[LETTERHEAD OF SKADDEN, ARPS, SLATE, XXXXXXX & XXXX LLP]
February 20, 2008
VIA EMAIL AND COURIER
Xxxxxx X. Xxxxxx, Esq.
Partner
White & Case LLP
Wachovia Financial Center
000 Xxxxx Xxxxxxxx Xxxxxxxxx
Xxxxx 0000
Xxxxx, Xxxxxxx 00000-0000
RE: Delphi Corporation and its related Debtor and non-Debtor
subsidiaries and affiliates (collectively "Delphi") --
Investment Agreement with Plan Investors
Dear Xxx:
We have reviewed with our client as well as with counsel to the
Statutory Committees and GM your letter, dated February 13, 2008, that was sent
on behalf of all of the Plan Investors (other than Xxxxxxx Xxxxx). At the
outset, let me observe that this is a difficult letter to write to Delphi's plan
investors and presumptive largest equity stakeholders in the reorganized
company, but it appears to be a necessary and important communication that is
required by the conduct in recent months of the Plan Investors and Additional
Plan Investors (collectively referred to as "Investors").
Rather than having the benefit and assistance of the full support and
cooperation of the Investors since obtaining authority from the Bankruptcy Court
on November 16, 2007 to obtain and close exit financing necessary to consummate
the Plan, Delphi has instead encountered resistance, objections and even
interference from certain of the Investors. Instead of moving together to
promptly consummate the Plan that was confirmed by the Bankruptcy Court on
January 25, 2008 pursuant
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 2
to a Confirmation Order which the Plan Investors approved and which became a
final order on February 4, 2008, substantially all of the interaction with the
Investors since the confirmation hearing has focused on obstacles to plan
consummation (at least some of which have been interposed by the Investors
themselves).
As you know, the EPCA between Delphi and the Plan Investors was
recently amended on December 10, 2007 in accordance with requirements of the
Plan Investors to account for general economic conditions, industry conditions
and company-centric conditions extant and/or otherwise reasonably foreseeable at
that time. The record in the Bankruptcy Court leading up to and including the
EPCA amendment approval hearing and the confirmation hearing make very clear the
expectations of the Bankruptcy Court, the company and its stakeholders with
respect to the Investors. Fundamental to those expectations is the overarching
obligation of the Plan Investors in section 6(d) of the EPCA to use "reasonable
best efforts to take all actions, and do all things, reasonably necessary,
proper or advisable on its part.. .to cooperate with the Company and to
consummate and make effective the transactions." Sections 8(d) and 8(g) of the
Co-Investor Letter restrict the Plan Investors from alternate transactions and
affirmatively obliges each of them from impeding or interfering with the
acceptance, confirmation or the effective date of the Plan. Section 3 of the
Additional Investor Agreement dated July 23, 2007 provides that each Additional
Investor "shall be bound, and shall cause its Affiliates to be bound, by the
EPCA..." and Section 12(a) of the same agreement prohibits an Additional
Investor from participating in any transaction that is inconsistent with the
Additional Investor Agreement or the EPCA. (See also section 2(k) of the EPCA
which binds Ultimate Purchasers to the terms of the EPCA).
With that context, we will respond to the concerns set forth in your
February 13, 2008 letter with respect to exit financing and then address certain
other matters relevant to the Investors that require immediate consideration by
your clients.
Xxxxxx's Exit Financing Discussions
with the Plan Investors and the February 13, 2008 Letter
Delphi and the lead arrangers of its exit financing facilities have
worked closely together from the exit financing approval hearing on
November 16, 2007 through the end of the year to be in a position to launch the
exit financing syndication on January 5, 2008. XXXX was regularly informed of
the progress made by Xxxxxx and the lead arrangers in this respect and was
consulted with respect to the amount, structure and terms of the exit financing
that was being contemplated by Xxxxxx consistent with the authorization obtained
by the company in November 2007. As you are aware, Xxxxxx and the lead arrangers
postponed the initial exit financing launch meeting after it was publicly
announced at the request of the Plan
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 3
Investors so that Xxxxxx, the leader arrangers and the Plan Investors could
instead meet and confer on January 8, 2008 in New York City. Following that
meeting, Delphi and the lead arrangers, with the participation of a
representative of Appaloosa, launched the syndication of the exit financing
facilities at public and private lender meetings held in New York and London on
January 9 and 10, 2008. The amount, structure and terms of the exit financing
presented by Xxxxxx and the lead arrangers to prospective lenders at those
meetings was consistent with the amount, structure and terms discussed with and
agreed to by the Plan Investors on January 5, 2008.
