A group of hedge funds that provided bankruptcy funding to Delphi Corp on Monday won a high-stakes auction to take control of the auto parts supplier, scuttling a rival deal brokered by the Obama administration.

Delphi's board of directors and GM both offered their support for the proposed deal that would hand the company's assets over to its debtor-in-possession lenders in exchange for their forgiveness of nearly $3.5 billion in loans.

The result, announced by Delphi late Monday, came after a two-day auction in New York.

Delphi, GM and the White House-appointed autos task force had all previously backed a rival bid that would have given control of Delphi to private equity firm Platinum Equity.

A bankruptcy court hearing to review the results of the auction was scheduled for Wednesday.

Approval of the proposed deal would end a costly and long-running bankruptcy that contributed to GM's own collapse and became wrapped up in the effort by U.S. officials to restructure GM's operations with some $50 billion in aid.

Because the U.S. Treasury provided bankruptcy financing to GM, government officials had a dominant say in the shape of the new company that emerged from bankruptcy earlier this month.

But the government has had little direct influence in the end game for Delphi, which remains a crucial parts supplier to GM with the power to shut down its assembly plants.

GM, which would have provided $2 billion in cash and credit under the now-rejected Platinum deal, said the transfer of Delphi's assets to its bankruptcy lenders would provide GM with better terms as well.

GM supports this bid, which is still subject to Delphi bankruptcy court approval, and we are pleased that Delphi is now positioned to move forward in its restructuring, the automaker said in a statement.

Platinum said it had been forced out of the running for Delphi because the company's debtor-in-possession lenders, which include Elliott Management and Silver Point Capital, refused to release their claim on the parts supplier's assets.

PLATINUM SAYS TALKS CONTINUE

The Los Angeles-based firm said in a statement that it was continuing talks with the Delphi lenders and remained interested in taking some operational role at the restructured supplier.

We look forward to working on the next phase of this process with Delphi, its lenders and General Motors -- all of whom have acknowledged the value of Platinum Equity's operating expertise, the firm said.

Delphi, which has been in bankruptcy protection since 2005, was spun off by automaker GM in 1999.

It had been consistently unprofitable before filing for bankruptcy and GM's own deepening crisis and the collapse in U.S. auto sales thwarted a previous attempt to emerge from court protection.

Delphi saw a previous plan to emerge from Chapter 11 fall through in April 2008, when investors led by Appaloosa Management backed out of a plan to provide $2.55 billion in financing.

But Delphi's international operations were never part of its bankruptcy and the company's auto electronics offerings were also widely seen as an area of competitive strength.

Delphi's bankruptcy lenders concluded those assets were undervalued by a Platinum deal negotiated in late May that would have only paid 20 cents on the dollar for the largest tranche of debtor-in-possession loans.

Such loans are typically paid in full even though the hedge funds calling the shots on the Delphi credit bid bought the DIP loans in the secondary market at a steep discount, according to people familiar with the discussions and court filings.

Delphi remains GM's largest supplier. GM has been seeking to buy the Delphi plants it needs for critical components including Delphi's steering business and union-represented plants in Kokomo, Indiana; Rochester and Lockport, New York; and Grand Rapids, Michigan.

Delphi's lenders include Elliott Management, Silver Point Capital and Monarch Alternative Capital. JPMorgan Chase & Co is the agent for the bankruptcy loan.

Delphi said in its statement that GM and its lenders agreed to modify financing agreements to provide sufficient liquidity for the auto parts supplier to emerge from bankruptcy.

It also said that the bid by lenders would resolve hundreds of legal objections to its reorganization by keeping responsibility for payment of employee severance with the reorganized company.

(Reporting by Kevin Krolicki and Megan Davies; Editing by Valerie Lee)

General motors