Delphi's bonds slid last week on speculation that the auto parts maker was headed for bankruptcy because of a breakdown in talks with its union and General Motors about the restructuring of its U.S. operations. Its 6.55% '06 bonds fell 11 points to trade as low as 79, but the bonds rebounded to the 82-83 range. Its longer term 7.125% '29 bonds slid five points to the 69-70 range. In contrast, its loans stayed relatively stable. The company's term "B" loan fell a point to 101 1/2, while its revolving credit dipped half a point to 94 1/2. Press officials for both companies said talks are continuing and would not comment about bankruptcy speculation.
Fears that Delphi is heading for bankruptcy prompted action by a large buyer of credit default swap protection, according to an analyst, and that assisted Delphi's drop. One trader said hundreds of millions of dollars of Delphi's bond debt traded after the bankruptcy rumblings picked up. Hedge funds and money managers were the biggest buyers of the bonds, he said.
Delphi is in talks with its largest union, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), and General Motors, its former parent, to cut its high employee pension and healthcare costs. A Delphi spokeswoman said it is seeking financial support from General Motors, but would not elaborate on how much it is asking from the auto maker. Delphi is dependent on General Motors for a large portion of its business. The company receives 50% of its revenues from General Motors.
General Motors has ties to Delphi through limited guarantees it provided to employees who transferred to Delphi when it was spun off in May 1999. These agreements require it to pay pension and healthcare benefits to these employees under certain circumstances. In its 10-Q filed with the Securities and Exchange Commission in August 2005, General Motors says its maximum exposure under these agreements cannot be estimated. "No amounts have been recorded for such indemnities as the corporation's obligations under them are not probable and estimable," said the company in the filing.
Delphi has stated that if it does not achieve restructuring by Oct. 17 2005, it would consider a judicial reorganization under federal bankruptcy laws. According to the 10-Q, Delphi has notified General Motors that if it does take part in Delphi's restructuring plan, it's less likely that General Motors would be obligated to provide benefits under the limited guarantee agreements.
The analyst said General Motors does not wish to support Delphi in its restructuring plan. "General Motor's management said privately this week that this is more a UAW-Delphi issue than a Delphi-GM issue," said the analyst. "The market had expected GM to bail out Delphi." He added General Motors could be on the hook for between $2 -11 billion in unfunded pension and healthcare liabilities if Delphi files for bankruptcy.
