Hedge fund pulls out of $2.6B investment deal with Delphi

This GM didn't need.

Besides slumping U.S. sales and a strike that has shut down 30 of its factories, the automaker may now be on the financial hook to help its former subsidiary and largest parts supplier, Delphi dphhiq. Delphi's lifeline to exit bankruptcy was stalled after a private equity fund ended a deal for a $2.55 billion cash injection on Friday.

The Appaloosa Management-led investment was an essential pillar in Delphi's reorganization, which has been complicated by a tight credit market. The loss of the deal puts Delphi's plan to exit bankruptcy at risk and raises the issue of whether General Motors gm would be forced to offer even more support than it is already giving.

"I would not be surprised to see additional forms of financial support from GM," Fitch Ratings analyst Mark Oline said. "It's been never-ending since the initial filing."

Standard & Poor's analyst Marc Eiger told investors that the sooner Delphi emerges from bankruptcy, the better off GM will be. He noted that GM recently increased the amount of loan money it offered to Delphi, and it "may need to provide more cash to help Delphi emerge."

As for an equity deal, Appaloosa said it is still negotiating to invest in Delphi despite its refusal to do so under the terms of the existing agreement.

GM spokeswoman Renee Rashid-Merem said it is disappointed Appaloosa had withdrawn. "There has been a tremendous amount of effort and progress made to establish the foundation that would enable Delphi to emerge from Chapter 11," she said in a statement. "GM will continue to work with the involved parties to facilitate Delphi's efforts to emerge from bankruptcy."

Appaloosa's announcement came as Delphi faced a Friday deadline to raise $6.1 billion in loans to help it out of bankruptcy. Delphi followed Appaloosa's statement with its own, saying it had raised the needed loan money and was ready to do the deal but that Appaloosa had backed down.

"We are extremely disappointed that our plan investors have taken the position that they are not obligated to fund their planned investment commitments to Delphi and instead have chosen to walk away from the company and its stakeholders," Delphi's restructuring chief, John Sheehan, said in a statement. "We are prepared to pursue actions that are in the best interests of Delphi and its stakeholders."

Delphi, which has been in bankruptcy since October 2005, offered no specifics on what those actions may be.

Appaloosa said Delphi has breached an agreement it had with the investor group.

The letter from Appaloosa's David Tepper, a well-known investor in distressed companies, said he had been "actively engaging in discussion to resolve our outstanding issues in a mutually acceptable manner."

Tepper also asserted Friday that he is now entitled to an $82.5 million fee, because Delphi breached their agreement by seeking an alternative transaction. It referred in its filing to Delphi's effort to take more loans from GM, a move that threatened the power of the investor group.

Under the restructuring plan approved by the court and creditors, GM can offer up to $750 million in loans. A judge recently ruled that a GM affiliate — but not GM itself — could offer two other loans, one of $2 billion and a second loan worth as much as $825 million.

Five of six investors in the Appaloosa group had objected to GM's increased participation in the loans package over concerns about GM expanding its influence over Delphi. They had argued the loans would "adversely affect the company and the investors by materially increasing and concentrating GM's ongoing influence and control."

The other investors in the Appaloosa-led group are Harbinger Capital Partners Master Fund I, Merrill Lynch, Pierce, Fenner & Smith, UBS Securities, Pardus Capital Management and Goldman Sachs Group.

Goldman Sachs was the one investor in the group that hadn't objected to more loans from GM.

GM is also in negotiations to increase its contribution to Delphi's pension plans from the $1.5 billion obligation it has now.

AP Auto Writer Dee-Ann Durbin in Detroit contributed to this report.