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Parts Division GM Dumped on Shareholders Has Rating Slashed: S&P Cuts Delphi's Debt Deep into Junk
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Former Parts Division GM Dumped on Shareholders Has Rating Slashed: S&P Cuts Delphi's Debt Deep into Junk
The Wall Street Journal reports that Standard and Poor's Rating Service has cut Delphi Corporation's senior unsecured debt to CCC- from B-. This is the second cut within four months. (See "S&P Cuts Delphi's Long-Term Debt to Five Notches into Junk," Auto on Info, May 2005.) The following table puts the cut into perspective.
S&P Long-Term Debt Ratings Rating Manufacturer Investment Grade Rating AAA Toyota Motor Corporation AA+ AA AA- A+ Honda Motor Company A A- BBB+ Nissan Motor Company BBB BBB- Junk Grade Rating BB+ Ford Motor Company BB General Motors Corporation BB- B+ B B- CCC+ CCC CCC- Delphi Corporation D Delphi's current financial condition is less than enviable. It has reported a string of losses of late and for all of 2004 it reported a loss of $4.75 billion. The Wall Street Journal states its current debt to be about $4 billion and its pension and other employee-benefit obligations to be $14.5 billion. Of the latter, the Journal reports $4.3 billion to be underfunded pension liabilities and $9.6 billion to be retiree health-care liabilities, per Delphi.
Delphi, General Motors Corporation's largest auto parts supplier, was spun off by GM in 1999, subject to one or more agreements with the United Auto Workers. By reason of these agreements and the recentness of the spin-off, GM would likely be found obligated for a sizable portion of Delphi's obligations in the event of the latter's collapse or Chapter 11 reorganization.
In a quest to avoid collapse or Chapter 11 reorganization, Delphi has entered into discussions seeking help from GM and the United Auto Workers. The latter must consent to any additional plant closings prior to 2007.
GM is resisting an assumption of direct liability of the size of that assumed by Ford Motor Company from its former parts division, Visteon Corporation (which was dealt a similar set of cards); it is likely hoping for big UAW concessions. However, with $20 billion of borrowed cash on hand and more money coming in from the sale of a sizable chunk of its financing business, GM may have difficulty getting the UAW to budge.
Nonetheless, GM's marketing department may have the expertise at selling dreams that might benefit the shareholders and bondholders of both Delphi and GM.
Sources for rating cut and financial condition of Delphi Corporation: "Credit Ratings for Delphi Are Downgraded," Simona Covel, Wall Street Journal, August 8, 2005, p. A2, "Delphi Posts Loss; Revenue Drops 6.9%," Lee Hawkins, Jr., Wall Street Journal, August 9, 2005, p. A3, "Delphi, Visteon Post Losses on Labor Costs," Dee-Ann Durbin, the Associated Press, available at Yahoo! News, and "Delphi Posts Loss, Bankruptcy Is Possible," David Bailey, Reuters, available at Yahoo! News
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