The Wall Street Journal-20080213-Delphi-s Bankruptcy Exit Hits a Snag- J-P- Morgan- Citigroup Confront Loan Hurdles

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Delphi's Bankruptcy Exit Hits a Snag; J.P. Morgan, Citigroup Confront Loan Hurdles

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The $6.1 billion plan to pull auto-parts supplier Delphi Corp. out of bankruptcy protection was in jeopardy yesterday as bank lenders tried to cope with credit markets that remain virtually shut, say people familiar with the matter.

Delphi's chief lenders, J.P. Morgan Chase & Co. and Citigroup Inc.'s Citigroup Global Markets, are having difficulties syndicating the loan to other lenders, these people said. Hedge funds and other investors are also balking at the terms, saying that they aren't priced appropriately for the risk involved.

Increasingly, say investors and others involved in the matter, Delphi's former parent, General Motors Corp., may have to step in and provide financing to fill the gap. Yet too much GM involvement might spook stock investors, who don't want the country's largest parts supplier too beholden to GM and its price-cutting demands.

GM Chief Financial Officer Fritz Henderson said the auto maker is exploring options in the event Delphi can't obtain the Chapter 11 exit financing as planned.

"Our objective is to have Delphi exit," Mr. Henderson said in an interview, but he declined to give specific details. "What we've tried to do is be constructive with Delphi and the plan- investors as to how we play a role."

The Delphi situation underscores the fraught state of today's credit markets, where banks are unwilling to provide financing and investors are leery of the paper that does make it to market. These conditions have been largely tied to mortgages and the home-building industry. The dynamic is spreading to other parts of the economy, with potentially serious effects.

"There are some orders for the book," said one person familiar with the deal. "But the issue is whether the book can get filled at this rate. That's the concern. GM has a role to play in all of this, of course. But the credit market is impossible, just impossible."

It has been a grueling period for Delphi, which was finally poised to put 28 months of union, bankruptcy and financing negotiations behind it. But now it must go back to the bargaining table. Delphi is leaning on the banks to keep marketing secured loans to investors. But the company fears the banks could walk away from the plan, given they are only required to make "best efforts" to arrange the loan.

Delphi could consider trying to get a smaller exit-financing package, but falling U.S. auto sales and lowered forecasts for GM sales in 2008 "probably mean Delphi needs more money, not less," said a person familiar with Delphi's talks with lenders. "Any logical person would look at the situation in the U.S. economy and say Delphi needs more. Delphi may just need to spend a little more time in bankruptcy than it had planned."

GM's Mr. Henderson acknowledged credit market conditions "are very difficult" but said GM's willingness to inject more money into Delphi "depends on what the plan-investors do." Private-equity fund Appaloosa Partners heads up a $2.55 billion investment that is the backbone of Delphi's reorganization plan.

The lenders are limited in their ability to sweeten the terms of the loan because Delphi has an "interest-expense condition" that limits the amount it can pay on interest to $585 million for 2008. That clause was put in by Delphi's equity investors to limit the cost of capital, said people familiar with the matter. If the interest payment exceeds the limit, Appaloosa founder David Tepper and his investors can walk away from the deal.

Delphi estimated its exit-financing package would be made up in part of a $3.7 billion term loan at an interest rate of Libor plus 3.75% and a $750 million second lien note at 9.5%.

"That was attractive last summer, but it's a nonstarter now," said a distressed-debt investor who passed on the Delphi debt. "The deal is not going well, and GM's in a bad spot unless some of the equity sponsors step in."

Further complicating the situation, said people directly involved in the matter, is that J.P. Morgan and Citigroup are bound only on a "best-efforts basis" to arrange the loan. That is a lesser commitment than the "material adverse change" clause, which binds banks to a deal barring only a steep decline in a client's performance. Chemical company Solutia Corp. had a MAC clause in its $2 billion exit- financing agreement with banks, but its banks backed out of the deal and now are being sued by Solutia.

"This is about the worst market you could try to bring a loan into. Delphi has maneuvered itself somehow to becoming one of the last auto suppliers to come out and try to obtain financing. They're not in a good position," said Hamburg Tang, managing director at Global Investment Advisors, a $1.8 billion investment fund and division of Reich & Tang Asset Management LLC. "They are one of the last in line, and they've only got a best-efforts commitment from the banks."

Delphi originally went to the markets last summer seeking $7.1 billion in exit financing but had to pull that deal because of credit- market turmoil.

Delphi spokesman Lindsey Williams said the supplier "continues to work with our lead arrangers with respect to exit financing."

So far this month, just seven "leveraged loans," with a total value of $3.2 billion, have gone to the markets, according to Standard & Poor's. That is down from 41 deals with a value of $23 billion in January.

"The loan market is somewhat shuttered. Basically, the only deals getting done are those committed to by the agents or those that are underwritten," said Robert Polenberg, S&P director in the leveraged- commentary and data group.

J.P. Morgan declined to comment. A Citigroup spokesperson didn't return a call seeking comment.