GTX - Garrett Motion

[wabuffo]

got in mail a mail from US Bankruptcy Court, saying that a Substantial Shareholder cannot be buying or selling shares of Garrett.

obviously i am not a Substantial Shareholder by any means on this name, but is this bankruptcy something that prevents me from dumping the shares as a no-body shareholder. i don't need a tracking position about a stock i dont care.

 

And they talks about Claims of Worthless Stock Deductions.

 

http://www.kccllc.net/garrettmotion/document/2012212200920000000000014

 

Here's the motion that deals with those two things.  Both the Substantial Shareholder limitation and the Worthless Stock Deductions deal with limiting buying or selling of the stock (or writing it off as worthless on one's tax return) by large holders that could restrict the ability for GTX to preserve its NOLs.  They've set the limit at 4.5% of total shares o/s (~3.4 million shares).  The purpose is to limit a substantial turnover in ownership by major holders of the stock.

 

wabuffo

[Xerxes]

Thanks Wabuffo.

Greatly appreciated.

[hasilp89]

No song and dance with earnings anymore, however skimming through 10q, saw that total sales were up along with a 53% increase in China sales. Interesting to see China as a whole ramping back up.

[hasilp89]

Anyone heard anything with the auction process. last i saw it was meant to be held today.

[5xEBITDA]

Should have begun 9am today.

 

In other news

 

------------

 

On Saturday, Dec. 19, Honeywell International and certain affiliates, or Honeywell group, filed a notice of their proof of claims against the Garrett Motion debtors, pursuant to deadlines established in connection with the upcoming February estimation trial. At a hearing on Nov. 18, the parties agreed, at the the suggestion of the court, to pivot from the partial estimation previously proposed by the debtors to a full estimation of the “actual” or “net amount” of Honeywell group’s claims under an indemnification and reimbursement, related tax and intercreditor and other agreements put in place in connection with the corporate spinout of Garrett Motion from the Honeywell group.

 

The bulk of the disputed obligations relate to the 2018 indemnification and reimbursement agreement between debtor Garrett ASASCO and former parent Honeywell. Garrett ASASCO agreed to pay 90% of Honeywell’s asbestos liabilities arising from its former Bendix subsidiary for 30 years and to pay certain tax-related charges to Honeywell. According to Honeywell’s proof of claims notice, the separation was conditioned on Garrett undertaking the payment and guarantee obligations under the indemnification agreement and 30 Garrett subsidiaries entered into an indemnification guarantee agreement.

 

As described in the notice and in the claim summary included therein (available HERE), Honeywell group asserts claims of (i) at least $1.8 billion relating to the indemnification and reimbursement agreement, as well as additional continent tort and other claims; (ii) certain contingent tort and other claims under an intercreditor agreement; (iii) at least $126 million under a tax matter agreement; and (iv) at least $10.3 million under a cash repatriation agreement as well as a variety of other miscellaneous contractual (at least $5.9 million), shared facility claims claims (at least $1 million) and various contingent claims.

 

Garrett carried this indemnity claim at $1.08 billion and the tax claim at $193 million on its balance sheet as of June 30. Garrett is seeking to shed or reduce the Honeywell liability as much as possible as part of its bankruptcy process, while an alternative plan proposed by certain shareholders and Honeywell would see Honeywell settle its claims for $1.45 billion, paid out over time.

 

Prior to the filing of the chapter 11 petitions, Garret Motion instituted proceedings in New York state court seeking to invalidate up to $5 billion in asbestos indemnification obligations that stem from the indemnity and related agreements. That proceeding was removed from the bankruptcy court, and, also at the Nov. 18 hearing, the court heard arguments on Honeywell’s motion to dismiss the Garrett Motion debtors’ invalidation lawsuit and took the motion under advisement.

 

Recently, Garret Motion filed a notice of other additional counterclaims they intend to assert to reduce or eliminate Honeywell International’s asbestos and tax indemnification claims, but, as reflected in a later amendment, has apparently not committed to arguing that the 2018 spinoff rendered Garrett Motion insolvent or inadequately capitalized, claims counsel signaled the debtors could potentially pursue at the Nov. 18 hearing.

