Delphi: No Exit

Wikipedia listing "No Exit", a 1944 play by Jean-Paul Sartre, (see also–Delphi’s Chapter 11 problem.)

On the way to getting out of Chapter 11, auto parts company Delphi ran into the credit environment. Its $6.1 billion exit package, which has been set up by a group of banks lead by Citigroup (C) and JP Morgan (JPM), is in trouble. With the current fixed income markets in lock-down, hedge funds and other institutions don’t want the Delphi paper.

And, who can blame them? Buying into an auto parts business during the worst car sales recession in 20 years does have a kamikaze feel to it.

The lack of interest in the deal does show more evidence of the credit markets slipping into a period where almost no deals will get done. Delphi has gotten the unions to accept huge personnel cuts so the company’s cost base is probably as good as it can get. Other costs have be squeezed out of the business.

The banks cannot raise the interest on the notes to get more buyers for the debt. According to The Wall Street Journal "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 limitation speaks volumes. If the equity holder want to cap debt payments, they must think the upside in Delphi’s cash flow is limited.

No one is going to buy bonds that the equity holders don’t believe in.

Douglas A. McIntyre