Delphi settles with objectors to gain court OK of modified global settlement, restructuring agreements

By Rebecca Melvin

New York, Sept. 25 - After settling with several sets of objectors, Delphi Corp. obtained court approval of its modified global settlement and master restructuring agreements Thursday at the U.S. Bankruptcy Court for the Southern District of New York.

Delphi's official committee of unsecured creditors, senior noteholders CR Intrinsic Investors LLC and Highland Capital Management LP, and Wilmington Trust Co., as indenture trustee for $2 billion of senior notes, were among those that withdrew objections following settlement negotiations.

The hearing was adjourned Tuesday and resumed Thursday to allow settlement negotiations to take place.

The unsecured creditors committee withdrew its objection in exchange for assurances that a 20% recovery would be distributed to unsecured creditors prior to General Motors Corp. receiving a $2.055 billion administrative claim.

The 20% recovery was the first of two basic agreements struck among Delphi, GM and the committee, and it assumes that the case concludes with a plan of reorganization.

The other agreement - which assumes that there is no plan of reorganization - would split the first $600 million of recoveries evenly between Delphi and the committee.

The 20% recovery under the first scenario isn't yet known, Delphi counsel Jack Butler of Skadden, Arps, Slate, Meagher & Flom LLP told reporters during a break in the hearing. But another attorney close to the case said the 20% recovery would equal $650 million.

"These two mechanisms give the committee comfort," the attorney said.

First amendment to modified plan

A first amendment to the amended and restated global settlement agreement was filed midday Thursday and revealed the terms of Delphi series D preferred stock that will be issued to GM upon emergence from bankruptcy.

GM has agreed to take its $2.055 billion administrative claim and change it into preferred shares at that time. GM also has a $2 billion unsecured claim.

But GM has also agreed under the amended agreements to raise its financial backing of Delphi to an estimated $10.6 billion, up from about $6 billion under the January 2008 settlement.

In addition, GM has agreed to provide these funds prior to emergence from bankruptcy. Closing on these funds is expected to occur Oct. 29.

The GM agreement will also modify the mechanics and expand the amount of Delphi's net hourly pension liability transfer to GM to $3.4 billion from $1.5 billion. Pension transfers may occur Oct. 29, or as soon after that as certain thresholds can be met.

When ruling on the modified agreements, judge Robert Drain said that the handful of objections to the amendment to the agreements with GM - based on his reading of them - revolved around features of the global settlement, rather than features of the master restructuring agreement.

The restructuring agreement deals with the ongoing relationship as a business matter of GM and Delphi, he said; while the global settlement deals more with the treatment of GM in the bankruptcy case, as well as the resolution between GM and Delphi and Delphi pension liabilities.

"In light of the first amendment, and based on my review of that amendment, and withdraw of objections, and my review of declarations and other exhibits, I find that the GSA is a valid, proper settlement of the respective claims and rights of Delphi and GM," Drain said.

In their objection, the noteholders had said that Delphi was trying to incur an administrative priority debt to GM to cover losses generated since the company's plan of reorganization failed to take effect, and placed the burden of these losses on all Delphi divisions when "losses are clearly attributable to the North American operations."

The noteholders said Delphi should be exploring other alternatives to restructure its North American operations, including union negotiations, exiting unprofitable businesses and rejecting unprofitable contracts and negotiating agreements with its customers, including GM, to increase its pricing to rational levels that would allow the North American operations to operate on an economic basis.

In addition, the noteholders said the proposed shifting of assets and debts constituted a substantive consolidation of the company's estates outside of a plan of reorganization.

After the hearing, Butler told reporters that the agreements approved Thursday represented "a major milestone in this Chapter 11 case."

Now Delphi has a workable business plan, Butler said, with $4.6 billion additional support from GM, which based on today's current economic environment, should make obtaining the necessary exit financing more achievable.

Still it is likely that all classes of creditors will have to be re-solicited and a final hearing will take place, which will look a lot like a confirmation hearing, he said.

As far as when emergence can be expected, Butler kept his statement to "as soon as practical," especially in light of the current uncertain state of the financial and credit markets.

Convertible preferred shares

Delphi will issue $2.055 billion of series D mandatory convertible preferred stock, with a par value of $0.01 per share, to GM in exchange for its administrative claim.

The company will convert the preferred shares into common stock no later than three years from the plan effective date.

The conversion price will be equal to or greater than 138% of the conversion price for at least 35 trading days in the 45 consecutive trading days immediately preceding the date of conversion.

In the event of liquidation, dissolution, or winding up of the company, each share of preferred stock will receive out of assets a preferential distribution in cash in an amount equal to the stated value per share plus unpaid dividends.

Upon a merger, consolidation or sale of the company, the preferreds will be converted into the greater of common stock on an as-converted basis and the stated value plus unpaid dividend participation to which entitled.

The preferred stock, which will have senior ranking, will be convertible at any time into a number of common stock equal to the stated value divided by the conversion price, which shall initially be the plan value per share.

For six months after Delphi emerges from bankruptcy, it can redeem up to one half of the preferred stock at a price per share equal to 85% of the stated value per share.

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

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