 

[hasilp89]

Looks like Company has chosen Centerbridge/Oaktree plan.

 

https://www.businesswire.com/news/home/20210111005545/en/Garrett-Motion-Selects-Enhanced-Proposal-From-Centerbridge-and-Oaktree-Following-Robust-Competitive-Process

 

Under the proposed transaction (the “Proposed Transaction”):

 

All creditors of the Company other than Honeywell International Inc. (“Honeywell”) are unimpaired and paid in full in cash. Honeywell has agreed to the resolution of its claims as described below.

 

Prepetition funded debt is reduced from approximately $1.9 billion on the date of the Chapter 11 filing to an estimated $1.1 billion at emergence.

 

Stockholders (other than the parties to the Plan Sponsor Agreement) will be offered the option of receiving cash for their shares at a price of $6.25 per share, representing an approximate 30% premium over the market price as of the close of trading Friday, January 8, 2021.

 

The Company will remain publicly listed. Stockholders who do not opt to receive cash will be entitled to retain their existing shares of common stock and receive the right to subscribe for a share of up to $200 million of Series A Preferred Stock on the same terms as the Plan Sponsors.

 

The Plan Sponsors and stockholders participating in the rights offering will subscribe for $1,250 million of Series A Preferred Stock, the proceeds of which will be used to repay existing funded debt, make a $375 million payment to Honeywell, fund cash payments to stockholders opting to receive cash for their shares and to pay transaction expenses.

 

All asbestos and tax indemnification obligations to Honeywell incurred in connection with the 2018 spin-off will be resolved.

 

In addition to receiving the $375 million cash payment at emergence, Honeywell will receive Series B Preferred Stock payable in installments of $35 million in 2022, and $100 million annually 2023-2030. The Company will have the option to prepay the Series B Preferred Stock in full at any time at a call price equivalent to $584 million as of the emergence date (representing the present value of the installments at a 7.25% discount rate). The Company will also have the option to make a partial payment of the Series B Preferred Stock, reducing the present value to $400 million, at any time within 18 months of emergence. In every case the duration of future liabilities to Honeywell will be reduced from 30 years prior to the Chapter 11 filing to a maximum of nine years.

Other important terms and conditions of the Proposed Transaction are included in a Plan Sponsor Agreement, entered into by the Company, the Plan Sponsors and the other parties thereto.

 

The Company expects to file a modified Plan of Reorganization reflecting the terms of the Plan Sponsor Agreement by January 22, and targets emergence from Chapter 11 by April 30, 2021, subject to receiving bankruptcy court approval and satisfaction of customary closing conditions. On January 8, 2021, the Company had filed documents seeking confirmation of a Plan of Reorganization consistent with the amended milestones under an agreement with its lenders and included in a Form 8-k filing with the Securities and Exchange Commission. Such documents would be amended and refiled to reflect the terms of the Plan Sponsor Agreement.

[hasilp89]

need some help understanding how dilutive the Convertible Preferred A will be.

 

Is it based on the conversion price? Converts at $3.50 does that mean - $1,250,000,000 / $3.50 = 357M new hares = ~80% dilution for common equity?

or

The liquidation preference - $1 liquidation preference = 1.25B shares = pretty much complete dilution (seems incorrect)

or

something else.

 

Oaktree/Centerbridge are clearly getting the upper hand here - $6.25 floor on all the common they were buying in the $1/2 range and 11% coupon Pref A with $3.5 conversion, but trying to understand best options / outcome on holding/participating versus calling it a day at $6.25.

[wabuffo]

need some help understanding how dilutive the Convertible Preferred A will be.

 

Current common shares o/s = 76m shares.  In total, $1250.8m of Series A preferred shares will get issued that convert at a value equal to $3.50 per common share.  Therefore, ($1250.8/$3.50) = 357m new common shares when fully converted.  Total common share count after Series A preferred shares fully convert = 357m + 76m = 433m total common shares o/s.

