Delphi Bankruptcy GM's Latest Pain

Special From The Street
By TSC Staff

10/10/2005 With its biggest parts supplier under Bankruptcy Court supervision, General Motors finds its own future even harder to predict.

GM says Saturday's Chapter 11 filing by former subsidiary Delphi probably doesn't trigger any immediate liability for the No. 1 U.S. automaker. But it could create obligations of as much as $11 billion if various pension guarantees were enforced.

GM, which spun off Delphi in 1999, says it's too early to tell how big a bill it could face.

Delphi, which lost almost $5 billion last year and had been negotiating for months for labor concessions with the United Auto Workers union, filed for Chapter 11 protection in New York on Saturday. The company expects to continue operating with $4.5 billion of post-petition financing and said it expects to reorganize over two years.

Delphi employed roughly 185,200 people worldwide at the end of 2004, including 147,900 hourly workers. About 75% of hourly workers were represented by the union, including 25,200 in the U.S. by the UAW. Delphi provides about half of GM's parts, making it by far the automaker's biggest supplier.

For now, GM sees no immediate effect on its global automotive operations from the filing, with Delphi committed to maintaining its supply lines as it carries out its restructuring. But the former parent sketched out a number of potential quagmires related to the filing, the biggest of which stems from pension guarantees GM agreed to as part of the spinoff that created Delphi as a public company six years ago.

GM noted that the pension deals cut with the UAW, International Union of Electrical Workers and United Steel Workers contain separate benefit guarantees relating to pension, healthcare and life insurance benefits, each of which has separate "triggering events" that kick in if Delphi fails to make good. "Therefore, it is possible that GM could incur liability under one of the guarantees (e.g. pension) without triggering the other guarantees (e.g. post retirement healthcare or life insurance)," GM noted. "In addition, with respect to pension benefits, GM's obligation under the pension benefit guarantees only arises to the extent that the combination of pension benefits provided by Delphi and the Pension Benefit Guarantee Corp. falls short of the amounts GM has guaranteed."

GM also said it could be hurt if Delphi or one of its subsidiaries rejects an existing contract with GM, something that could end up disrupting its supply chain and force the suspension of production. GM could potentially benefit, however, if the filing ends up narrowing the roughly $2 billion in above-market premium it pays every year for systems and services it buys from Delphi in North America.

"The range of GM's contingent exposure extends from there being potentially no material financial impact to the company if the guarantees are not triggered, to approximately $10 to $11 billion at the high end, with amounts closer to the midpoint being considered more possible than amounts towards either of the extreme ends of this range," GM said in a statement.