The Work

July 28, 2009 1:46 PM

Delphi Agrees to Sell Assets to Its DIP Lenders

Posted by Julie Triedman

The U.S.'s largest auto parts maker, Delphi Corp., appears poised to exit bankruptcy after its largest postpetition creditors won an auction Monday for control of the company.

The deal, which beat a controversial government-backed deal to sell Delphi's assets to private equity firm Platinum Equity, follows seven weeks of brinksmanship between the company's debtor-in-possession (DIP) lenders, Delphi, General Motors, and the U.S. Auto Task Force over the sale.

Delphi announced the proposed sale to Platinum June 1. It prompted immediate opposition from the DIP lenders, who claimed that the sale would have given the lowest tier of DIP lenders no more than a 10-to-20-cent return on every dollar put in. (Under the June plan, Platinum would have gained control of Delphi for about $250 million in cash and a $250 million credit line.)

A group of DIP lenders, represented by Marc Abrams of Willkie Farr & Gallagher, argued before U.S. bankruptcy court judge Robert Drain that they had been shut out of the deal process, and that the true value of the company's assets was undervalued under the terms of the proposed sale to Platinum. The sale had to be structured as a competitive auction, the lenders argued.

In June the lenders convinced Judge Drain to open up the process. In early July they persuaded him to deny Platinum a $30 million breakup fee if it were to lose at the scheduled auction.

In the end, the DIP lenders held a critical card: if they didn't approve of the sale to Platinum, they told the judge in an official notice last week, they had the right to foreclose on the company's assets. And they planned to do so if a sale to Platinum was approved. 

If successful, the sale, accomplished not as a 363 sale like GM or Chrysler but as an approved reorganization plan, will cap four years of effort by a team from Skadden, Arps, Slate, Meagher & Flom, led by John "Jack" Butler. Last year, Butler, Delphi's lead lawyer, helped arrange the equity sale to another private equity firm, Appaloosa Management. But the firm backed out of that deal on the morning of the scheduled signing last April 4. Delphi's estate still is engaged in litigation against Appaloosa. Under the terms of the proposed sale, the DIP lenders may recover as much as $145 million if the suit is successful, Bloomberg reports.

"The DIP lenders' pure credit bid is modeled on the Platinum Equity deal," notes Butler, but the DIP lenders' bid was better for several reasons, including its "speed and certainty of execution," he says. The company has now obtained support for its modified reorganization plan from its lenders, creditors committee, and indenture trustee, as well as GM and the Pension Benefit Guaranty Corporation.

A hearing on the sale begins Wednesday in bankruptcy court in Manhattan. If final court approval is obtained, the company hopes to emerge from bankruptcy as soon as sometime later this calendar quarter, assuming regulatory approvals are received, says Butler.
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