Giant auto-parts maker Delphi Corp. is sliding deeper into trouble, raising doubts about its ability to survive as a stand-alone company.It is laboring to put together a plan to emerge from federal bankruptcy-court protection. But odds are increasing that the nation's largest auto-parts maker instead will be liquidated, with some U.S. plants being taken over by its former parent company, General Motors Corp., according to people involved in the bankruptcy process. Even if that doesn't happen, GM's financial obligation could grow by billions of dollars, these people say.

Several financial hurdles loom in coming months: Delphi's bankruptcy financing expires at year end, and there are indications that its current lenders may balk at renewing it. Its pension plan will need a large cash infusion or GM to take over some of it. The government's pension-insurance agency has expressed concern about the growing possibility of liquidation.

Delphi's woes underscore just how abysmal this year has been for the U.S. auto industry. As gasoline prices rose and consumer confidence fell, auto makers have watched sales of cars and light trucks drop about 20% so far this year, to levels not seen since the recession of the early 1990s. A slew of parts makers have sought bankruptcy protection, including two that recently filed for a second time. The mess has imperiled the jobs and retirement benefits of hundreds of thousands of workers and former workers.

Troy, Mich.-based Delphi blames its difficulties on circumstances beyond its control, such as the credit crunch and collapsing light-truck sales at General Motors. It says it doesn't intend to liquidate.

"We've not thrown that word around," says Delphi spokesman Lindsey Williams. "If that were our intent, we would not be working as feverishly as we are. We've been going down a lot of avenues to emerge from bankruptcy."

Delphi, formerly GM's in-house parts maker, produces auto electronics, safety equipment and steering systems, among other things. It filed for Chapter 11 bankruptcy protection in October 2005, citing the rising cost of labor and raw materials and the difficulty of passing along the increases to auto makers. Many of Delphi's U.S. competitors found themselves facing similar problems, and a number of them also wound up in bankruptcy court.

A liquidation of Delphi, which employs 159,000 and had $22 billion in revenue last year, would be costly to many, especially to GM. The struggling auto maker would have to decide whether to continue running money-losing Delphi plants to keep parts flowing to GM's assembly lines. Thus far, GM has had trouble finding other suppliers to build the parts at similar prices.

When GM spun off the company in 1999, it retained an obligation to fund pension and health-care benefits for former GM workers who moved to Delphi. Delphi's problems have already cost GM about $11 billion in cash and write-downs.

Delphi's pension plan, which covers about 85,000, had obligations of $14.05 billion at year end, but was underfunded by $3.3 billion, according to Securities and Exchange Commission filings.

In an Aug. 15 letter to GM and Delphi, the government's pension-insurance agency, the Pension Benefit Guaranty Corp., pressed GM to take over $1.5 billion of Delphi pension obligations next month. If Delphi were to be liquidated and its pension fund terminated, the federal agency would be on the hook for unfunded portions. The agency says it has an $8 billion claim in court should the pension plan fail, and has liens against all of Delphi's foreign assets.

"In our view, if Delphi has a proper business plan in place, it has the necessary cash flow to be a viable business," said Charles E.F. Millard, the agency's director, in an interview. "But the clock is ticking and time is getting short. If this becomes a liquidation, then our $8 billion claim would swamp any claim the creditors have. We are trying to get everyone's attention." He said time is running out "if there's going to be an emergence from bankruptcy."

Ray Young, the chief financial officer of General Motors, said this month that the auto maker was having a "constructive dialogue" with Delphi, but "they have to understand there is only so much that we can do. They're going to have to do their own form of self help here."

A liquidation could also prove costly to hedge fund Appaloosa Management LP, which was Delphi's largest shareholder, with 9.3% of its shares, according to Appaloosa's most recent filing, in April. Delphi had struck a deal with Appaloosa's founder, veteran "vulture" investor David Tepper, and several other investors that was supposed to bring Delphi out of bankruptcy last year. But that deal fell apart this spring. Appaloosa didn't return calls seeking comment.

"It is not at all clear a stand-alone reorganization is feasible for this company given the challenges in the financing markets and the U.S. auto market," says Durc Savini, head of the auto-supplier practice for Miller Buckfire & Co., a New York turnaround firm that advised on the bankruptcy proceedings of Dana Corp. and Dura Automotive, auto-parts makers that emerged from protection earlier this year. "Raising money, debt or equity, for an auto supplier is extremely difficult and only getting worse."

DIP Financing

Delphi currently has $4.3 billion in bankruptcy loans, called debtor-in-possession, or DIP, financing. It expires at the end of the year, so Delphi will have to line up new financing amid tight credit markets and tumbling U.S. auto sales.

Because DIP lenders are paid back before any other creditors, such financing is ordinarily considered quite safe. But Delphi's current DIP financing trades in the secondary market at about 82 cents on the dollar, a discount that indicates doubts about Delphi's solvency.

"For DIP to trade at 80 cents says people have no confidence it will come out of bankruptcy," says Judith Elkin, a bankruptcy lawyer at the law firm of Haynes & Boone, which worked on the Delphi case for outside investors until earlier this year. "It has no stand-alone plan or an exit financing, so it's going on a hope and a prayer."

Delphi's current DIP lenders, led by J.P. Morgan Chase & Co., have hired turnaround firm Alvarez & Marsal as a financial adviser to study the situation, an unusual step, according to several people familiar with the financing. The banks also have retained Blackstone Group LP to gauge the interest of other lenders in taking a piece of any new bankruptcy loan, these people say.

There are signs that J.P. Morgan and other lenders will be reluctant to extend the current financing, or will exact a steep price from Delphi and GM to get it done. "DIP lenders are probably going to demand GM put in a lot of money, maybe cover the DIP themselves or pay down first lien, or demand some sort of preferred equity in Delphi. It will be very difficult," says one person involved in the effort. A J.P. Morgan spokeswoman declined to comment.

After Delphi sought bankruptcy protection, Chairman Steve Miller, a turnaround specialist who also served as chief executive officer, negotiated new agreements with the United Auto Workers and GM that shed thousands of jobs and got Delphi out of unprofitable business lines such as chassis and brake hoses. It closed 21 of 29 U.S. factories, cut its hourly work force nearly in half, and let go 40% of its salaried staff.

Delphi lost $1.14 billion on sales of $10.48 billion during the first half of this year, compared with a loss of $1.35 billion on sales of $11.68 billion in the year-ago period.

In a successful bankruptcy reorganization, holders of company bonds often recover a substantial portion of the bonds' face value, frequently in the form of new stock. A year ago, Delphi bonds that mature in 2009 were trading at near face value, a sign that investors were expecting a successful reorganization. Now they trade at about 11 cents on the dollar, according to Robert W. Baird & Co., signaling a loss of confidence in Delphi's ability to reorganize. Stock in Delphi, which traded around $2 a share for much of last summer, now hovers around seven cents.

GM and Delphi

Delphi's struggles threaten to further complicate GM's effort to turn around its own North American operations. GM has been buying out workers and closing plants, and is rushing to implement a $15 billion liquidity plan intended to keep it afloat through 2009.

GM needs Delphi, its largest parts supplier. Without Delphi, it would have to buy parts from other suppliers, who likely would be unwilling to absorb the kind of losses Delphi swallows on the auto maker's behalf.

GM could take the wheel in the event of a Delphi liquidation. It could take back U.S. plants it once owned, which today mostly produce GM parts. GM also could help Delphi sell off other assets. While its core U.S. operations have been weak, Delphi has been growing internationally and winning business from companies other than GM.(by:online.wsj.com)