During the syndication process in January 2008, it became apparent to
Delphi and the lead arrangers that the likelihood of consummation of the
syndication with respect to its proposed amount, structure or terms would be
enhanced by GM participation. Again, XXXX was consulted with respect to these
developments and advised Xxxxxx to complete its discussions with GM and obtain
committed enhanced participation by GM after which the Investors would again
evaluate their position on the exit financing. Delphi thereafter proceeded to
obtain a commitment from GM for enhanced participation in the exit financing
syndication that would, in the reasonable view of Delphi and its lead arrangers,
allow the company to obtain the exit financing required to consummate the Plan
and remain below the maximum pro forma interest expense limitation of $585
million set forth in section 9(a)(xx) of the EPCA.
GM's concessions to Delphi in respect of the plan to facilitate this
result are quite extraordinary: GM has agreed to forego certain cash
distributions at the Effective Date of the Plan and instead will finance up to
$2 billion of the Term A loan and all of the $825 million Term B loan without
any original issue discount (OID) and at an interest rate calculated to ensure
compliance with the EPCA interest expense limitation (i.e., GM has agreed to
bear all interest rate risk under the EPCA). Following Xxxxxx's successful
negotiations with GM, the company sought to meet and confer with the Plan
Investors and to obtain their support and cooperation (as required by the EPCA)
with respect to the exit financing syndication going forward (inclusive of GM's
enhanced participation). These discussions, which have been ongoing, culminated
in a meeting on February 6, 2008 among Delphi, Xxxxxxxxx and GM, as well as your
subsequent letter dated February 13, 2008. While the Investors should have
enthusiastically supported the exit financing with the enhanced participation by
GM, at the very least Delphi had anticipated that your letter would have
provided constructive suggestions and even a basis for some additional minor
modifications of the proposed exit financing facility. Unfortunately, the letter
turned out to amount to nothing more than a restatement of positions expressed
by the Plan Investors at the February 6th meeting.
Indeed, the letter itself is profoundly disappointing. The letter
begins by expressing concern about Xxxxxx's ability to consummate the exit
financing and
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 4
the "adverse impacts of marketing a debt financing that does not have a
reasonable certainty of being achieved." At the same time, the letter attacks
GM's enhanced participation in the exit financing as an approach that "may not
only undermine the Company's efforts to market the exit financing to the broad
syndicate of financial institutions that we expected but also is contrary to
Xxxxxx's stated goal of reducing its reliance on and exposure to GM..." The
letter asserts that this approach "detracts from efforts to develop and
implement more viable alternatives" but fails to suggest a single such
alternative. The letter then asserts a series of concerns that are not supported
either by the terms of the EPCA or the record in the Bankruptcy Court inclusive
of the confirmation hearing record and confirmation order.
The letter concludes with a request for an update on the company's
discussions with the PBGC and IRS on the pension waivers since "given today's
date [February 13 ,2008], it seems unlikely that the company could emerge before
February 29, 2008 under the best of circumstances" - even though the Plan
Investors were consulted about and were completely aware that Xxxxxx had moved
back its internal plan consummation target to March 28, 2008 in order to resolve
exit financing matters with the lead arrangers, GM and the Plan Investors.
Exit financing is part of the Plan pursuant to Section 7.14 thereof
which provides "on the Effective Date, the Reorganized Debtors shall receive the
proceeds of the Exit Financing Arrangements in the aggregate amount necessary to
implement the Plan and within the terms of the conditions previously approved by
the Bankruptcy Court as described in the exit financing letter and term sheet
attached [to the Plan] as Exhibit 7.14, as such term sheet may be amended,
modified or supplemented....". Under section 9(a)(xxviii)(A)(i) of the EPCA, the
Plan is a "Delivered Investment Document". Pursuant to the amendment to the EPCA
agreed to in December 2007, "Delivered Investment Documents" were not subject to
the condition set forth in section 9(a)(xxviii) of the EPCA, which condition
allows XXXX to determine that it is not reasonably satisfied with certain
transaction documents. Pursuant to section 9(a)(xxviii)(C)(3) of the EPCA, prior
to the issuance of the Confirmation Order, XXXX had the right to make a
determination within ten days with respect to amendments or supplements to
Delivered Investment Documents (including the Plan). XXXX did not make such
determination with respect to the Plan amendments made in connection with the
Confirmation Order.
Delphi's current exit financing plan, when consummated, will satisfy
EPCA conditions relating to financing (Section 9(a)(xix)) and one year pro forma
interest expense (Section 9(a)(xx)). The EPCA does not require syndication of
exit financing or explicitly prohibit GM's participation in exit financing.
