JPMorgan held a meeting last Tuesday for Delphi pre-petition lenders to unveil $2 billion in debtor-in-possession loans the bank is leading with Citigroup. The deal consists of a $1.75 billion revolver and a $250 million term loan with expected pricing of LIBOR plus 2 3/4% on both. Investors expect syndication to launch Thursday.
The court approved $950 million of the $2 billion senior secured DIP financing for use last Tuesday and a second DIP hearing is set for Oct. 27 for the remainder of the financing. The company also received interim approval of an adequate protection package for the company's $2.5 billion pre-petition secured revolver and term loan. The proceeds of the DIP financing, together with cash generated from daily operations and cash on hand, will be used to fund post-petition operating expenses, including supplier obligations and employee wages, salaries and benefits.
Delphi's bank debt shrugged its way through the market and traded up last week. Its revolving credit moved up a point to par, while its term loan also traded up a point to 103. "For the bank debt, it is largely irrelevant and with the filing, the bank debt becomes better because the collateral package has improved post-filing," said one portfolio manager about Delphi entering Chapter 11. "The bonds are the big losers with the filing."
The company's bonds continued to slide. Delphi's 6.5% '09 bonds dropped 10 points to the high 50s after the filing. While bank debt holders are expected to get paid back at par, the picture is far less rosy for bond holders. Rob Halders, senior research analyst at Tejas Securities, estimates bondholders will get back 70 cents on the dollar. He added it could take two years for Delphi to emerge from bankruptcy, at which time the bondholders will be paid back. "If you assume a two-year bankruptcy, people investing in the bankrupt company should be looking at making a 15-20% return," said Halders.
The amount of recovery on the bonds depends on how much Delphi can win in concessions on its pension and employee benefits. Eric Selle, director of Wachovia Securities' high-yield fixed income research division, estimates Delphi's pension and employee benefits are $16 billion. If Delphi is unable to achieve concessions on its labor contracts, a portion of the pensions would go to the Pension Benefit Guaranty Corporation. These claims would then be paid before unsecured claims. "If Delphi can get new labor contracts and can lower and extend benefit packages so they do not come in as a claim, then the bonds could receive par," said Selle. "If they don't get a new labor contract then the recovery value would be between 50 cents and par."
Walter Morales, chief investment officer at Commonwealth Advisors, estimates investors in Delphi's unsecured debt could recover 60-69 cents on the dollar, but that this could increase if Delphi is able to shift its employee benefit costs to General Motors, its former parent. He said GM has a strong incentive to assume these liabilities because of the supply disruptions that could occur at Delphi if it is left to carry the liabilities.
The company is not discussing plans for its direction following bankruptcy and a spokeswoman said talks on that matter are going to be held this week. "Discussions will be for the next several months and that is when we will be making modifications and coming up with a restructuring plan," she said.
Outside of the bank deals, one investor said the real issue is the affect these proceedings will have on the state of Michigan. "[They] just took a huge wage cut which will impact the tax base which will impact the state's budgets and on and on and on," he said. "Delphi management is asking for a 2/3 reduction in wages, that hurts. I think the impact of this bankruptcy is being underestimated by the market."