Fitch Ratings has assigned a rating of 'BB-' to Delphi
Corporation's (Delphi) $2 billion of debtor-in-possession (DIP) credit
facilities. The DIP facilities will consist of a revolving credit
portion and a term loan portion and are to be pari passu with each
other in terms of priority of repayment, collateral, and guarantees.
The term loan and revolving credit will, therefore, share the same
ratings. The obligations of Delphi and its domestic guarantors under
the DIP facilities benefit from superpriority claim status and
perfected first-priority priming liens and guarantees. Therefore, the
DIP facilities will be first in line among Delphi's creditors for
repayment upon either the company's future reorganization or
liquidation of all or part of its assets or businesses. Assets
securing the DIP facilities provide ample overcollateralization, but
the illiquid nature of a portion of these assets and the potential
deterioration in values that would occur in a liquidation scenario are
factors in the rating.
The rating is a point-in-time rating and will not be monitored by Fitch following its issuance. The rating is based on the information made available to Fitch and based on the terms and conditions outlined as of the time of the rating. Fitch will not be monitoring or updating the rating to reflect any changes that may take place to the terms and conditions of the facilities.
Delphi and its domestic subsidiaries filed for voluntary protection under Chapter 11 of the United States Bankruptcy Code on Oct. 8, 2005. Delphi's non-US subsidiaries, which account for less than half of the company's consolidated revenues during 2005, are not subject to the domestic bankruptcy filings and continue to operate without court supervision.
The DIP rating reflects the materially negative pro forma cash flow performance of Delphi's domestic operations and the company's inability to reverse this trend absent major concessions from the United Auto Workers (UAW) union. If Delphi is unable to reach a new labor agreement with the UAW by Dec. 16, Delphi has stated that it will petition the court to void its existing labor contract and impose terms requested by Delphi. The severe reduction in wages, benefits, and other terms requested by Delphi raises the risk of a work stoppage. A major work stoppage at Delphi could interrupt the supply of critical parts to GM, providing significant incentive for GM to contribute to an agreement between the UAW and Delphi, thereby facilitating Delphi's operating continuity and eventual emergence from bankruptcy. A major work action at Delphi, and the impact it would have on GM's long-term production plans, could severely impair the realizable value of Delphi's asset base in a liquidation scenario.
The DIP obligations will consist of direct borrowings and open letters of credit under the $2 billion overall commitment, as well as any other liabilities incurred with the DIP lenders through hedging transactions, cash management arrangements, and the like. The DIP facilities will benefit from superpriority claims status, first-priority guarantees by all material domestic subsidiaries, first-priority perfected senior priming liens on all assets of Delphi and all of its material domestic subsidiaries that were subject to existing liens on the pre-petition senior secured credit facilities, and perfected first-liens and junior liens on all previously unencumbered domestic assets. The DIP collateral package includes pledges of 100% of the voting capital stock of all material domestic subsidiaries and up to 65% of the voting capital stock of direct and indirect foreign subsidiaries. Usage of the DIP facilities will be subject to a borrowing base calculation applicable to domestic tangible assets, as detailed below.
The DIP facility borrowing base formula will consist of 85% of eligible non-GM accounts receivable; plus 85% of eligible GM accounts receivable, limited to 25% of total eligible accounts receivable; plus the lesser of 65% of eligible inventory or 85% of the net orderly liquidation value based on a third-party appraisal; plus a fixed asset component based on 80% of the net orderly liquidation value of eligible machinery and equipment, based on a third-party appraisal and 50% of fair market value of real estate based on a third-party appraisal, provided that the fixed assets component is limited to 30% of the aggregate amount of the borrowing base; less up to a $40 million carve-out for bankruptcy court and professional fees; and less the aggregate amount of any domestic secured hedging obligations in excess of $75 million. The borrowing base computation is expected to closely approximate the $2 billion size of the aggregate facilities and result in full availability of the commitment.
The DIP rating also reflects Fitch's view that there would be a high degree of illiquidity tied to Delphi's assets, should liquidation of all or part of the company ultimately prove necessary. The valuation of the company's domestic asset base would be severely compromised in the event a UAW agreement cannot be reached, GM continues to lose market share, or Delphi's domestic cash flow and availability prove to be insufficient for any other reason. While Delphi's overseas operations are characterized by a significantly more diversified customer base and meaningfully positive cash flow generation, there is no contractual ability under the U.S. credit agreements to force repatriation of any of Delphi's foreign cash while the company remains a going concern. Under a worst case scenario, Delphi's DIP and pre-petition lenders would most likely take steps to enforce their right (through the existence of stock pledges by the foreign subsidiaries) to direct the company to sell its overseas assets under suboptimal conditions.
