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Delphi crisis may hurt vendors

CEO Miller says company can pay its bills -- even if it is bankrupt

DETROIT -- Suppliers to Delphi Corp. are bracing for a financial storm if the nation's largest automotive supplier files for Chapter 11 bankruptcy protection.

Delphi could owe its own suppliers as much as $1.9 billion for parts delivered before the company seeks protection in bankruptcy court, according to an Automotive News estimate.

Money owed suppliers could be frozen by the court, possibly for months or years. That could restrict suppliers' ability to pay for raw materials, wages and other expenses to maintain business.

Delayed payments also could put a Delphi supplier in violation of bank loans that depend on receivables as collateral.

Delphi has approximately 2,000 U.S. suppliers. Many of those vendors are financially fragile, says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich.

The possibility of delayed or reduced payments is a recipe for disaster, adds Glenn Reynolds, an analyst with CreditSights of New York. "The fallout would be even greater as the cascading series of bankruptcies of Tier 2 and Tier 3 suppliers that serve the GM supplier chain start to file," he wrote in a research note to investors. "That would be a major supplier domino effect."

But Delphi CEO Steve Miller says he could enter Chapter 11 with adequate cash to pay Delphi's vendors.

"A filing should not be devastating to our creditors," Miller said in an interview last week. "We would expect to keep operating and keep procuring parts to support our operations."

Miller says vendors could eventually receive payment for parts delivered before Delphi files for bankruptcy.

To ensure a smooth flow of parts, Delphi could ask the bankruptcy court to designate key suppliers as "critical vendors." That would allow Delphi to pay them for parts delivered before its bankruptcy filing.

All this would be moot if Delphi negotiates a bailout with General Motors and the UAW. Miller wants concessions from GM and the UAW to ease Delphi's bloated labor costs.

Miller originally demanded a bailout deal on or before Oct. 17. After that date, new federal rules make it tougher for bankrupt companies to reorganize.

But lately Miller has hedged on his deadline, arguing that a complete deal won't be necessary by Oct. 17 as long as GM and the UAW demonstrate their willingness to bail out Delphi.

Cratering Detroit?

The showdown between Delphi, the UAW and GM could hardly come at a worse time. North American suppliers have been staggered by cutthroat price cuts, declining production and high raw material costs.

Over the past year, those factors have triggered a string of bankruptcy filings by prominent suppliers such as Collins & Aikman Corp., Tower Automotive Inc., Intermet Corp., Oxford Automotive Inc. and Citation Corp. But those bankruptcies would pale in comparison to a Delphi filing. Delphi's U.S. operations alone generated sales of $11.18 billion last year, fully $2 billion more than the combined global sales of the five companies that have filed.

Delphi would be the largest industrial company to seek court protection in at least a decade, according to BankruptcyData.com, a service that tracks bankruptcies. And some suppliers are taking steps to avoid getting hurt. Harris Thomas Industries Inc., a small metal forging company in Dayton, Ohio, has steadily reduced its dependence on Delphi sales.

Company President Mike Arlt scaled back his Delphi business from 30 percent of sales in 2002 to less than 1 percent today because he recognized the scale of Delphi's vulnerability.

In 2002, GM had asked a Korean supplier to produce a component that Arlt's company formerly supplied to Delphi. That was the last straw, said Arlt, whose company's annual revenues are less than $50 million.

"If we were still doing 30 percent of our sales with Delphi, and they filed for Chapter 11, that would be devastating to us," he said.

At risk

But other suppliers still rely on Delphi for most of their sales. Many would face financial hardship or "cascade into bankruptcy or liquidation were Delphi to file for Chapter 11," says consultant Craig Fitzgerald. Those Delphi suppliers most likely to be at risk are those with $250 million or less in sales, privately owned and eking out just a 3 to 4 percent profit. These suppliers are leveraged heavily, carrying as much as $3 of debt for every $1 retained in the business, says Fitzgerald, a partner with Plante & Moran PLLC, a consulting firm in Southfield, Mich.

That could be cause for concern to bankers. Many suppliers borrow money from banks, pledging their receivables as collateral. If Delphi's payments are tied up in bankruptcy court, lenders could demand immediate payment from those vendors.

Deep freeze

A bankruptcy filing would freeze money that Delphi owed its suppliers, and that would play havoc with those suppliers' cash flow.

Creditors typically recover pennies on the dollar from bankrupt customers, and payback can take months or years.

Delphi suppliers are "pretty much panicking," says Jay Rose, a business development officer for Euler Hermes ACI of Owings Mills, Md.

Euler Hermes sells trade credit insurance to companies who fear their customers will be unable to pay.

Euler is turning away new customers seeking protection of payments owed by Delphi, says Tony Clary, vice president for risk management.

"The situation is too negative," Clary says. "You've got Delphi saying that by Oct. 17 that they will file for bankruptcy if they do not get relief."

You may e-mail Dave Barkholz at

You may e-mail Robert Sherefkin at

You can reach David Barkholz at dbarkholz@crain.com

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