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.