Delphi latest hit by credit crunch

Subprime home loan industry problems work to slow the parts maker's bankruptcy emergence.

David Shepardson / Detroit News Washington Bureau

WASHINGTON -- Delphi Corp.'s plan to seek less in exit financing and emerge from bankruptcy later than expected makes the parts supplier the latest automotive victim of the credit crunch.

Troy-based Delphi said last week that it is having difficulty raising the $7.1 billion it needs and now expects to emerge from Chapter 11 bankruptcy sometime in January 2008, a few weeks later than anticipated.

The company also said it may reduce its financing, which may slightly shrink some payments to creditors.

Late Friday, Delphi said it would transfer $650 million from its profitable foreign subsidiaries to help it emerge from bankruptcy.

It said the move would guarantee liquidity "during a time of uncertainty in the capital markets."

Delphi's financing glitch is the latest automotive deal to feel the pressure of the credit crunch fueled by problems in the subprime mortgage market.

In July, a group of banks led by JP Morgan Chase kept $10 billion in loans that investors refused to buy to complete the sale of 80.1 percent of Chrysler to Cerberus Capital Management LP.

Cerberus and former Chrysler parent Daimler AG agreed to take on $2 billion in unsold loans.

Some experts say the credit crunch also is one reason General Motors Corp. is delaying until 2010 the funding of a $30 billion trust to pay for retiree health care.

The trust would be controlled by the United Auto Workers. GM and the union agreed to the VEBA trust last month as part of a tentative agreement on a new four-year contract that workers are now voting on.

The tight credit market contrasts with the easy money times in 2005 and 2006 that helped finance a number of auto sector deals, including Ford Motor Co.'s sale of its Hertz rental car group for $5.6 billion in cash and the assumption of $10 billion in debt by a group of private equity funds. Cerberus also raised $7.4 billion to buy a majority stake in GMAC, GM's financing arm, last November.

"These are still good deals with a lot of money to be made and cheap assets," said David Cole, director of the Center for Automotive Research in Ann Arbor.

"The credit crunch is really hitting Delphi hard."

Last week, Delphi executive chairman Robert S. "Steve" Miller told reporters in New York that he expected to complete the deal shortly.

He said the problems with credit markets that had made it difficult for the company appeared to be "settling down."

"I am confident that we will get the funding put together very shortly," he said, according to wire service reports.

Delphi's plan will pay GM $2.7 billion in cash to settle the automaker's claims. Delphi has been negotiating amendments in the plan with GM, creditors, lenders and private equity partners. A group of investors led by Appaloosa Management LP agreed to pump up to $2.6 billion into the company. Under the plan, current Delphi shareholders will be able to buy 28 percent of the reorganized company. Unsecured creditors were to be fully repaid under the deal, getting 20 percent in cash, but they may get less cash under the revised deal.

Cole said investors may be worried about the softness in the auto market predicted for the second half of 2007 and the possibility of a recession next year. "I don't think the money is shut off, it's just more challenging," Cole said. "There's a lot of pain right now in the financial markets. This is a temporary hiccup and not a game changer."

Cole said the weakness in the credit markets is a clear reason why GM is paying $5.4 billion to fund retiree health care before starting the VEBA in 2010. "That gives them more time for the markets to improve," Cole said.

Across the economy, dozens of deals have been redrawn or canceled because of credit concerns. Goldman Sachs Capital Partners and private equity firm Kohlberg Kravis Roberts, for example, canceled their $8 billion buyout of audio equipment maker Harman International last month.

The problems in the credit markets will slow the pace of restructuring in the auto sector, said David Brophy, director of the center for venture capital and private equity finance at the University of Michigan's Ross School of Business.

"When carrots are in short supply, you have to pay more for carrots," Brophy said.

Many private equity funds are winning control of companies because they have the best access to debt. "The risk is the winner's curse and overpaying," Brophy said.

The auto deals and others require steady cash to make debt repayments. "The real question is heading into a slower economy, what happens to all those sweet deals?" Brophy said.

The longer-term question is will big pension funds decide to shift from investing in private equity funds to venture capital or strategic investing, Brophy said. "There's a lot of pain being felt by private equity."

You can reach David Shepardson at (202) 662-8735 or dshepardson@detnews.com.