Fitch also factored into the ratings the expectation that usage under the DIP revolver has significant potential to increase steadily over the tenor of the facility, in order to finance cash interest and cash adequate protection payments, as well as offset negative U.S. operating cash flow performance.
Fitch's DIP rating also incorporates Delphi's substantial critical mass and continued importance to GM, the bankruptcy court's approval of the Dec. 16, 2005 date to finalize the UAW contract negotiations, the concentration cap for GM accounts receivable at 25% of total eligible receivables within the DIP borrowing base calculation, the existence of significant non-U.S. operations that do not have a customer concentration with GM and are projected to generate positive cash flows, and the existence of GM's contingent obligations with regard to Delphi's legacy costs. Delphi's technology assets and growth in non-GM business are additional positive considerations.
The DIP credit agreement will be subject only to a global EBITDAR financial covenant, for which required levels will be established using a financial plan that does not assume any meaningful improvement in the company's cost base. Therefore, either a liquidity shortfall or a material decline in the value of the collateral base would be the most likely causes of any default under the DIP facility.
Delphi's pre-petition senior secured lenders were owed almost $2.5 billion of outstanding loan principal upon the company's bankruptcy filing. In return for allowing their security interests to be consensually primed by the DIP lenders, the pre-petition senior secured lenders will be entitled adequate protection payments approximating $300 million per annum, consisting of ongoing cash interest payments applicable to the outstanding pre-petition loan principal at the ABR option default rate of interest per the pre-petition credit agreement. Drawdowns under the DIP credit facilities are expected to be the main source of cash to make the adequate protection payments.
Delphi's pre-petition liabilities subject to compromise include approximately $2 billion of senior unsecured notes, $412 million of junior subordinated notes that supported the pre-petition Delphi Trust I and II trust preferred stock, trade payables, and certain other liabilities. These obligations are all stayed in bankruptcy and will not receive payment of any interest, principal, or fees. Additional claims include pension and OPEB liabilities and could include claims made under Delphi's indemnification to GM arising from retirement benefit guarantees (that Fitch expects to be triggered).
Delphi's foreign operations, which have not filed for bankruptcy, currently have debt and debt availability of approximately $1.1 billion. These foreign obligations primarily consist of securitization and factoring agreements. Delphi's DIP credit agreement permits up to an aggregate of $1.5 billion of foreign indebtedness and liens (excluding intercompany debt).
Delphi Corporation, headquartered in Troy, Michigan, is one of the largest global automotive suppliers, with pro forma 2005 revenues approximating $27 billion. Key product lines consist of vehicle electronics, transportation components, integrated systems and modules, and other electronic technology. Delphi was spun off as a separate company from General Motors on Jan. 1, 1999, in accordance with the terms of a master separation agreement.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
The rating is a point-in-time rating and will not be monitored by Fitch following its issuance. The rating is based on the information made available to Fitch and based on the terms and conditions outlined as of the time of the rating. Fitch will not be monitoring or updating the rating to reflect any changes that may take place to the terms and conditions of the facilities.
Delphi and its domestic subsidiaries filed for voluntary protection under Chapter 11 of the United States Bankruptcy Code on Oct. 8, 2005. Delphi's non-US subsidiaries, which account for less than half of the company's consolidated revenues during 2005, are not subject to the domestic bankruptcy filings and continue to operate without court supervision.
The DIP rating reflects the materially negative pro forma cash flow performance of Delphi's domestic operations and the company's inability to reverse this trend absent major concessions from the United Auto Workers (UAW) union. If Delphi is unable to reach a new labor agreement with the UAW by Dec. 16, Delphi has stated that it will petition the court to void its existing labor contract and impose terms requested by Delphi. The severe reduction in wages, benefits, and other terms requested by Delphi raises the risk of a work stoppage. A major work stoppage at Delphi could interrupt the supply of critical parts to GM, providing significant incentive for GM to contribute to an agreement between the UAW and Delphi, thereby facilitating Delphi's operating continuity and eventual emergence from bankruptcy. A major work action at Delphi, and the impact it would have on GM's long-term production plans, could severely impair the realizable value of Delphi's asset base in a liquidation scenario.
The DIP obligations will consist of direct borrowings and open letters of credit under the $2 billion overall commitment, as well as any other liabilities incurred with the DIP lenders through hedging transactions, cash management arrangements, and the like. The DIP facilities will benefit from superpriority claims status, first-priority guarantees by all material domestic subsidiaries, first-priority perfected senior priming liens on all assets of Delphi and all of its material domestic subsidiaries that were subject to existing liens on the pre-petition senior secured credit facilities, and perfected first-liens and junior liens on all previously unencumbered domestic assets. The DIP collateral package includes pledges of 100% of the voting capital stock of all material domestic subsidiaries and up to 65% of the voting capital stock of direct and indirect foreign subsidiaries. Usage of the DIP facilities will be subject to a borrowing base calculation applicable to domestic tangible assets, as detailed below.
