net losses of $741 million during the first half of 2005.

The day of reckoning is near. Next Monday, bankruptcy laws change to make it tougher for companies to get extensions on reorganization plans and add compensation to keep executives. Miller says he needs to feel confident by then that he'll get a settlement or he will file.

The following are the top three reasons to expect a settlement and the top three pointing to a bankruptcy filing.

Why a settlement

1. Loss of control. GM and UAW, the two parties being asked to save Delphi, lose their power to control events if Delphi enters Chapter 11. The bankruptcy judge is empowered to strip union benefits and force parts price increases on Delphi customers.

The UAW rank and file, riled by contract changes, could stage work stoppages and slowdowns. That could cause supply interruptions not only to GM but the entire industry, says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich.

Delphi's 2,000 U.S. suppliers also would be hurt by the court initially freezing about $1.9 billion that Delphi owes them for parts already delivered. With perhaps 25 percent or more of the North American supply base already stressed financially, the inability to get paid what Delphi owes them could cause a cascade of bankruptcies and failures, says Craig Fitzgerald, partner in the strategy and global service group of Plante & Moran PLLC in Southfield, Mich. But Miller has been putting away cash and pledges an orderly reorganization that won't ravage Delphi vendors.

2. GM may conclude that it would pay more in bankruptcy than out. Analysts have pegged the cost of a GM bailout of Delphi at about $2.5 billion. The figure reflects GM paying $100,000 apiece to buy out 25,000 Delphi and GM workers to either get them off the Delphi payroll or allow Delphi workers to flow back to GM. In bankruptcy, though, GM might have to pay as much as $7.3 billion as part of pension and health care guarantees that the automaker made to the UAW as part of its spinoff of Delphi in 1999, according to a report by Brian Johnson, analyst for the New York brokerage firm Sanford C. Bernstein & Co. LLC. GM declined comment on the negotiations.

3. The UAW could determine that the union can protect workers better in a settlement than bankruptcy court. The realization may be setting in with the UAW rank and file that some concessions are inevitable, J.P. Morgan Securities Inc. said in a report last week. It cited comments on a UAW local Web site. If the UAW can keep GM and Delphi at the bargaining table, it can better direct how the sacrifices will be made compared with a bankruptcy judge possibly terminating pension plans or suspending health care benefits for retirees, says Timothy Wood, a partner in Plante & Moran's restructuring and operating improvement group.

Why a bankruptcy filing

1. GM has other more pressing needs for its money than a Delphi bailout. GM is looking at massive spending in the next several years to reload its product offerings and bring manufacturing flexibility to its factories, said Fitzgerald, who believes Delphi will file for Chapter 11 protection. The vehicles making up the GM fleet today were launched on average 3.7 years ago compared with 2.4 years for Toyota and Honda.

2. Delphi becomes a precedent for future GM negotiations with the UAW. GM's master collective agreement with the UAW expires in October 2007. A Delphi bankruptcy filing that rocks the world of the UAW rank and file might make the union more amenable to GM concession requests in two years, Fitzgerald said.

3. Time may be too short to bridge the vastly divergent views on who should sacrifice to save Delphi. The UAW's world view is that workers gave up wages and other benefits at the bargaining table to preserve the health care, pension and cost-of-living gains earned over the years. To ask the rank and file to make sacrifices to cover the perceived bungled strategies of Delphi and GM management is not an easy sell.

From Automotive News (A Crain publication)