Delphi Warns of Bankruptcy as GM Negotiations Hang in the Balance

Strategic Insights -

Delphi, the world's second-largest listed car parts maker, is on the brink of collapse as it struggles to renegotiate a rescue deal with General Motors, its largest customer. The company's chairman and chief executive, Steve Miller, warned that bankruptcy protection may be the only option if a deal is not reached soon. The warning has significant implications for both Delphi and GM, with the potential for tens of billions of dollars in liabilities and a major hit to the automotive industry.

Key Takeaways:

  • Delphi is at risk of bankruptcy if it cannot reach a rescue deal with GM and US trade unions, which would allow it to dump expensive pension and healthcare liabilities.
  • The company is paying over $100 million a quarter to 4,000 laid-off workers it cannot sack, with pay and benefits for a US worker totaling $130,000 a year.
  • GM would be an unsecured creditor if Delphi were to file for bankruptcy, with Deutsche Bank analysts estimating the guarantee would cost a minimum of $2.4 billion.
  • Delphi's shares plummeted 11% after the warning but recovered to $4.94, down 2 cents, in lunchtime trading.
  • The company reported a net loss of $338 million for the second quarter, with sales to new customers failing to offset an 18% fall in sales to GM.
  • Delphi has been hurt by a slowdown in production at GM, as well as flawed accounting, which led to the resignation of the chief financial officer and several other executives.
  • A possible bankruptcy was accompanied by a warning that pension contributions required next year would be higher than cashflow and raising new funds would be tough because "substantially all" its assets were pledged to back loans.
  • Visteon, the second-biggest US car parts maker, reported a net loss of $1.2 billion, against net income of $31 million in the same period last year.

Statistics:

  • Delphi's net loss for the second quarter was $338 million.
  • Sales to GM fell 18% to $3.4 billion.
  • The company is paying over $100 million a quarter to 4,000 laid-off workers it cannot sack.
  • GM's guarantee for healthcare benefits and pensions for Delphi's former workers could cost a minimum of $2.4 billion.
  • Delphi's shares began trading at $17 in 1999 and plummeted 11% after the warning.

Sources:

  • "Delphi Warns of Bankruptcy as GM Negotiations Hang in the Balance", Bloomberg (no date provided).
  • "Delphi Sees Worsening Cash Flow, Raising Doubts About Survival", Bloomberg (no date provided).
  • "Delphi's Loss Widens as Sales to GM Decline", Bloomberg (no date provided).
  • "Visteon Reports $1.2 Billion Net Loss", Bloomberg (no date provided).