 

This means that current shareholders are getting .75 subscription rights per 1 common share currently owned.  The math is current shareholders get a pool of Series A preferred shares equal to $200m.  ($200m/$3.50) = 57m new shares when fully converted.  So rights to 57m shares/76m existing shares = .75

 

Furthermore, the current share price reflects the fact that you are getting 1.75 fully converted common shares which includes (.75 x $3.50 =) $2.63 embedded cost to exercise your subscription right.

 

wabuffo

[hasilp89]

Thank you wabuffo, that is what i had originally thought.

 

Can you clarify you last comment? "Furthermore, the current share price reflects the fact that you are getting 1.75 fully converted common shares which includes (.75 x $3.50 =) $2.63 embedded cost to exercise your subscription right."

 

With the rights offering wouldn't you be buying an additional 3 shares (@ $3.50 each) for every 4 shares you already own? 

 

Also am i correct in thinking they come out of this with no debt? The comment below makes me think not but i assumed the Pref A was being raised in order to eliminate the debt.

"Prepetition funded debt is reduced from approximately $1.9 billion on the date of the Chapter 11 filing to an estimated $1.1 billion at emergence."

[wabuffo]

With the rights offering wouldn't you be buying an additional 3 shares (@ $3.50 each) for every 4 shares you already own? 

 

Right - which is the same as saying buying an additional .75 shares (@$3.50) for every 1 share you already own.

 

What I meant by my statement is that the current share price should reflect all this.  Let's do the calculation.  What we don't know is what is the implied Equity Value Per Share under the fully diluted 433m common share scenario.  The Company is offering $6.25 per share as the cash-out price.  Let's say that the current market closing price makes reflects the realizeable value from owning the shares and exercising the Subscription Rights through the emergence of GTX out of Chapter 11.

 

So today you own 1.75 shares (1 current share + .75 of another share via exercising the rights).  But it will cost you $2.63 to exercise the rights (.75 x $3.50)

 

Thus the cost of 1.75 common shares = current market price + cost to exercise = $6.11 + 2.63 = $8.74.  $8.74/1.75 = $5.00 per fully diluted common share (ie, 433m common shares x $5.00 = $2.163b of implied common equity value (after full conversion of the Series A preferred shares).  Is $5.00 per share the right value?  No idea - you'd have to figure that out from the recent financial projections filed by the Company.

https://www.sec.gov/Archives/edgar/data/1735707/000119312521005353/d74296dex991.htm

 

"Prepetition funded debt is reduced from approximately $1.9 billion on the date of the Chapter 11 filing to an estimated $1.1 billion at emergence."

 

They will have debt = $1.1b. Plus the Honeywell Series B preferreds.  They will also have some $120m in cash.  The cash raised from the Series A preferred shares ($1.251b) will go to reducing the prepetition debt by $800m (ie, paying claims and some of the debt) plus issuing a $375m cash payment to Honeywell as well as funding the buyout of any common shares.

 

Hope that helps,

wabuffo

[hasilp89]

that is extremely helpful. thank you so much wabuffo.

[wabuffo]

that is extremely helpful. thank you so much wabuffo.

 

Here is some more info.  When Centerbridge/Oaktree/Honeywell made their initial bid, they put together an illustrative implied equity value calculation in this Court Document

http://www.kccllc.net/garrettmotion/document/2012212201023000000000008

 

This is the relevant table from that document:

 

Ok - so I took that table and updated it (as best as I could) for this new, revised proposal.  YMMV and I could've made some mistakes here but my best estimate for the current value of the shares (pre-emergence with subscription rights attached) is around $6.56 per share.

 

Also note that the industry peer benchmark used in this example (Borg-Warner) is now trading at a 8.4x EV/EBITDA multiple now that equity markets for industrials have recovered, FWIW.

 

wabuffo

[Hielko]

Not sure if you can use the current BorgWarner multiple to update this valuation. The current BorgWarner EV/EBITDA multiple is relative high because earnings were low this year, just like Garrett's earnings. But the model takes 2017-2019 avg. EBITDA as input, so it is already ignoring the bad 2020 results. If you want to use todays multiple you also have to use the way lower TTM EBITDA for Garrett.

