Chapter 11 Threatens Delphi

The company reported that it's drawing down $1.5 billion from its revolving credit facility and saw its debt downgraded to junk status by S&P and F...
Stephen TaubAugust 5, 2005

Is Delphi Corp. on the brink of bankruptcy? A number of analysts thought it could indeed be, as the beleaguered auto-parts company said Friday that it’s in discussions with its main unions and General Motors, its former parent, about restructuring the company’s U.S. operations.

Delphi also reported that it initiated a drawdown of $1.5 billion under its $1.8 billion revolving credit facility. The news spooked investors, who traded its shares down by around 16 percent.

“Bankruptcy is clearly on the table. It is an option of last resort, but we are seeing more talk about it than a month ago,” Morningstar analyst John Novak told Reuters.

Meanwhile, two major credit-rating agencies moved to drop Delphi’s debt status to junk. Standard & Poor’s lowered Delphi’s credit rating to CCC-plus from B-plus, its senior unsecured rating to CCC-minus from B-minus, and its short-term rating to C from B-3.

“The rating actions reflect increased concerns about a potential bankruptcy filing by Delphi in light of recent public comments by its top executives and the initiation of a $1.5 billion drawdown of its revolving credit facility,” says S&P’s credit analyst Martin King.

Fitch Ratings downgraded Delphi’s senior unsecured debt rating to CCC from B and the rating on its trust preferred securities to CCC-minus from CCC-plus. Like S&P, Fitch cited the drawdown, but also mentioned “the implied heightened bankruptcy risk as the company enters a critical stage in its discussions with the UAW.”

“Delphi certainly is turning up the pressure on the unions during a critical phase of negotiations,” Fitch managing director Mark Oline told Reuters.

Delphi is being hit with a combination of operating challenges; a massive accounting scandal that resulted in the resignations of six executives, including CFO Alan Dawes; and a massive restatement. The company is also being investigated by the Securities and Exchange Commission and the Department of Justice.