Section 9(a)(xix)(A) provides that "[t]he Company shall have received the
proceeds of the Debt Financings and the Rights Offering that, together with the
proceeds of the sale of the Investor Shares, are sufficient to fund fully the
transactions contemplated by
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 5
this Agreement, the Preferred Term Sheet, the GM Settlement (to the extent the
Company is to fund such transactions) and the Plan." Xxxxxx believes that this
condition is fully satisfied when the aggregate of proceeds received is
sufficient to fund the transactions. The EPCA does not require a minimum amount
of liquidity other than sufficient proceeds to meet the obligations under the
Plan and minimum availability under the revolver portion of the exit financing
facilities pursuant to section 9(a)(xix) of the EPCA.
Indeed, the financing authority obtained by Xxxxxx in November 2007
was pursuant to a financing letter with the lead arrangers that by its terms and
by the terms of the EPCA is on a "commercially reasonable best effort" basis.
The lead arranger letter specifically anticipated there would be revised
interest rates associated with the syndicated financing and also anticipated
that there would be OID as referenced in the letter. The fact that no specific
interest rates are required in the lead arranger financing letter or the EPCA is
illustrated in a number of ways in the documents including, by way of example,
in the definition of "Applicable Margin" in Annex I to Exhibit A to the
Financing Letter, which provides that the ""Applicable Margin" is an amount
presently anticipated based on current market conditions." There is no basis to
assert that the EPCA "requires" certain financing terms such as the absence of
OID and certain unspecified maximum interest rates. The EPCA says nothing of the
sort. The only terms required by the EPCA is the $585 million interest expense
limitation for 2008.
Simply stated, so long as Delphi procures adequate exit financing
consistent with the provisions of the EPCA and authority obtained from the
Bankruptcy Court to fund the transactions contemplated in the Plan and does not
breach the one year pro forma interest expense condition, the Investors should
recognize Delphi's compliance with the EPCA and proceed to closing on the EPCA
investments and related consummation of the Plan. Given GM's agreement to
participate in Delphi's exit financing as permitted by the EPCA and the view of
Xxxxxx's lead arrangers that the remaining syndication of the exit facility
should be achievable on terms which Xxxxxx believes are compliant with the EPCA,
Delphi has decided to proceed with completion of the syndication of the exit
facilities as described on Exhibit A hereto. Delphi presently expects that the
lead arrangers will announce GM's enhanced participation in the exit financing
to prospective investors next week on or about February 25, 2008.
Assuming that the Investors meet their obligations to Delphi under the
EPCA and Additional Investor Agreement (as applicable), Delphi and the lead
arrangers expect to complete the exit financing syndication within approximately
two weeks. These obligations include the obligation to use reasonable best
efforts to cooperate with the company and to consummate and make effective the
transactions
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 6
including the consummation of the Plan which includes consummation of the exit
financing facilities.
Common Interest Agreement Among the Plan Investors
(Other than Xxxxxxx Xxxxx) dated February 10, 2008
Last week, you provided us with a copy of a "Common Interest
Agreement" dated February 10, 2008 that was entered into by the Plan Investors
(excluding Xxxxxxx Xxxxx) pursuant to which the Common Interest Parties purport
to establish certain rights and privileges with respect to the sharing of
confidential and allegedly privileged information and documents among the Common
Interest Parties. According to its recitals, the Common Interest Parties have a
common interest in "potential litigation between the Common Interest Parties, on
the one hand, and Delphi.. .on the other hand." Putting aside for the moment
whether the agreement is effective in any respect and/or could prevent the
Bankruptcy Court, the United States Trustee, the Debtors, the Statutory
Committees, or other interested persons from discovering and/or inquiring into
oral and/or written communications involving the Plan Investors (as to which
Delphi expressly reserves all of its rights), there is a serious question as to
whether execution of the Common Interest Agreement is in contravention of the
EPCA and the Co-Investor Letter.
Among other provisions and as discussed above, each Plan Investor is
affirmatively obligated under the EPCA to use reasonable best efforts to
cooperate with the company and to consummate and make effective the
transactions. Also as discussed above, the Co-Investors are restricted under the
Co-Investor Letter from alternate transactions and affirmatively obliges each of
them from impeding or interfering with the acceptance, confirmation or the
effective date of the Plan. Paragraphs 1(c), 2(a) and 2(b) of the Common
Interest Agreement each appear to restrain effective cooperation and/or
communications between one or more of the Common Interest Parties and the
Debtors. The Debtors believe such cooperation and communications are essential
to consummation of the transactions under the EPCA and the Plan. Accordingly,
the Debtors respectfully request that the Common Interest Parties terminate the
Common Interest Agreement retroactive to its date of execution as well as any
prior oral or written agreements on this subject.