[wabuffo]

Hielko - fair point. 

 

wabuffo

[Hielko]

But BorgWarner is up ~5% or so since October, so I do think you could make a similar adjustment upwards to the implied enterprise value.

[hasilp89]

I ran a similar exercise using the numbers from their presentation. (take with a grain of salt).

Assuming share price at $6.25 they are emerging at 8.7x EV/EBITDA on 2021E which comes down to 6x range in a few years.

What annoys me here is when I look at it from a FCF basis (note i haven't modeled this out in detail just back of envelope with their numbers) debt is reduced so interest and principal should come down a bit. Indemnity used to be a $180m hit to FCF. It is reduced to $100m but now we have the 11% dividend to Pref A which sucks up $138m. Seems like you end up in a worse FCF position in the short term, although it can PIK and would convert at some point at which you're looking at a 9% FWD FCF yield.

 

is there an arbitrage opportunity to buy the common now at $6.2 in order to have access to the rights offering and sell shortly there after with ownership of the Pref A well in the money and with an 11% coupon or does the common tank after Pref A is issued?

 

 

 

 

 

[ugadawg_98]

Now we have a competing offer. Thanks to Wabuffo and others for following this.

[wabuffo]

Now we have a competing offer. Thanks to Wabuffo and others for following this.

 

We'll have to wait til the hearing on Feb 16th to see if the Judge will end the debtors' exclusivity to file a Plan.  If it looks like that might happen, I fully expect COH to up their offer.  Right now the EC plan is better on almost every front than the COH plan.

 

wabuffo

[BG2008]

Now we have a competing offer. Thanks to Wabuffo and others for following this.

 

We'll have to wait til the hearing on Feb 16th to see if the Judge will end the debtors' exclusivity to file a Plan.  If it looks like that might happen, I fully expect COH to up their offer.  Right now the EC plan is better on almost every front than the COH plan.

 

wabuffo

 

Wabuffo,

 

In a previous life, I would size up these BK Equity investments.  But I manage more capital today and have moved onto more compounders and better quality businesses.  Keeping track of the dockets takes an immense amount of time and patience.  It is great for those interested in learning and have that kind of focus.  What is your read on our options for us and the the current price?  My attention is all focused on real estate trading at 1/2 price with good management. So I apologize for "outsourcing" the research on my 55bps position. 

 

I owe you a six pack of beer and/or dinner. 

 

Ask me anything about INDT, BERY (still interesting here and likely at an inflection point), HHC, etc. 

[wabuffo]

Keeping track of the dockets takes an immense amount of time and patience.  It is great for those interested in learning and have that kind of focus.  What is your read on our options for us and the the current price?

 

BG2008 - short answer - price is getting pretty full right now.  Its basically sitting at the EC's cash-out price ($7) and their bid isn't even guaranteed to be accepted by the BK judge.

 

Longer answer - the EC has changed its offer so that has scrambled the marbles a bit. But I will come back to that in a second.  Prior to the EC's filing of a new PoR, here was a comparison of the COH (Centerbridge-Oaktree-Honeywell) and the Equity Committee (EC) bid called the "Standalone Plan".  [click on the image for full-size viewing]

 

 

The EC is offering Honeywell the exact same terms that they are getting for their claim under the COH bid ($375m in cash + a new Series B pfd), while diluting the pre-petition shareholders a lot less (95.2% vs 30% under the COH bid).  The only objection I think the debtors had was that the EC bid made their Series A preferred non-convertible which makes the emergent GTX balance sheet a bit more leveraged.  COH was also pointing out that they were offering a cash-out option at $6.25 per share which the EC was not.

 

Soooo...... long-story short, the EC have reworked their offer to fix both of those issues.  They are now making their Series A pfd convertible to common AND adding warrants .  Plus they are adding a cash-out option at $7 (though the cash-out offer has a cap of $225m on it)

 

Here is the term sheet for their Series A preferreds. 

