August 15, 2008
U.S. Is Pressuring Delphi Over Pension
Obligations
by The New York Times
The government is trying to force Delphi to transfer more
than $1.5 billion of unfunded pension obligations to General
Motors by Sept. 30. It is warning Delphi, the big auto parts
maker, that if it misses the deadline, it will have to
contribute more than $2 billion to the fund, a burden that could
dash any hopes of Delphi emerging from bankruptcy with its
pension plan intact.
Delphi’s efforts to put together a strategic plan to come out
of bankruptcy fell apart in April. Since then, it has struggled
to arrange financing in a worsening economy with a deteriorating
outlook for the auto industry. If a deal is not reached, the
company may have to terminate its pension fund.
The Pension Benefit Guaranty Corporation, the federal agency
that takes over pension funds terminated in distress, is warning
that it would then lay immediate claim to $8 billion, diluting
the claims of Delphi’s other unsecured creditors, who are owed
about $3.5 billion. Already, the pension agency has been placing
liens on a number of Delphi’s foreign plants and other assets,
girding itself to fight for a share of the money.
“The negative consequences will be severe for all of Delphi’s
stakeholders,” Charles E. F. Millard, the director of the
pension agency, wrote in a letter to top executives of G.M. and
Delphi on Thursday.
As long as Delphi keeps its pension plan intact, the pension
agency has no claims on the unsecured creditors’ money.
When G.M. spun off Delphi as an independent auto parts
company, it spun off part of its pension fund to cover the
workers shifted to Delphi. G.M. also agreed to take back part of
that fund if Delphi were ever in severe financial distress.
G.M.’s pension fund is now strong because of the company’s
decision to sell $13 billion of bonds in 2003 and put the
proceeds into its pension fund. Most parties to Delphi’s
bankruptcy proceedings say that as a result, G.M.’s pension fund
could safely absorb $1.5 billion of unfunded pension obligations
from Delphi. But the longer the negotiations continue, the more
the cost to G.M. could grow — and G.M. wants to get the best
possible return for its support.
This year, G.M. had been preparing to take back a portion of
the pension fund as part of Delphi’s reorganization plan. Delphi
has been allowed to skip its pension contributions while in
bankruptcy, and it also received waivers from the Internal
Revenue Service that pushed the due dates into the future.
But this spring, with its reorganization seemingly on track,
Delphi allowed the I.R.S. pension waivers to expire. And then
oil prices soared, the auto sector’s prospects took a sharp turn
for the worse, Delphi lost a crucial part of its financing and
its reorganization plan unraveled, scuttling the pension
transfer to G.M.
In the months since, Delphi has been locked in a legal
dispute with its departed bankruptcy-exit financier, Appaloosa
Management, and uncertainty has mounted about the American auto
industry’s overall future. Delphi has not been able to find new
exit financing.
Meanwhile, because the pension waivers were allowed to
expire, Delphi’s pension contribution schedule is speeding up
again. On Sept. 30, about $2.4 billion in contributions will
come due.
Delphi does not have $2.4 billion to spend on its pension
fund. It does not have to produce that much cash on Sept. 30,
because of an eight-month grace period, but as it falls behind
schedule, the I.R.S. has the authority to impose excise taxes.
Delphi disclosed in a filing with the Securities and Exchange
Commission that it could be liable for as much as $3.4 billion
in excise taxes on top of the $2.4 billion contribution.
Given Delphi’s difficulties finding exit financing, its
situation would become untenable if it were suddenly liable for
$5.8 billion in overdue pension contributions and penalties.
As Delphi has been dealing with these setbacks, G.M. has been
rethinking its willingness to take over a share of Delphi’s
pension plan and provide other help. In addition to taking over
part of Delphi’s pension obligations, G.M. has committed itself
to helping Delphi close manufacturing sites, financing buyouts,
buying some of Delphi’s output and taking over some of Delphi’s
retiree health obligations.
In its S.E.C. filings, G.M. has estimated the cost of all
this support at $11 billion. The amount would grow significantly
if Delphi had to terminate its pension fund, according to people
close to the bankruptcy negotiations.
Last spring’s strategic plan had called for G.M. to receive
compensation in the form of cash, notes and stock in the new
Delphi after it came out of bankruptcy. But as Delphi’s problems
have deepened, G.M. wants to make sure its compensation will
still be adequate, given its crucial role.
People close to the negotiations said they feared G.M. was
engaging in brinksmanship by prolonging negotiations.
A G.M. spokeswoman did not respond to
a call seeking comment.
Meanwhile, Delphi’s unsecured creditors seemed concerned that
G.M.’s efforts to get better compensation would worsen their own
chances of a recovery on their claims, now almost three years
old.
Despite the plea by Mr. Millard, the pension agency director,
that the pension transfer to G.M. go forward before the Sept. 30
deadline, Delphi’s creditors expressed little interest in
speeding up that transaction if it meant a delay in their bigger
chess game over how Delphi would operate in the future and how
its resources would be divided among creditors.
Delphi’s pension plans for hourly and salaried workers cover
more than 75,000 people. If Delphi manages to emerge from
bankruptcy with the funds intact, the plans would be frozen,
meaning that participants would no longer build up the value of
their benefits, but would be guaranteed the amount they had
earned by the time of the freeze.
If the plans were to terminate, the workers would still get
the benefits they had earned until then, with part being paid by
the government guarantor and the rest being paid by G.M. They
would probably be exposed to a wrenching dispute between G.M.
and the pension agency over who would pay how much, though,
because of ambiguity in G.M.’s old agreement.
“The hit to the P.B.G.C. would be well in excess of $2.5
billion,” said Mr. Millard, adding that he was unable to say how
much in excess. “I want everyone to realize how high the stakes
are.”
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