U.S. Judge Okays Delphi Sale to Lenders

NEW YORK (Reuters) – A U.S. judge ruled on Thursday that auto parts maker Delphi Corp can sell itself to a group of lenders, paving the way for the company to end its near four-year trip through bankruptcy court.

Earlier this week, Delphi’s board accepted a bid from its debtor-in-possession lenders, including several hedge funds, to take over much of its operations.

In exchange, the lenders, led by Elliott Management Corp and Silver Point Capital LP, agreed to forgive nearly $3.5 billion of debtor-in-possession loans. The lenders are also investing about $750 million in capital into the new company, according to the company’s bankruptcy lawyer, Jack Butler of law firm Skadden Arps Slate Meagher & Flom.

Under the deal, Delphi will emerge as three companies: “New Delphi”; a General Motors subsidiary that will contain the plants it is acquiring; and DPH Holding Co, which will dispose of other Delphi businesses.

General Motors [GM.UL], Delphi’s former parent, would take over the supplier’s steering business and plants in Michigan, Indiana and New York.

Under the deal, GM, which has already taken over $11 billion in charges for Delphi’s restructuring, will assume $1.1 billion in Delphi’s obligations and waive $2.15 billion in its own claims against the supplier.

In addition, GM would pay $1.75 billion for a stake in the new Delphi and provide it with $500 million in loans.

Judge Robert Drain approved the sale during the second day of a hearing in U.S. bankruptcy court in Manhattan, saying he believed the auction process for the company was “fair” and would bring a successful conclusion to a company that has been through a set of “colossal” problems.

The deal with its lenders is the latest in a series of attempts to get Delphi out of bankruptcy since it first sought court protection in October 2005.

In April 2008, investors led by Appaloosa Management backed out of a plan that would have provided $2.55 billion of financing, forcing Delphi to come up with a new plan during the worst U.S. auto sales market since the 1980s and as automakers like GM and Chrysler were forced into bankruptcy themselves.

It also thwarts an effort made earlier this year by Platinum Equity Capital Partners, a Beverly Hills, California, private equity firm, to take over Delphi — in a deal with GM that had the backing of the U.S. government’s auto task force.

Platinum said in a statement on Thursday that it will “continue exploring ways to contribute to Delphi’s long-term health and profitability.”

THE LONG WAY OUT

The emergence of Delphi from bankruptcy would resolve a major uncertainty and cash drain for GM, which spun off the Troy, Michigan-based company in 1999 and remains its largest customer.

If Delphi had been forced to liquidate, it would have deprived GM of a key supplier and could have forced a near-total shutdown of GM vehicle production.

That would have choked off revenue for GM just as it begins operations after its own federally funded bankruptcy that left the U.S. government with majority ownership of the automaker.

GM said it would maintain its existing parts-supply deals with Delphi, a commitment the company’s new owners also pledged to honor.

Elliott Management said in a statement that the deal will allow Delphi to emerge from bankruptcy with “a well-capitalized balance sheet” and a stronger competitive position.

Delphi’s current chief executive Rodney O’Neal, will remain as CEO of the “New Delphi,” a Delphi spokesman said. Longtime Delphi executive John Brooks will be the “authorized representative” for DPH Holding.

Delphi hopes to close the sale by the end of the third quarter and is targeting Aug. 31 as a closing date.

During the bankruptcy process, Delphi has cut costs from its operations, come to new agreements with its labor force, and resolved issues with funding of its pension plans.

Last week, Delphi said it will terminate its salaried and hourly pension plans, sticking the government’s Pension Benefit Guaranty Corp with a $6.2-billion liability.

GM said it would pay the government agency $70 million and a share of its future earnings from Delphi. The automaker will also honor a pension guarantee provided to some union-member retirees, it said in a filing with securities regulators.

Drain approved the plan over almost 2,000 objections from union workers and from state tax and workers compensation authorities.

The case is In re Delphi Corp, U.S. Bankruptcy Court, Southern District of New York (Manhattan), No. 05-44481. (Reporting by Emily Chasan; Additional reporting by Jonathan Stempel and Kevin Krolicki; Editing by Matthew Lewis, Gary Hill)