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Parts
Division Jettisoned by GM Files Chapter 11 Bankruptcy; S&P Cuts GM's Debt Deeper
into Junk
Auto on Info October 2005
Parts Division Jettisoned by GM Files Chapter 11 Bankruptcy; S&P Cuts GM's Debt Deeper into Junk
By James B. Bleeker
On Saturday, October 8, 2005, Delphi Corporation, a motley of auto parts plants discarded by General Motors Corporation in 1999, filed a Chapter 11 bankruptcy petition with the intent of restructuring some of its liabilities and discarding others and with the hope of one day emerging as a company capable of selling products that accord it something other than a loss.
In a Chapter 11 proceeding, the U.S. bankruptcy court judge has broad discretion to eliminate existing contractual obligations and some or all debt and to convert some or all of the remaining debt - secured loans and bonds - to shares, which may leave those creditors with previously secured or unsecured rights to interest income with only very modest rights to dividends. By dilution and reverse splits, existing shares may be reduced to something close to nothing.
Some early requests by Delphi include:
1. Reduction of wages paid employees to $9-to-$10.50 per hour from current $25-to-$27 per hour,
2. Elimination of employee dental and vision benefit coverage,
3. Reduction of employee holiday and vacation days,
4. Increase in employee out-of-pocket health care costs by a factor of 10,
5. Elimination of the burden to pay laid-off workers 95% of their take-home pay,
6. Right to hire outside companies for some services,
7. Rather dramatic employee count reductions by plant sales, plant closings, retirements, and layoffs.
Understandably, the United Auto Workers union and its members, as well as other involved unions, are a tad, or more, riled and have threatened slowdowns and, when permitted by law, strikes.
Troublesome prospects for GM from Delphi's bankruptcy include:
1. As Delphi Corporation has been short on earnings during its rather brief existence, its pension obligations are underfunded by about $10.8 billion, per the U.S. Pension Benefit Guaranty Corporation, and General Motors may be saddled with the entire amount. (However, complicating matters are the uncertain interpretation that may be given the agreement between GM and the United Auto Workers made at the time of the GM-Delphi split and the broad discretion given the bankruptcy court judge in divvying up responsibilities. GM has said that its financial obligation for the underfunding rests someplace between nothing and $11 billion.)
2. Delphi Corporation may ask the bankruptcy court to discard some or all of its unprofitable or less profitable contracts with GM, while retaining the more lucrative ones. This would force GM, Delphi's largest customer, to find other sources for the auto parts no longer provided by Delphi, and these new sources may charge more for the auto parts that they supply and may find increasing output sufficiently to satisfy demand trying and maintaining quality standards even more trying. The result may be that GM may have to pay more for parts and at the same time GM quality may drop to even lower levels than those presently prevailing.
3. Slowdowns and strikes by Delphi employee union members may create parts shortages sufficient to prompt layoffs at GM, which too must pay its UAW employees whether working or not.
4. Delphi's restructuring of output (plant closings and consolidations), by itself, may impair quality, something that may further propagate and/or solidify GM's reputation as a provisioner of low-to-bottom-end motor vehicles.
5. Disgruntled Delphi employees may, intentionally or inadvertently, impair parts quality more.
Delphi's bankruptcy has raised sufficient concerns regarding General Motors' future to prompt Standard & Poor's to cut GM's unsecured long-term debt rating another notch deeper into junk, to BB-. The following table puts the cut into perspective.
Table I S&P Long-Term Debt Ratings as of October 30, 2005 Ratings Automobile Manufacturers Investment Grade Ratings AAA Toyota Motor Corporation AA+ AA AA- A+ Honda Motor Company A A- Suzuki Motor Corporation, Volkswagen AG BBB+ Nissan Motor Company BBB DaimlerChrysler AG BBB- Junk Grade Ratings BB+ Ford Motor Company BB BB- General Motors Corporation B+ Visteon Corporation* B B- CCC+ CCC CCC- Delphi Corporation D * S&P's long-term debt rating for Visteon Corporation, Ford Motor Company's former parts division, was raised from BB- to BB+ in early October 2005 in response to Ford Motor Company's bailout package. The drop in rating means that S&P concluded that the Delphi bankruptcy filing made it more likely that GM will be unable to pay its bills. Banc of America agreed; it cut its rating of GM shares to "sell" and increased its assessed likelihood of a GM bankruptcy filing from 10% to 30%.
From the perspective of a GM owner contemplating the purchase of a product by the Reliable Two - Toyota Motor Corporation or Honda Motor Company, the decision may never have been more compelling.
General Motors' and Delphi's current problems have a long history.
For more than a decade, U.S. consumers have been shifting to the quality products of the Reliable Two and out of the products of General Motors. The following chart summarizes the trend.
The next chart indicates that the shift has been for good cause.
However, factors in addition to a reliability gap may have played important roles in the abandonment of GM products. (See Durability Menu Page, Auto Manufacturer Awards and Honors, and Paragraph 2 of Caveats of Summary of Important Points of Table I.)
