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Question 1

Based on the information you see in the financial statements, what has to happen for Delphi to become a viable concern?

There are manyissues, which will have to be changed for Delphi to become a viable concern. The firm is currently highly leveraged and it has a large amount of interest expense. The company is suffering from losses and declining revenues by the end of the year 2007, the company was generating losses of $ 3 billion on revenues of 22 billion.

The revenue growth rate and the profitability of the firm are falling significantly. The filing had listed the consolidated assets to be less than the consolidated liabilities of Delphi Corporation. The consolidated assets and liabilities were $ 17.1 billion and $ 22.2 billion, respectively. A number of financial indicators and ratios have also been computed which show the worse performance of Delphi Corporation. These are shown in the table below:

  2007 2006 2005
Total Assets 13667 15392 17023
Total Liabilities 26976 27244 23111
Surplus/ (Deficit) -13309 -11852 -6088
Debt to Equity Ratio -12.52% -12.09% -19.76%
Interest Coverage -2.529 -11.324 -6.827
Net Margin -13.75% -20.70% -8.75%
Current Assets 8219 9215 9554
Current Liabilities 9092 8370 6803
Working Capital -873 845 2751
Increase/(Decrease in Cash & Cash Equivalents) -631 -554 1271

The company is not able to pay its outstanding obligations and the interest coverage ratio for the company is negative. The net profit margin ratio for Delphi Corporation is also negative along with the working capital requirement. Therefore, if Delphi Corporation wants to become a viable concern it will have to first, the debt or the advantage position of the company will have to be lowered and the interest expense of the company should be reduced significantly.

The coverage ratios of the firm should match the industry comparables. The profits of the company should become positive and the company needs to generate enough cash inflows, which cover all the cash out flows of the company. The operating costs of the firm will have to be lower and Delphi Corporation should match the operating margins of the comparable firms as shown in additional information in the excel spreadsheet. Lastly, Delphi Corporation should have lower capital expenditures, lower dividend payouts and restructured debt with lower interest rates to generate positive increases in cash and cash equivalents. All of these could be achieved through the Plan of Reorganization.

Question 2

Why didn’t Delphi management negotiate reorganization with the various claimants instead of choosing to go into bankruptcy? Why did it choose Chapter 11 instead of Chapter 7?

The management of Delphi Corporation did not negotiate the reorganization with the various claimants and instead the firm had gone into bankruptcy because the company has a number of creditors and most of them are unsecured creditors. There were high chances that the POR might give a claimant less than the face value of their claim and thus that claimant was deemed impaired.

Therefore, in this way the claimants would not be able to accept the POR of Delphi Corporation. For instance, the unsecured lenders would be impaired significantly and they might be receiving the shares of the new equity at 60% of their original claim. This would impair their value and for this reason, they would never accept the POR of Delphi Corporation. In a POR, all the secured creditors of the company would be satisfied first with their 100% claims and then the claims of the unsecured lenders would be settled which also included the GM Corporation.

However, under the Chapter 11 bankruptcy, the code provided the judge with a authority under which the judge can resort to the cram down and approve the POR if it was thought to be fair and equitable and thus all the dissenting class or classes would be forced down to accept the POR. Secondly, since all the unsecured lenders knew that the judge had the option of conducting a cram down therefore, it removed the incentive of a claimant class or classes to continually reject the POR with the hope of getting a better proposal.

Finally, the management of Delphi Corporation had chosen Chapter 11 instead of Chapter 7 because Chapter 7 was very unusual in large corporate bankruptcy because it rarely offered anything higher to all the concerned parties than keeping the company intact on a going concern basis. Moreover, the Chapter 7 liquidation would also deliver a decidedly less value to all the impaired classes therefore; it was unlikely that the judge would opt for this course of action............................

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