Delphi Enters Bankruptcy with New CFO

A restructuring may require General Motors to assume as much as $11 billion in retirement benefits for union-covered employees who transferred to Delphi as part of its 1999 spin-off.

On Saturday, auto-parts supplier Delphi Corp. and 38 of its domestic subsidiaries filed for the largest bankruptcy in U.S. automotive history. The filing, in U.S. Bankruptcy Court in New York, is part of a long-running effort to help the Troy, Michigan-based company restructure its U.S. operations and combat the high costs of labor and benefits.

Delphi also named former Sprint Corp. chief financial officer Robert Dellinger as its new CFO. Dellinger, who left Sprint after its merger with Nextel was completed in August, was also a longtime executive at General Electric. John Sheehan, who has served as acting chief financial officer since March, was named chief restructuring officer; he will also retain his roles as chief accounting officer and controller.

Sheehan assumed his temporary role after the resignation of the company’s senior management, including former CFO Alan Dawes, amid the company’s accounting scandal. The Securities and Exchange Commission and the Federal Bureau of Investigation are both looking into the matter.

Delphi’s bankruptcy follows the company’s unsuccessful attempts to seek cuts in wages and benefits from the United Auto Workers union, according to Reuters. Delphi, which had been struggling since it was spun off from General Motors in 1999, posted net losses of $741 million in the first half of 2005 and $4.8 billion in 2004.

The spin-off agreement with its former corporate parent required Delphi to pay GM wages of $27 an hour to most of its 24,000 UAW-represented workers — double the level of competing suppliers — according to the Associated Press, which cited Standard & Poor’s. Reportedly, Delphi has proposed cutting wages by more than half, to $10 or $12 per hour. The company employs a total of more than 50,000 employees in the United States.

The bankruptcy could allow cuts in wages, benefits, and jobs to go forward without UAW’s approval. In a statement, however, chief executive officer Robert S. Miller said that Delphi will be making another proposal to unions later this month. There are also calls from management for a significant reduction in the U.S. workforce and for a substantial portion of U.S. manufacturing operations to be divested, consolidated, or wound down.

“We are not going to adversely affect our customers,” Miller said, according to AP. “Our people will get their paychecks and will still have their health benefits. Retirees will continue to get their checks. Any changes to that will be dealt with in an orderly way.”

Negotiations with the UAW, however, may be further strained by a Delphi announcement a day before its bankruptcy filing: The company sweetened the severance for its 21 top executives to make those packages more competitive. Said UAW leaders, in a statement: “Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers, engineers, administrative and support staff, mid-level managers, and others.”

Delphi plans to finance its global operations with $4.5 billion in debt facilities plus additional financing lines. Included is a commitment for up to $2 billion in senior secured debtor-in-possession financing from a group of lenders led by JPMorgan Chase and Citigroup Global Markets, according to Delphi.

General Motors reportedly warned in a statement after the filing that Delphi’s restructuring may require GM to assume $10 billion to $11 billion in retirement benefits for union-covered employees who transferred to Delphi as part of the 1999 spin-off, if certain triggers are met.

A Reuters article also notes analyst speculation that the bankruptcy may lead to losses in the highly leveraged market for credit derivative products such as collateralized debt obligations (CDOs) because Delphi is linked to more than half of such instruments. The impact, analysts say, will largely depend on how much the bankruptcy affects GM, which is referenced in 80 percent of the CDOs.

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