Meter still running on GM's Delphi ride

( Reuter )- Almost a decade after spinning off Delphi Corp and more than two years after the auto parts maker filed for bankruptcy, General Motors Corp (GM.N) is still grappling with the costly legacy of its former subsidiary.

With credit markets in turmoil and the clock ticking to save a $6.1 billion financing package needed for Delphi to exit from Chapter 11 protection by its end-March target, GM has stepped forward as lender of last resort.

GM's latest offer: $2.25 billion that had been scheduled to be paid out to the automaker in cash can instead be converted into debt for Delphi.

In its annual report filed on Thursday with securities regulators, GM offered that concession to pave the way for Delphi to emerge from bankruptcy with its current arrangements intact because it said the alternative could be far worse.

If the current exit financing deal falls through and another is not cobbled together, GM said, that could disrupt production, complicate its relations with the United Auto Workers, and drive up the final cost of its exposure to Delphi, which filed for bankruptcy in October 2005.

"Due to these uncertainties it is reasonably possible that additional losses could arise in the future," GM said.

Lehman Brothers analyst Brian Johnson said GM's disclosure on Delphi along with the pressure on its former finance subsidiary GMAC underscored the automaker's vulnerability to risks beyond its core business of making and selling cars.

"The credit crunch is hitting GM on multiple fronts, forcing it to revisit issues that management had hoped to put behind it by 2008," Johnson said.

As it attempts to climb back from a $39 billion loss in 2007, GM already faces a slumping U.S. market for new vehicles and deepening economic uncertainty that threatens to complicate its effort to get thousands of workers to accept buyout offers now on the table for 74,000 UAW-represented employees.

But it has been the turmoil in the credit markets touched off by last year's subprime mortgage crisis that threatens to delay GM's effort to pull clear of Delphi.

When GM spun the parts company off in 1999, it retained some responsibility for retiree health care and other benefits for the former unit's unionized hourly workers if Delphi were unable to provide them. It also relies on the supplier for a range of parts it needs to keep its own factories running.

But the loan market's capacity to absorb Delphi's $6.1 billion exit financing deal and others like it has proved extremely limited. Included in the package is a $3.7 billion term loan that J.P. Morgan and Citibank began attempting to syndicate last month.

The financing is a condition of Delphi's securing an equity infusion of $2.55 billion from a consortium led by Appaloosa Management.

If GM's offer of an additional $2.25 billion is applied against the amount of the stalled syndicated loan, Delphi still needs to raise another $1.45 billion, analysts said.

GM's choice, Johnson said, is to either "write a new check for $1.45 billion," or risk letting the current plan unravel .

KeyBanc analyst Brett Hoselton also cautioned in a note for clients this month that GM could be on the hook for all of the remaining Delphi financing.

Citing the turbulence in the capital markets, Delphi said on Thursday it was seeking a two-month extension on its right to complete its reorganization without interference.

A spokesman said Delphi's expectation that it would emerge from court protection by the end of March had not changed.

Delphi sought the extension until May 31 out of an "abundance of caution," it said in a filing with the U.S. Bankruptcy Court in New York.

"In a normal market, this deal would have gone through easily," CRT analyst Kirk Ludtke said of the Delphi exit financing.

But now potential creditors are taking a harder look at potential leverage or debt-to-cash-flow ratios. With $5.2 billion in net debt, Delphi would have a leverage ratio more than twice as high as Dana Corp, which struggled to emerge from bankruptcy earlier this month, he said.

Credit rating agencies are watching GM's next moves on Delphi closely. Fitch Ratings this week affirmed its GM rating at "B" -- the fifth-highest junk rating -- but said a cash drain of more than $8 billion could be one factor to prompt a downgrade.

"With Delphi currently unable to raise financing required to exit bankruptcy, the situation remains highly uncertain," the rating agency said.

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