Delphi and Chapter 11: the long goodbye

By: Colin Whitbread, Wednesday, October 07, 2009,

Tags: Corporate Finance, Delphi, Financial Results, Supplier Strategy.

AutomotiveWorld.com

Delphi's exit from Chapter 11, almost exactly four years to the day after filing for bankruptcy protection, has brought to an end what will surely go down in history as one of the most laborious and complex restructurings that any auto supplier has had to endure. True, Federal-Mogul's six-year stint under the supervision of the US bankruptcy court may make Delphi's reorganisation look relatively swift, but the sheer scale of the undertaking has proved to be way beyond even the most pessimistic expectations expressed in October 2005.

The apparently straightforward ambition of addressing legacy issues and the high cost structure of Delphi's US operations (non-US subsidiaries have remained excluded from bankruptcy) has at times proved a nightmare. But it has been the protracted exit from Chapter 11 that has proved an almost insurmountable challenge, stretching the tenacity of Delphi's executive chairman Steve Miller - dubbed the Turnaround Kid from the title of his autobiography - to the limit. Only now the constraints of Project Nerka, which was introduced to lower the public profile of key Delphi executives, most notably Miller, through the Chapter 11 process are finally lifted will the full story of the last four years emerge, but it is clear that events have verged on the traumatic at times.

A quick glance at documents associated with the original Chapter 11 filing shows little sense of the titanic reorganisation battle that lie ahead. Indeed, some analysts at the time predicted an exit from bankruptcy within 12 months, with the top-three global auto supplier sporting a leaner and more profitable structure, which it had already been working on for months prior to the filing, capable of keeping it in that position.

Miller himself acknowledged that the Chapter 11 filing came about following what were described as constructive discussions with union representatives, but also that necessary modifications to collective bargaining agreements without assistance from GM or intervention of the US courts could not be completed. In Miller's words: "Having been unable to resolve our US legacy issues out of court, we determined it was in Delphi's best interest to address the US cost-structure issues through the Chapter 11 process now while our liquidity position is strong."

In fact it was this stance that drew criticism from some quarters who believed that Delphi, along with a number of other auto suppliers, was abusing the Chapter 11 process, using it not as a necessary process to address cash flow and liquidity issues but as a means of general corporate restructuring via cost slashing in all its various forms. Critics argued that was the exclusive role of strong management and not the role of the US courts.

The fact that an 8-K filing with the SEC on 31 March 2006 presented a comprehensive and credible plan of transformation, vividly underscores the lack of real progress that dogged Delphi’s stay in Chapter 11 for over three and a half years.

Despite this focus on renegotiation of onerous collective bargaining agreements, in truth Delphi entered Chapter 11 with a plethora of legacy challenges, mostly inherited from its previous ownership by General Motors. Realignment of the product portfolio and the North American manufacturing footprint were key amongst these challenges and Delphi management was well aware that addressing these meant wholesale divestment, consolidation or winding down.

The fact that an 8-K filing with the SEC on 31 March 2006 presented a comprehensive and credible plan of transformation addressing these issues, vividly underscores the lack of real progress that dogged Delphi's stay in Chapter 11 for over three and a half years. Indeed, this plan was seen as the framework for a complete Plan of Reorganisation as required by the bankruptcy court, which even at that time had a 5 August 2006 deadline.

Seven businesses were tagged non-core and to be eliminated by 1 January 2008, with just eight US manufacturing facilities dubbed core to continuing operations. The eventual plan of reorganisation surfaced on 6 September 2007, with five product areas deemed core. But with this basic structure agreed, it was the collapse of a vital equity purchase and commitment agreement that contrived to blow Delphi way off course again.

When it came down to the wire, Appaloosa Management, the agreed lead investor, reneged on its financial commitment in early April 2008, effectively derailing an exit process that had been agreed by all other relevant parties. Modifications to the plan followed in ensuing quarters, leading to an amended plan being filed in October 2008, but it was clear at that point that the distressed financial markets would thwart any swift exit from bankruptcy.

The last 12 months have seen further tortuous negotiations with GM and other key stakeholders to finally get to today's position - the finishing line having been crossed.

The fact that Delphi has reportedly spent US$400m on fees for lawyers, financial advisers and consultants and filed almost 19,000 documents through the bankruptcy period, speaks volumes.

The conclusions to be drawn from the last four years are probably as complex as they are numerous and will no doubt become the subject of postgraduate theses for years to come. One glaring truth has to be that the Chapter 11 process, particularly as it was structured at the time Delphi filed (subsequently amended so most companies now have to exit in 18 months) can be extremely cumbersome and time consuming in such complex cases, with an overbearing emphasis on due legal process that sometimes appears detrimental to the longer-term interests of the workforce and business owners.

The fact that Delphi has reportedly spent US$400m on fees for lawyers, financial advisers and consultants and filed almost 19,000 documents through the bankruptcy period speaks volumes. The only positive from this might be that Delphi's experiences were such that Chrysler and GM were spared similar fates, with politicians and others prepared to override traditional practices to guarantee speedy exits from their bankruptcies.

Another is that there are few real winners in such a process, except, perhaps, the above legal and financial professionals. The four-year stint in bankruptcy has taken a very heavy toll on the workforce, left former investors with nothing and unsecured creditors with very little and diverted management attention from core day-to-day management tasks. GM has also taken a major financial hit at the very time when it can least afford to.

On a brighter note, Delphi's non-US businesses have continued to fare relatively well and even the troubled US operations have continued to draw in new business and deliver leading edge technology. Once the current auto industry slump has run its course, the power of the new Delphi - shorn of its legacy cost structure, unnecessarily cumbersome product portfolio, complex US manufacturing footprint and burdensome balance sheet - will finally become visible. With Miller vacating his position and wholesale changes at board level following, Delphi will unarguably be entering a new era, albeit with the current management team, led by chief executive Rodney O'Neal, still in place for the time being.

Delphi Holdings LLP, led by senior creditors Elliott Management Corp., and Silver Point Capital LP is now the private owner of most of the assets of the former Delphi Corporation business, with further unwanted bits being sold to GM or liquidated. Only time will tell whether the four years in Chapter 11- a period described by Miller as brutal - have truly given Delphi a resilient future based on sustainable profitability and genuine competitiveness in all its core product areas.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Published on Wednesday, October 07, 2009