Delphi survival move may signal bankruptcy shift

By Caroline Humer - Analysis

NEW YORK (Reuters) - U.S. auto parts maker Delphi Corp (DPHIQ.PK) will soon know if it has succeeded in its latest maneuver to keep its bankruptcy funding alive, a move that may signal a shift in how troubled companies cope with tight financing markets.

Delphi's quest to renew a $4.35 billion loan has been hindered by the broad credit crisis and meltdown in the auto sector, pushing the company to work out what is termed a forbearance plan.

In forbearance, lenders typically agree not to foreclose or repossess assets after a loan default provided it meets certain milestones -- a move that prevents liquidation, experts said.

In Delphi's case, getting approval for a forbearance agreement is easier than the usual path - a straight extension of its bankruptcy loan - because its particular credit agreement requires approval of fewer than 25 percent of its lenders compared with 100 percent.

Signatures approving the plan are due by Thursday, a company spokesman confirmed.

While companies often strike forbearance agreements with their lenders as they head toward a bankruptcy filing, it had been unusual in the days of easy-credit to craft such an agreement once bankruptcy funds were in place.

"Out of bankruptcy, when you are in violation of your credit agreements, the first thing you negotiate is a forbearance agreement," said Scott Peltz, managing director of the corporate recovery services group at business consulting firm RSM McGladrey. "I have not seen that occur within bankruptcy."

The move, which would give Delphi up to six months of financing after the loan expires, is a harbinger for how other companies may proceed as they run into trouble extending bankruptcy funding, experts said.

"I expect (forbearance agreements) to become more and more common right now because of the stresses in the financial markets and the credit markets that we are dealing with," said Jack Williams, American Bankruptcy Institute's resident scholar and a bankruptcy professor at Georgia State University.

Bankruptcy loans, called debtor-in-possession or DIP financing, have become scarce for companies considering bankruptcy and those already in bankruptcy, he explained. "There aren't a lot of people playing in the DIP lending market anymore," Williams said.

That has become a problem for many companies as they are forced to accept lending terms that could hinder their ability to emerge from bankruptcy intact, experts have said. Companies such as Interstate Bakeries Corp IBCIQ.PK, Lehman Brothers (LEHMQ.PK) and Circuit City (CCTYQ.PK) have all agreed to high lending rates or short loan terms in recent months.

As more companies file for Chapter 11 protection and stay in bankruptcy longer, defaults will increase and could have more dire consequences, according to one expert.

"It's kind of unnerving to have this happen now because this is an omen of things to come," said Anthony Sabino, a law professor at St. John's University in the Tobin School of Business in New York.

"If you default upon a default and have no operating funds whatever, then your Chapter 11 has given up the ghost and you are forced to reorganize under Chapter 7 - forced to liquidation," Sabino said.

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