Staggering Legal Fees, Smaller Footprint

Delphi Corp. Says It Has Spent More than $400 million on bankruptcy legal fees, and the newly restructured company expects annual sales of about $14 billion, cutting by more than half the revenue stream of what was the world's largest supplier when it spun off from General Motors Corp. in 1999.

The Troy, MI-based parts producer filed for bankruptcy in October 2005 and struggled to emerge as credit became scarce and vehicle sales tanked.

Its proposed exit from Chapter 11, announced June 1, should have been cause to celebrate, but instead it happened quietly on the day its former parent landed in bankruptcy court after months of refusing to acknowledge that option.

Delphi's emergence from bankruptcy is not a done deal. The final approval hearing in the U.S. Bankruptcy Court for the Southern District of New York is set for July 23. If the reorganization plan wins court approval, the case will be closed officially and a new Delphi born.

Until that time, however, the supplier is reluctant to answer even basic questions, such as how many employees the company will have and how soon profitability will be achieved. Delphi will keep a low profile until final approval is granted because its bankruptcy is indelibly tied to that of its former parent.

GM is in the process of acquiring from Delphi its global steering business as well as manufacturing plants in Kokomo, IN (electronic components); Wyoming, MI (valvetrain products); Lockport, NY (HVAC systems); and Rochester, NY (engine-management systems).

In addition, GM has pumped hundreds of millions of dollars into Delphi in recent years to keep the supplier alive and prevent disruptions at the auto maker's vehicle-assembly plants.

Since May 2008, GM has advanced Delphi amounts ranging from $50 million to $650 million and accelerated payments of up to $300 million for parts shipped, according to a 952-page motion to amend Delphi's reorganization plan.

But on March 23, the U.S. Treasury Dept. notified Delphi it would not approve these early payments from GM until the government could further review the transactions and “various alternatives for Delphi's emergence from Chapter 11,” the legal brief says.

Since then, Delphi says it has been “constantly negotiating” with its debtor-in-possession lenders “to maintain liquidity while negotiating agreements” that would enable it to successfully finish the reorganization.

Legal fees associated with the case have been astronomical. In addition to paying its own lawyers by the hour and for all expenses incurred, Delphi also must pay the fees and expenses of a committee of top creditors, as appointed by the court.

Between October 2005 and January 2008, Delphi says it spent $381 million for legal fees and expenses, and that figure is sure to climb significantly as the case winds down and precipitates a flurry of filings.

“Bankruptcy court is very expensive,” says Laura Bartell, a professor and bankruptcy expert at Wayne State University Law School. All the legal fees must be paid in full by cash on the date the court approves closing the bankruptcy case.

A dramatically smaller Delphi will emerge when the case concludes.

Three years ago, Delphi had 41 plants in the U.S. and identified eight it intended to keep. The amended reorganization plan shows Delphi keeping only four U.S. plants in Brookhaven, MS; Clinton, MS; Vandalia, OH; and Warren, OH.

Three of the plants produce wiring systems, while Vandalia supplies door modules, instrument panels and climate-control systems.

Most of what remains of Delphi will exist overseas. The new company will be controlled by Parnassus Holdings II LLC, a unit of private-equity fund Platinum Equity LLC, which has arranged $3.6 billion in emergence capital and capital commitments.

Meanwhile, 18 U.S. plants now idled will be grouped into a new entity, the Reorganized DPH Holdings Co., until they can be sold.

Delphi says it's too early to break down the percentage of global and U.S. sales for the new company. The core products going forward will remain electrical/electronic architecture; powertrain; electronics and safety; thermal systems; and Delphi product and service solutions.

The court record reveals a dizzying array of high-stakes transactions between GM and Delphi.

On Sept. 30, GM reimbursed Delphi $230 million related to 2007 U.S. hourly workforce special attrition programs. And in the fourth quarter, GM reimbursed Delphi $68 million related to United Auto Workers union “buy-down” arrangements, also part of the 2007 attrition program.

Upon approval of an amended master restructuring agreement in 2008, Delphi received net cash from GM totaling $559 million and recognized related pre-tax earnings of $355 million.

GM also has agreed to reimburse Delphi for hourly workforce labor costs in excess of $26 per hour, including hourly pension contributions. On Sept. 30, GM paid Delphi $273 million for retroactive labor costs from Oct. 1, 2006, through Sept. 30, 2008.

Also last September, GM provided a $210 million advance on working capital recovery to Delphi related to the global steering business the auto maker is purchasing. The steering operations lost $281 million in 2006, $677 million in 2007 and $34 million in 2008, according to the court filing. For the first quarter of this year, the steering business reports income of $31 million.

Delphi's labor unions also approved last September transferring assets and liabilities of the supplier's hourly pension plan to GM's hourly pension plan.

Delphi has not made certain minimum required contributions to the pension plan and, as a result, the Internal Revenue Service has assessed excise taxes of $17 million and $18 million for the years ended September 2005 and September 2007, respectively. The IRS may assert additional excise taxes if the assessments are not paid.

Despite its challenges, Delphi has managed to downsize significantly through the sale of several plants.

In February 2008, the supplier sold its interiors and closures business to Renco Group, which renamed the operations Inteva Products LLC. The deal netted Delphi proceeds of $98 million.

The interiors and closures operations reported losses of $45 million in 2006 and $80 million in 2007.

Proceeds for Delphi from other sales include:

In the first two years following separation from GM, Delphi generated about $2 billion in net income. But it was all downhill from there. Net losses amounted to $4.8 billion in 2004, $2.4 billion in 2005, $5.5 billion in 2006 and $3.1 billion in 2007, as well as a net operating loss in 2008 of $1.5 billion.

In first-quarter 2009, Delphi recorded net income of $556 million, but the net operating loss was $534 million.

With regard to future profitability, spokesman Lindsey Williams says: “We believe that Delphi has completed the lion's share of the restructuring initiatives identified in its 2006 transformation plan and is well-positioned to compete. The timing of Delphi's profitability will depend on a number of factors, including the challenged automotive supply industry in which we operate.”

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