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This case is suitable for students just beginning to learn finance principles but is also appropriate to use in courses with experienced students and executives. In January 2008, Delphi Corporation (Delphi) had been in Chapter 11 bankruptcy for more than two years but appeared to be on the brink of approving a plan of reorganization (POR) that would allow it to emerge from bankruptcy with a significantly improved balance sheet. Delphi’s POR called for a reduction of the company’s leverage by exchanging the debt of the unsecured creditors for a mixture of new debt and new equity. The resulting reduction in interest expense was projected to return Delphi to profitability and make the restructured company a viable going concern. Students take the position of various claimants to explain why that claimant class would or would not vote for the plan.
• Understand the strengths and weaknesses of Delphi and the auto industry at the onset of the credit crisis of 2007-09. • Understand the principles of bankruptcy and the process of a Chapter 11 and Chapter 7 bankruptcy, including DIP financing and the plan of reorganization (POR) • Critically evaluate the POR and the incentives of the various claimants as to whether they are likely to vote to accept it. • Illustrate the impact of the firm’s valuation on the POR.