More recently, the pace of the U.S. consumer shift toward quality dramatically increased. As a result of the shift, GM, with huge and growing inventories of unsold vehicles, cut output and prices (via discounts), but the prices at which U.S. consumers were willing to buy GM products left GM with big losses. This prompted GM to seek cost reductions from suppliers at a time when some of its suppliers (in particular, Delphi) were showing sizable losses by reason of GM's output cuts. With no prospect of better sales or better prices, Delphi became the first major Detroit automotive company to enter a bankruptcy reorganization proceeding. Interesting questions raised by Delphi's bankruptcy route are:
1. Will GM follow Delphi into bankruptcy reorganization?
2. Will Delphi re-emerge from bankruptcy or die within it?
3. If Delphi re-emerges, how many more Chapter 11 proceedings will it re-enter? (Some companies have filed thrice before expiring.)
In considering these questions, one is lead to the question: Do GM products have any real value? The following table suggests not.
Median Value of a New Big Three Vehicle as Assessed by Mini-Survey Respondents Reporting Ownership of a Quality Four Product on or before July 8, 2005, by Manufacturer Manufacturer Big 3 Vehicle Valued at More Than What Is Currently Asked Big 3 Vehicle Valued at What Is Currently Asked Big 3 Vehicle Valued at Only 95% of What Is Currently Asked Big 3 Vehicle Valued at Only 80% of What Is Currently Asked Big 3 Vehicle Valued at Only 50% of What Is Currently Asked Big 3 Vehicle Valued at Nothing Big 3 Vehicle Valued at Nothing Plus Respondent Would Require $20,000+ per Year to Drive It Big 3 Vehicle Valued at Nothing Plus Respondent Would Require $200,000+ per Year to Drive It Respondent Unwilling to Own a Big Three Vehicle under Any Circumstance Toyota Motor Corporation √ Honda Motor Company √ Subaru Division of Fuji Heavy Industries, Ltd.1 √ Nissan Motor Company1 √ 1 Very few respondents reported owning a product by Nissan or Subaru. The Big Three manufacturers are General Motors Corporation, Ford Motor Company, and the Chrysler Group of DaimlerChrysler AG. See Glossary. To view more results or to express your assessment of the value of a new Big Three Vehicle, go to Mini-Survey No. 31, "The True Value of a Big Three." However, complicating considerations are questions as to whether any information trickles into the bottom third of the U.S. population, if information does so trickle, can it be effectively used, and how much information trickles into the bottom half of the U.S. population.
Likely all that may be safely said presently is that automotive news over the next 3 years should be interestingly informative.
Sources regarding Delphi bankruptcy: "Delphi in Bankruptcy: GM Could Lose as Much as $12 Billion in Fallout," Michael Ellis, Detroit Free Press, October 10, 2005, at http://www.freep.com/money/autonews/delphi10e_20051010.htm, "Delphi in Bankruptcy," Brett Clanton and David Phillips, Detroit News, October 9, 2005, at http://www.detnews.com/2005/autosinsider/0510/08/01-341700.htm, "Delphi Files Bankruptcy," Reuters, October 8, 2005, available at Yahoo! News, "DGM Fears up to $11 Billion Delphi Tab," Bill Vlasic and Brett Clanton, Detroit News, October 10, 2005, at http://www.detnews.com/2005/autosinsider/0510/10/A01-343339.htm, "GM Shares Buffeted by Delphi Bankruptcy," Tom Brown, Reuters, October 10, 2005, available at Yahoo! News, "Bankruptcy Details: Delphi Seeks Quick Wage Cuts," Jewel Gopwani, Detroit Free Press, October 10, 2005, at http://www.freep.com/money/autonews/bankrupt10e_20051010.htm, "S&P Cuts GM Ratings Deeper into Junk," Reuters, October 10, 2005, available at Yahoo! News, "Standard and Poor's Downgrades GM Further into 'Junk' Yard," AFP, October 10, 2005, available at Yahoo! News, "Delphi Filing Is a Red Flag for Wall Street," Joe Guy Collier, Detroit Free Press, October 11, 2005, at http://www.freep.com/money/autonews/delphi11e_20051011.htm, "Delphi's Pension Plan Underfunded by $10.8 Billion, Government Says," the associated Press at Detroit News, October 11, 2005, at http://www.detnews.com/2005/autosinsider/0510/11/delp-345488.htm, "Delphi Demands Drastic Makeover," Bill Vlassic and Brett Clanton, Detroit News, October 12, 2005, at http://www.detnews.com/2005/autosinsider/0510/12/A01-346329.htm, "Unions Irate over Delphi's New Offer," Tom Walsh and Jason Roberson, Detroit Free Press, October 22, 2005, at http://www.freep.com/money/autonews/delphi22e_20051022.htm, "Union Leaders Blast Delphi Contract Proposals," the Associated Press at Detroit News, October 22, 2005, at http://www.detnews.com/2005/autosinsider/0510/22/autos-357085.htm, "Delphi's Demand: Take $9 an Hour," Jason Roberson and Michael Ellis, Detroit Free Press, October 26, 2005, at http://www.freep.com/money/autonews/delphi26e_20051026.htm
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The footnote in Table I should read, "S&P's long-term debt rating for Visteon Corporation, Ford Motor Company's former parts division, was raised from B- to B+ in early October 2005 in response to Ford Motor Company's bailout package."
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