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 7
Alleged Conduct of Plan Investors and/or Additional Plan Investors
As you can appreciate, Xxxxxx has a fiduciary responsibility to
evaluate information received by the company which may materially affect the
best interests of the company and its stakeholders in the chapter 11 cases.
Recently, credible information has come to Delphi's attention that one or more
Investors may have been trading and/or shorting one or more of Delphi's
outstanding public securities. Delphi has also been advised that these investors
may have material unrealized or realized gains on these investments. Delphi has
been further advised that one or more of these investors may have communicated
with XXXX and/or its representatives regarding scenarios and/or courses of
conduct pursuant to which the EPCA would not be consummated and/or funded to
Delphi's detriment and the detriment of all of the company's stakeholders.
Delphi consulted with its Statutory Committees regarding this
information at a joint meeting with the Statutory Committees on February 14,
2008. Xxxxxx was advised at that time that similar information was also received
independently by representatives of at least one of the Statutory Committees. In
order for the company to continue to evaluate this information, it is necessary
that XXXX provide the following information to the undersigned on behalf of the
company by the close of business on Friday, February 22, 2008: (a) a complete
list of all Investors; (b) the name, address, telephone and email contact
information for the principal contact(s) at each such Investor; (c) a copy of
any written agreement between XXXX and any such Investor relating to Delphi, its
chapter 11 cases or the EPCA, and (d) a written statement summarizing any
knowledge that XXXX and/or its representatives has with respect to the accuracy
and/or credibility of the information described in the immediately preceding
paragraph or any similar matter.
Report on PBGC/IRS Discussions
In the February 13, 2008 letter, you requested a status report with
respect to current discussions between Xxxxxx, the IRS and the PBGC concerning
the three pension waivers that currently expire on February 29, 2008. XXXX has
been separately briefed on this subject and is aware that the company filed
requests with the IRS on January 31, 2008 for extensions of the pension funding
waivers and the company's discussions with the two agencies. However, for
purposes of clarity and based on the letter dated February 20, 2008 from the
Executive Director of the PBGC attached as Exhibit B, the current position of
the PBGC is that they will recommend to the IRS that further extensions of the
three pension waivers be granted through March 31, 2008 in consideration of the
following concessions by Delphi and GM: (1) extension of the existing $150
million of letters of credit from March 15 to
Xxxxxx X. Xxxxxx, Esq.
February 20, 2008
Page 8
April 15; (2) provide an unconditional consensual lien from Delphi Singapore in
the amount of $50 million; (3) recognition of and waiver of defenses by Delphi
of $250 million of the PBGC's existing statutory liens as valid, enforceable and
perfected; and (4) a guarantee or other assurance from GM for $300 million
issued to the PBGC on behalf of Delphi's Salaried and Hourly Pension Plans in
the event that the waivers become null and void.
While Xxxxxx had previously offered the first two concessions to the
PBGC, the latter two requests are not reasonable under the facts and
circumstances applicable to Xxxxxx's situation including the fact of the
existence of a final confirmation order which preserves Xxxxxx's Salaried and
Hourly Pension Plans. Discussions are continuing with the agencies. Xxxxxx plans
to brief the Bankruptcy Court on developments regarding the pension waivers as
well as the other matters discussed in this letter at a Xxxxxxxx Conference
scheduled for February 21, 2008.
Conclusion
In conclusion, let me again reiterate Xxxxxx's basic views. The
company has substantially achieved its chapter 11 transformation plan and has
obtained a final confirmation order in support of its reorganization plan on
terms consistent with the EPCA. The company has also obtained the additional
financial support from GM that the company believes is necessary to successfully
syndicate its exit financing arrangements and remain consistent with the EPCA.
The company also believes that if the Investors would proceed with their
reasonable best efforts to take all actions, and do all things, reasonably
necessary, proper or advisable to cooperate with the company and to consummate
and make effective the transactions contemplated by the EPCA that the Plan will
become effective on or prior to March 31, 2008. The company looks forward to
working with XXXX and the remaining Investors to meet this timetable over the
next five weeks.
Sincerely yours,
/s/ Xxxx Xx. Xxxxxx, Xx.
Xxxx Xx. Xxxxxx, Xx.
cc: Xx. Xxxx X. Xxxxxxx
Xxxxx X. Xxxxxxx, Esq.
Xxxx X. Xxxxxxxx, Esq.
Xxxxxx X. Xxxxxxxxx, Esq.
Xxxx Xxxx Xxxxxxx, Esq
Xxxxxxx Xxxxxxxxx, Esq.
