GM Shares Fall on Delphi Fears
General Motors Corp. shares fell 10% on Monday after it warned that the bankruptcy filing of its biggest parts supplier, Delphi Corp., could cost GM as much as $12 billion.
One leading brokerage said Delphi’s filing increased the risk that the largest automaker itself might take the same step.
GM bought more than $15 billion in parts from Delphi last year and remains its largest customer. The automaker is closely tied to the unit it spun off in 1999 through complicated supply and labor agreements.
Investors expect the extent of GM’s exposure, including potentially costly post-retirement and heathcare benefits, will be revealed in bankruptcy hearings that begin in New York today.
Delphi bonds tumbled 5 percentage points in over-the-counter trading. GM shares fell nearly $3, chopping $1.6 billion off its market capitalization to $14.4 billion, the stock’s worst performance in nearly seven months and the largest drag on the Dow Jones industrial average.
Troy, Mich.-based Delphi filed for Chapter 11 protection in Bankruptcy Court in New York on Saturday. It was the largest such filing in U.S. automotive history.
Other components makers, including Collins & Aikman Corp. and Tower Automotive Inc., have filed for bankruptcy protection. On Monday, Dana Corp., a major GM and Ford supplier, revealed accounting problems that would force it to restate earnings from 2004 through the first half of this year.
GM said the Delphi filing did not necessarily make the automaker liable for post-retirement healthcare and pension benefits for employees at Delphi.
But its range of exposure -- under benefit guarantees the automaker made as part of the 1999 spinoff -- extends from potentially no material effect to up to $11 billion, with amounts closer to the midpoint more possible than either end, GM said.
GM also said that Delphi, the nation’s biggest auto parts supplier, owed it about $1.2 billion, an amount GM may not be able to recover.
Citing fallout from the Delphi bankruptcy filing, Banc of America Securities cut its stock rating on GM to “sell” from “neutral” and cut its price target on the shares to $18 from $32. Banc of America also increased its estimate of the likelihood that GM itself would file for bankruptcy protection to 30% from 10%.
Standard & Poor’s on Monday cut GM’s debt ratings deeper into junk status and said it might cut them again. GM spokesman Jerry Dubrowski declined to comment on the Banc of America moves. Regarding Standard & Poor’s, he said: “Our focus continues to be on continuing our North American automotive operations and restoring them to profitability as quickly as possible.”
In its weekend statement, GM also said it faced an increased risk of costly supply disruptions after the Delphi filing.
As of June 30, GM said it had $32.3 billion in cash and cash equivalents. In the first half of this year, GM posted a loss of $2.5 billion in its North American operations.
Delphi has struggled since its spinoff from GM, posting net losses of $741 million in the first half of 2005. It had sought financing from GM and sharp cuts in wages and benefits from the United Auto Workers union to restructure unprofitable U.S. operations.
Delphi has 50,600 U.S. employees with about 44 manufacturing sites and 13 technical centers.
Delphi shares fell 79 cents to 33 cents. The New York Stock Exchange said it was reviewing Delphi’s listing status. GM shares fell $2.81 to $25.48.
