GM hit by Delphi bankruptcy
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GM bought more than $15 billion in parts from Delphi last year and remains its largest customer. The automaker is closely tied to the unit it spun off in 1999 through complicated supply and labor agreements.
Investors expect the extent of GM's exposure, including potentially costly post-retirement and heath-care benefits, will be revealed in bankruptcy hearings that begin in New York on Tuesday.
Delphi bonds tumbled 5 percentage points in over-the-counter trading. GM shares fell nearly $3, chopping $1.6 billion off its market capitalization to $14.4 billion, the stock's worst performance in nearly 7 months and the largest drag on the Dow Jones industrial average.
"The Delphi bankruptcy didn't help. The concern is, what are the repercussions of that for General Motors and for other automakers and the component makers. And it's all happening against background where real wages are not rising, so the question is, who's going to buy what American manufacturers produce?" said Michael Metz, chief investment strategist at Oppenheimer & Co.
Meanwhile, a meeting to form a committee of Delphi's unsecured creditors is set for October 17. JPMorgan Chase & Co. (NYSE:JPM - News) and Citigroup (NYSE:C - News) are assembling a group of lenders to provide debtor-in-possession financing that includes $1.75 billion in revolving credit and $250 million of term loans.
Troy, Michigan,-based Delphi filed for Chapter 11 protection in bankruptcy court in New York on Saturday. It was the largest such filing in U.S. automotive history and threatens to have broad implications across the industry.
"Delphi is weighing on the whole automotive industry," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. "More people want to move money out of that sector, and the situation is not going to get better any time soon."
Other components makers, including Collins & Aikman Corp. (Other OTC:CKCRQ.PK - News) and Tower Automotive Inc. (Other OTC:TWRAQ.PK - News), have filed for bankruptcy. On Monday, Dana Corp. (NYSE:DCN - News), a major GM and Ford supplier, revealed accounting problems that will force it to restate earnings from 2004 through the first half of 2005.
PENSION LIABILITY UNCERTAIN
GM said the Delphi filing did not necessarily make the automaker liable for post-retirement health-care and pension benefits for employees at Delphi.
But its range of exposure -- under benefit guarantees the automaker made as part of the 1999 spinoff -- extends from potentially no material impact to up to $11 billion, with amounts closer to the midpoint more possible than either end, GM said.
GM also said that Delphi, the nation's biggest auto parts supplier, owes it about $1.2 billion, an amount GM may not be able to recover.
Citing fallout from the Delphi bankruptcy, Banc of America cut its stock rating on GM to "sell" from "neutral" and cut its price target on the shares to $18 from $32. Banc of America also increased its estimate of the likelihood that GM itself would file for bankruptcy to 30 percent from 10 percent.
Standard & Poor's on Monday cut GM's debt ratings deeper into junk status and said it may cut them again. GM spokesman Jerry Dubrowski declined to comment on the Banc of America moves. Regarding Standard & Poor's, he said: "Our focus continues to be on continuing our North American automotive operations and restoring them to profitability as quickly as possible."
In its weekend statement, GM also said it faced an increased risk of costly supply disruptions after the Delphi filing. Delphi provides about $2,400 in parts for each North American vehicle the automaker produces, according to Merrill Lynch analyst John Casesa.
As of June 30, GM said it had $32.3 billion in cash and cash equivalents. In the first half of 2005, GM posted a loss of $2.5 billion in its North American operations.
HEAVY TOLL ON LABOR
Delphi has struggled since its spinoff from GM, posting net losses of $741 million in the first half of 2005 alone. It had sought financing from GM and sharp cuts in wages and benefits from the United Auto Workers union to restructure unprofitable U.S. operations.
The Chapter 11 filing potentially allows steep cuts to go forward without UAW approval. Delphi has 50,600 U.S. employees with about 44 manufacturing sites and 13 technical centers.
UAW representatives did not return calls seeking comment on Monday. However, in a statement issued late in the afternoon the union said it had hired New York law firm Cohen, Weiss and Simon LLP to represent it in bankruptcy court.
The statement also branded as "disgusting" Delphi's announced plans, both before and after its bankruptcy filing, to provide further cash and equity incentives to retain key executives.
"It is outrageous that U.S. bankruptcy laws allow corporations to get away with this kind of behavior," the UAW said. "It is also unfair that the law allows Delphi to put its U.S. operations into bankruptcy, while leaving its foreign operations untouched. That said, we have to deal with these realities."
Delphi's foreign entities, not included in the bankruptcy filing, have more than 134,000 workers who support 120 manufacturing sites and 20 technical centers in nearly 40 countries.
In court papers filed over the weekend, Delphi said it would ask a judge to void its labor contracts if it could not reach a restructuring agreement with its unions by mid-December. The company said it plans to submit proposed contract changes to the unions, in writing, on or before October 21.
Delphi Chief Executive Steve Miller told Reuters on Saturday to expect a significant reduction in U.S. employment and manufacturing, including dropping employees -- including 4,000 idle UAW workers the company pays under its contract -- as a reduction in operations makes them unnecessary.
Delphi shares fell 79 cents to close at 33 cents on the New York Stock Exchange. The NYSE said it was reviewing Delphi's listing status.
GM shares fell $2.81 to $25.48, also on the NYSE. GM shares have fallen about 35 percent in the last 12 months, compared with a 6 percent rise in the broader S&P 500 Index.