Court approves Delphi's DIP loan accommodation despite lender objections

By Rebecca Melvin

New York, Dec. 1 - Delphi Corp.'s request to extend by six months the payback date of its existing $4.35 billion debtor-in-possession lending agreement was approved by the U.S. Bankruptcy Court for the Southern District of New York on Monday despite lender objections.

The revised Nov. 26 accommodation agreement had the support of 68.37% of DIP lenders, but Greywolf Capital Management, Calyon New York Branch and a Tranche C lender group, were among five objectors that filed against the agreement, which will extend repayment through June 30 from the current Dec. 31 maturity date.

The objectors argued that Delphi and the approving lenders lacked the contractual authority to enter into such an agreement that limits the remedies and rights of DIP lenders that did not agree to the accommodation.

They also said that secured lenders under the court's Jan. 5, 2007 DIP order, which has already been extended and modified twice since then with unanimous lender consent, have the right to adequate protection against such an agreement.

In addition, they asserted, that even if Delphi did have authority contractually and legally to such a forbearance agreement, Delphi's exercise of that authority was not a valid use of its business judgment.

Judge Robert Drain said that on the contrary he "cannot fault the debtors as a business judgment in the accommodation agreement, which acknowledges the forthcoming maturity, but provides for forbearance from exercising remedies under the DIP lending agreement and order, and represents the best" option given the conclusion reached in October that the auto parts maker wouldn't be able to exit bankruptcy by the Dec. 31 maturity date.

"With the turmoil in the credit markets, the debtors haven't been able over the last few months to obtain commitments for exit financing or obtain refinancing of the existing DIP agreement. This is mysterious to me... the debtor makes critical parts for a critical product, namely automobiles, manufactured by OEMs worldwide," Drain said.

"Nevertheless the credit markets appear to remain seized up and unable to evaluate the underlying credit characteristics of Delphi, consequently the debtors have had to consider the options in light of the oncoming maturity of its DIP loan, and attempted to extend again into time when reasonably there is the hope that the credit markets would be functioning rationally or smoothly, and/or that some other source of credit support would become available," Drain said.

Drain said that the accommodation agreement doesn't by its terms, in fact, extend the maturity date. There are consequences to the non-extension, he said, including termination of the Tranche A revolver, interest accruing at a higher rate, the loss to Delphi of a Libor-based rate option, and the fact that Delphi must cash collateralize.

The DIP loans consist of the Tranche A revolver worth $1.1 billion that hasn't been fully drawn, the Tranche B $500 million term loan and the Tranche C $2.75 billion term loan, which represents a roll up of pre-petition debts.

Also during the hearing, Drain pointed out the set of circumstances that presents a real risk of liquidation for Delphi.

Softens the blow

Drain said "the blow of the agreement" should be softened by the revised funding arrangement with General Motors Corp., which was uncontested and also approved on Monday.

The GM arrangement, which was contingent on the accommodation being approved, will provide $300 million of additional funding to Delphi and will effectively add another $300 million through change-of-payment timing in the second and third quarters of 2009.

The first GM payment of $85 million is to be drawn in February and $110 million to be drawn in March. By March 31, $190 million will be drawn under GM's $300 million facility.

Delphi, a Troy, Mich., automotive electronics manufacturer, filed for bankruptcy on Oct. 8, 2005. Its Chapter 11 case number is 05-44481.

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