Appaloosa backs out of Delphi deal inblowtoGM

　　DETROIT (Reuters) - Investors led by Appaloosa Management backed out of a $2.55 billion equity deal to support Delphi Corp’s (Other OTC:DPHIQ.PK - News) emergence from bankruptcy on Friday, dealing a blow to General Motors Corp (NYSE:GM - News) and its goal of putting the problems of its former parts subsidiary behind it.The development sends the parties back to the drawing board to hammer out an alternate arrangement for Delphi that could both force GM to offer Delphi more cash and delay its savings on parts purchases from the supplier it spun off in 1999, analysts said.

　　Delphi said it had arranged $6.1 billion in exit financing and started the process of completing its reorganization on Friday, when Appaloosa terminated the separate but related equity portion of the deal.

　　"We think this is a valuation issue...where investors who agreed to a deal in a different type of market environment are now experiencing buyer’s remorse," said high-yield bond analyst Shelly Lombard with credit market research firm, Gimme Credit.

　　Delphi and the investors led by Appaloosa had announced the equity plan in December 2006, and the U.S. Bankruptcy Court in New York approved a revised version last August.

　　But the U.S. auto industry has continued its rocky downturn since the plan was adopted, and risk-averse investors have demanded better credit terms in recent months.

　　"It’s a new world since August," Standard & Poor’s equity analyst Efraim Levy said.

　　The collapse of the Delphi deal, which hinged on new financing and an equity infusion, represented a one-two punch for GM, possibly costing it more cash up front and delaying its savings on parts purchases, analysts said.

　　Analysts have warned that the unresolved Delphi situation has been a major financial risk to GM at a time when U.S. auto sales are expected to decline for a third consecutive year and could hit their lowest level since the early 1990s.

　　GM, the largest U.S. automaker, is attempting to claw back from a $39 billion loss in 2007 and has said it has been paying a $2 billion per year penalty on parts purchases from Delphi. The automaker has so far booked about $7.5 billion of charges for its exposure to Delphi.

　　Lehman analyst Brian Johnson said it would take several weeks at least to resolve the situation and could require revising Delphi’s reorganization plan. He also said GM could be forced to take on an additional $1 billion of Delphi’s pension obligations to reduce the amount needed from investors.

　　GM’S PAIN THRESHOLD

　　"GM is going to have to chip in more until they say ouch," said Kam Hon, an analyst at ratings agency DBRS. "The longer it drags on, the more uncertainty there is and the longer GM’s cost savings are delayed."

　　Fitch Ratings managing director Mark Oline said Delphi would have to emerge with less debt than contemplated by the current reorganization plan.

　　He said it was unlikely GM would end up with an equity stake in Delphi under a repackaged deal. "GM has made it clear it would like to treat Delphi at arm’s length," he said.

　　Meanwhile, Delphi’s enterprise value will continue to erode as the expensive bankruptcy case drags on, Oline said.

　　Delphi and GM said they were disappointed by Appaloosa’s decision, a development many analysts had expected.

　　"We are extremely disappointed that our plan investors have taken the position that they are not obligated to fund their plan investment commitments to Delphi and instead have chosen to walk away from the company and its stakeholders," Delphi Chief Restructuring Officer John Sheehan said in a statement.

　　Sheehan also said Delphi was prepared to pursue actions in the best interest of the company and its stakeholders, but Delphi did not specify what those might be.

　　Delphi, which filed for bankruptcy in October 2005, had turned to GM this year for help in completing the exit financing package needed to emerge from court protection. GM agreed to provide up to $2.8 billion of loans.

　　Appaloosa and other investors objected to that additional GM support, saying Delphi’s former parent could make it harder for the parts supplier to win business with other automakers.

　　Another concern for investors was that Delphi could emerge from bankruptcy without enough liquidity for the tougher auto market, raising the risk it could be driven back into a more costly second bankruptcy sometimes sarcastically called a "Chapter 22," a person familiar with the matter said on Friday.

　　Appaloosa said it was willing to discuss alternative deals and could still invest in Delphi under different terms. Merrill Lynch & Co Inc(NYSE:MER - News), Harbinger Capital, Goldman Sachs Group Inc(NYSE:GS - News), UBS AG (VTX:UBSN.VX - News) and Pardus Capital also had been part of the group.

　　Appaloosa said it believed the equity investors could be entitled to an $82.5 million fee and transaction expenses because of changes to Delphi’s plans.

　　GM shares shares closed down $1.01, or 4.68 percent, to $20.58 Friday on the New York Stock Exchange. Delphi shares fell a penny to 11 cents each on the Pink Sheets.

　　(Additional reporting by Kevin Krolicki; Editing by Gerald E. McCormick and Carol Bishopric)