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October 11, 2005Delphi filing raises a red flagGM bankruptcy becomes more likely, report saysKNIGHT RIDDER/TRIBUNEDETROIT - Delphi Corp.'s bankruptcy filing sent its shares - along with those of General Motors Corp. and most of the auto sector - down Monday as investors worried about the industry's financial stability. Delphi's stock plummeted 71 percent Monday; GM's fell 10 percent. Delphi's bankruptcy is a high-profile signal of the U.S. auto industry's continuing problem of rising costs and declining profits, said David Sowerby , whose company, Loomis Sayles & Co., manages $70 billion in investments for clients. A string of smaller auto suppliers - Collins & Aikman Corp., Meridian Automotive Systems Inc. and Tower Automotive Systems Inc. - filed for bankruptcy earlier this year. Delphi adds a big name to the list. "It's more and more the sobering acknowledgement that the industry is significantly challenged," said Sowerby, portfolio manager and chief market strategist in Loomis Sayles' Bloomfield Hills office. Other Wall Street experts were equally gloomy Monday. Banc of America Securities, a brokerage firm that tracks companies for investors, released a report that said Delphi's bankruptcy created a 30 percent chance GM would follow suit. Standard & Poor's downgraded GM's long-term credit rating, already at junk bond status, to BB-, meaning the company faces uncertainties that could keep it from meeting financial commitments. Other auto stocks, including Ford Motor Co., Lear Corp. and American Axle & Manufacturing Holdings Inc., also took a hit. Monday's decline in Delphi stock was expected. When a company goes through bankruptcy, the stock often becomes worthless or falls to a fraction of its prebankruptcy price. Stockholders fall behind creditors, such as banks and bondholders, in getting paid. GM's stock was pulled down because of its close ties to Delphi and what the Delphi filing means for GM's relationship with the UAW. The automaker is trying to negotiate reductions in health-care costs with the union. Its overall contract with the UAW, which affects everything from wages to pensions, expires in 2007. GM spun off Delphi six years ago as a separate company. As part of the agreement to shed Delphi, GM could become liable for pensions and other benefits for Delphi retirees as Delphi goes through bankruptcy. GM issued a statement Saturday saying it doesn't believe it will have to pay those costs, but if it did, GM estimates it would cost as much as $11 billion. Delphi's bankruptcy also could hurt GM by raising prices on parts, disrupting the supply of components and creating new costs for tools if it has to move to other suppliers. More troubling, though, could be the signal it sends about GM's abilities to negotiate lower employee and retiree costs with the UAW in its own negotiations, Banc of America Securities analyst Ronald Tadross wrote in a research report on the company released Monday. Delphi and the UAW were unable to reach new contract terms before the bankruptcy filing. If Delphi was unable to get concessions, GM could have trouble as well, Tadross wrote. The Banc of America report downgraded GM stock to sell from neutral and said the chances of GM filing for bankruptcy had risen to 30 percent from 10 percent. "It is our view that bankruptcy protection for GM is increasingly looking like a reasonable way to properly address the company's retirement liabilities and job security benefits," Tadross wrote. A GM spokesman said the company does not comment on research reports. Other analysts also cast doubt on GM's ability to get concessions from the UAW but didn't agree that Delphi's filing pushes GM closer to bankruptcy. Delphi's bankruptcy could cost GM billions of dollars in the next couple of years, said David Healy, an analyst who follows the auto industry for New York-based Burnham Securities Inc. "It will be ugly," Healy said. "It will be expensive." But if the bankruptcy process allows Delphi to cut wages and close unprofitable plants, it could eventually help GM, he said. "In the long run, they'll be buying parts from a Delphi that has a lot lower cost base," Healy said. "Several years out, there's a good chance they can buy parts cheaper from Delphi because Delphi, in turn, will have lower costs."
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