Jeferson Q.

Rico

Financial Risk Management

Case: Delphi Corp. and the Credit Derivatives Market (A)

I. Background/Introduction

Delphi Corporation is a global auto parts manufacturer. It was created as a spinoff from
General Motors in 1999, it had lost money in three of the six following years. Delphi had a
leading global market share.

Birchfield Capital Management (BCM) LLC was a hedge fund that specializes in investing in the
debt and other financial claims of bankrupt or near-bankrupt U.S. companies. By 2005
BCM is managing nearly $1 billion of assets.

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II. Areas for Consideration

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Although Delphi had a leading global market share, its most important customer, General
Motors, had for years been suffering significant declines in vehicle sales. On that period, the
price of cooper and other key raw commodity inputs used in making Delphi parts had risen
dramatically. And Delphi, like General Motors, was struggling to manage significant
obligations that it had to its retired unionized workers under various pension and medical
benefit plans. Given the heightened risk of bankruptcy, and the fund’s relatively large
exposure to Delphi, Bauer-Martin wondered if she should reduce the size of the investment,
or create a hedge against potential losses in bankruptcy using some type of credit derivative.

https://www.coursehero.com/file/35484761/Rico-Case-9-Delphi-Corp-and-Credit-Derivatives-Market-Apdf/
 III. Statement of the Problem

What are the options/actions of Birchfield Capital Management (Bauer-Martin) to maximize

the fund’s returns on its investment in Delphi bonds with minimal risk with the consideration
the of the Delphi Corp. filing of bankruptcy is a possibility?

IV. Alternative Courses of Action (ACA)

1. Reduce the size of the investment

a. Pros - pushing through with this action will minimize the possible lost in case of highly
anticipated bankruptcy of Delphi Corporation.

b. Cons - The consequence is that 1st is the relationship between the two companies. It
will not be able to a part of the possible positive turnaround in case Mr. Miller of

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Delphi. Birchfield Capital Management will miss the opportunity to invest in a

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profiting company if ever.

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2. Create a hedge against potential losses in bankruptcy using credit derivatives

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a. Pros – Using credit derivatives to the right extent to ensure profit and also minimize
losses in case of a credit event. It is a certainty tool in an uncertain part of the
business. It will keep the business relationship between two companies although
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Delphi is in the brink of bankruptcy.

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b. Cons - It will cost some premium and unlike in a pure investment, it will not gain full
amount of profit.

3. Do nothing and believe to newly appointed CEO, Robert “Steve” Miller a highly respected
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turnaround Manager.
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a. Pros – The relationship between the companies will remain strong. Trusting the new
management enforces new methods the address a new leap in Delphis’
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b. Cons – This is the riskiest move due to having no mitigating control of the financial
credit event that may occur. Once bankruptcy hits, the company is not protected and
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it will incur loses.

V. Conclusion and Recommendation:

In conclusion, the stock price is a relative and proportional value of a company's

worth and only represents percentage changes in market capital at any given point in
time. Any percentage changes in a stock price will result in an equal percentage change in
a company's value. This is the reason why investors are so concerned with stock prices
and any its changes (Investopedia, 2018). It was evident on Delphi’s share price and credit
standing that bankruptcy is mostly likely. Birchfield Capital Management should use ACA

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 number 2, “Create a hedge against potential losses in bankruptcy using credit
derivatives”. Using credit derivatives to the right extent to will ensure profit and also
minimize losses in case of the bankruptcy. It is a certainty tool in an uncertain part of the
business. It will keep the business relationship between two companies.

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