The DIP facility borrowing base formula will consist of 85% of eligible non-GM accounts receivable; plus 85% of eligible GM accounts receivable, limited to 25% of total eligible accounts receivable; plus the lesser of 65% of eligible inventory or 85% of the net orderly liquidation value based on a third-party appraisal; plus a fixed asset component based on 80% of the net orderly liquidation value of eligible machinery and equipment, based on a third-party appraisal and 50% of fair market value of real estate based on a third-party appraisal, provided that the fixed assets component is limited to 30% of the aggregate amount of the borrowing base; less up to a $40 million carve-out for bankruptcy court and professional fees; and less the aggregate amount of any domestic secured hedging obligations in excess of $75 million. The borrowing base computation is expected to closely approximate the $2 billion size of the aggregate facilities and result in full availability of the commitment.
The DIP rating also reflects Fitch's view that there would be a high degree of illiquidity tied to Delphi's assets, should liquidation of all or part of the company ultimately prove necessary. The valuation of the company's domestic asset base would be severely compromised in the event a UAW agreement cannot be reached, GM continues to lose market share, or Delphi's domestic cash flow and availability prove to be insufficient for any other reason. While Delphi's overseas operations are characterized by a significantly more diversified customer base and meaningfully positive cash flow generation, there is no contractual ability under the U.S. credit agreements to force repatriation of any of Delphi's foreign cash while the company remains a going concern. Under a worst case scenario, Delphi's DIP and pre-petition lenders would most likely take steps to enforce their right (through the existence of stock pledges by the foreign subsidiaries) to direct the company to sell its overseas assets under suboptimal conditions.
Fitch also factored into the ratings the expectation that usage under the DIP revolver has significant potential to increase steadily over the tenor of the facility, in order to finance cash interest and cash adequate protection payments, as well as offset negative U.S. operating cash flow performance.
Fitch's DIP rating also incorporates Delphi's substantial critical mass and continued importance to GM, the bankruptcy court's approval of the Dec. 16, 2005 date to finalize the UAW contract negotiations, the concentration cap for GM accounts receivable at 25% of total eligible receivables within the DIP borrowing base calculation, the existence of significant non-U.S. operations that do not have a customer concentration with GM and are projected to generate positive cash flows, and the existence of GM's contingent obligations with regard to Delphi's legacy costs. Delphi's technology assets and growth in non-GM business are additional positive considerations.
The DIP credit agreement will be subject only to a global EBITDAR financial covenant, for which required levels will be established using a financial plan that does not assume any meaningful improvement in the company's cost base. Therefore, either a liquidity shortfall or a material decline in the value of the collateral base would be the most likely causes of any default under the DIP facility.
Delphi's pre-petition senior secured lenders were owed almost $2.5 billion of outstanding loan principal upon the company's bankruptcy filing. In return for allowing their security interests to be consensually primed by the DIP lenders, the pre-petition senior secured lenders will be entitled adequate protection payments approximating $300 million per annum, consisting of ongoing cash interest payments applicable to the outstanding pre-petition loan principal at the ABR option default rate of interest per the pre-petition credit agreement. Drawdowns under the DIP credit facilities are expected to be the main source of cash to make the adequate protection payments.
Delphi's pre-petition liabilities subject to compromise include approximately $2 billion of senior unsecured notes, $412 million of junior subordinated notes that supported the pre-petition Delphi Trust I and II trust preferred stock, trade payables, and certain other liabilities. These obligations are all stayed in bankruptcy and will not receive payment of any interest, principal, or fees. Additional claims include pension and OPEB liabilities and could include claims made under Delphi's indemnification to GM arising from retirement benefit guarantees (that Fitch expects to be triggered).
Delphi's foreign operations, which have not filed for bankruptcy, currently have debt and debt availability of approximately $1.1 billion. These foreign obligations primarily consist of securitization and factoring agreements. Delphi's DIP credit agreement permits up to an aggregate of $1.5 billion of foreign indebtedness and liens (excluding intercompany debt).
Delphi Corporation, headquartered in Troy, Michigan, is one of the largest global automotive suppliers, with pro forma 2005 revenues approximating $27 billion. Key product lines consist of vehicle electronics, transportation components, integrated systems and modules, and other electronic technology. Delphi was spun off as a separate company from General Motors on Jan. 1, 1999, in accordance with the terms of a master separation agreement.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.