Fitch Affirms 'BBB' Rating of Delphi; Rating Outlook Stable

Business Wire,  Sept 19, 2003  

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Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 19, 2003

Fitch Ratings has affirmed Delphi Corporation's (Delphi) 'BBB' senior unsecured rating and its 'F2' commercial paper rating. The Rating Outlook remains Stable. Fitch's ratings for Delphi are based on the company's position as a technology leader, it's positive trend of growing its non-General Motors Corporation (GM) business (approaching 40% in the Q2 2003), and its successful efforts to further rationalize its cost structure. Negative factors include a generally challenging industry backdrop, Delphi's substantial pension/OPEB obligations, Delphi's current leverage to GM (approximately 60% of sales), and slightly weaker performance in calendar year 2003 by its main customer GM.

Over the last year since Fitch initiated coverage, Delphi has continued its evolution from captive automotive parts supplier to a lean independent supplier of manufactured (principally automotive) products. GM has gone from 65% of sales for fiscal year 2002 to slightly higher than 60% in the latest quarter. This shift is especially important given that the growth is principally the result of improved sales to non-GM customers (to include non-automotive customers) in business lines where Delphi normally achieves better margins. Further improvements have been made in its cost structure as it has continued to work through not only the rationalization of existing capacity (especially via the Automotive Holdings Group process) and Fitch anticipates that additional progress will be made as a result of the recent United Auto Workers (UAW) contract. Furthermore, the recent UAW contract should enable Delphi to become more competitive, as it provides for moderately reduced rates of growth in the areas of wages and benefits, while maintaining a relatively constant level of UAW jobs within Delphi going forward. These factors, when combined with Delphi's well-recognized technical capability, should enable Delphi to maintain/expand margins while reducing overall volatility.

Issues remain, however, as the automotive industry remains one of the most challenging in the industrial world. Only through efficiency gains and exciting new products will Delphi be able to deal effectively with the constant pricing pressure placed on it by the global OEMs. Beyond pricing pressures, Delphi must also deal with the continuing volatility of not only industry production levels but more importantly volatility in the production levels of key customers like GM. This has been especially relevant in 2003 as GM production is down 6% on a year-to-date basis.

The continued ability to maintain or improve current levels of cash flow is important as Delphi has substantial post retirement obligations including a substantially under funded pension fund ($4.1 billion as of the end of FY2002) and large other post-retirement benefit obligations (OPEB). Although the pension situation has most likely improved due to better equity markets and substantial pension contributions by Delphi, it will remain an issue for at least the next five years with Fitch estimating that Delphi will have to contribute in excess of $2.5 billion over that time frame. Healthcare costs (and associated OPEB costs) continue to be a concern due to the rapidly rising cost of providing these benefits. Recent government statistics indicate that in 2003 the cost of these benefits rose 13.9%. Although many companies have lowered their cost by sharing a greater portion of the burden with employees, Delphi has very limited ability to do that given its UAW contract.

Despite these challenges, Fitch anticipates that at U.S. production levels above 15.5 million units, Delphi will generate cash flow sufficient to meet all its obligations (whether pension contributions or current dividend payments) while providing a modest amount of free cash flow that could ultimately be used to reduce debt.

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