 

http://www.kccllc.net/garrettmotion/document/2012212210206000000000007

 

My quick summary of the key terms:

Securities Offered:

- $800m Series A convertible preferreds ($600m to shareholders, $200m to AP + backstop fees)

- along with preferreds, there are detachable warrants.

 

Preferred Shares Terms:

- issued with 3% discount to initial liquidation value

- redeemable only by company (not preferred holders)

- dividend rate = 12% (9% PIK, 3% cash)

- conversion at liquidation + PIK accrued at a price for common that is 2.5% less than 45-day VWAP.  Certain milestones and limits set for how much/when Company can force conversion.

 

Warrants Terms:

- number of detachable warrants = 15% of o/s common shares (12.5% for shareholders, 2.5% for AP).

- exercise price will be set based on some formula to be defined later based on TEV.

- expire at the later of: (a) 6/30/25 or (b) 48 months after BK plan effective date.

 

It really looks like the EC is trying hard to please the debtors by making the preferreds low-cost to the company from a cash dividend rate and giving the mgmt control over conversion of the preferred to equity.  Cynically, this management team doesn't care about dilution and just want to protect their jobs so they might go for this.  At least there is less dilution to the existing shareholders than the COH plan (which gives 70% of the new equity to a few participants in the bid).

 

To summarize:

- this EC bid gives Honeywell the exact same deal and same terms as the COH bid ($375m in cash + Series B pfds)

- addresses mgmt's concerns about b/s leverage and cost of that leverage (only 3% cash rate on Series A pfds, 9% PIK paid in common, mgmt controls timing of conversion)

- is superior to the COH bid in just about every way (eg, cash-out price, waterfall-chart FV of common, etc)

- fairer to existing shareholders in terms of less dilution.

 

So.... of course, the Court will reject this EC plan and stay with the COH bid?

 

We'll see - hearing is scheduled for Feb. 16th.  If the Judge waives the EC through and ends the Debtors' exclusivity to file their PoR (doesn't happen often in BK court), then almost certainly COH will raise their offer.  If all of that happens, then the share price is going higher (possibly quite a bit higher) - but I don't know if the EC bid is going anywhere.

 

In a previous life, I would size up these BK Equity investments.

 

It's too bad - they've been very lucrative during the back half of 2020.  TUESQ/TUEM (Tuesday Morning) has also been a good one for me.  It emerged this month from Ch. 11.  Of course, the pandemic has caused a lot of distress.  Most years are nothing but long dry spells when it comes to fishing in this pond.

 

wabuffo

[wabuffo]

No sooner than I finished my posts that I see all of the objections being filed against the EC's plan by the creditors, Honeywell, COH and the debtors (GTX mgmt) asking the BK Judge to reject it.

 

wabuffo

[hasilp89]

Ditto BG2008 I think I might owe you a bottle of papi after this one wabuffo. I probably overstayed my welcome with this name but it has been a great learning experience for me and appreciate your posts.

 

Two questions

- think this was answered by your next post re objections but  my assumption  was C&O were debt holders and controlled that group which had allowed this to go in this direction in the first place. Wouldn’t they / couldn’t they still favor their own plan or say no dice, you go bankrupt and as debt holders we take the business?

 

- in the EC plan the $600m pref a to shareholders plus the warrants for shareholders. Are those rights offerings you can elect to participate in? Assuming AP is backstopping.

 

[ugadawg_98]

No sooner than I finished my posts that I see all of the objections being filed against the EC's plan by the creditors, Honeywell, COH and the debtors (GTX mgmt) asking the BK Judge to reject it.

 

wabuffo

 

Any merit to what they’re saying or just “we make more with our plan”?

[wabuffo]

Any merit to what they’re saying or just “we make more with our plan”?

 

This was always going to be an uphill battle for the EC, because in general, Courts don't like to end exclusivity for the debtors without letting them try to formulate their plan of reorganization unopposed.

 

I still haven't made my way through all of the filings - but the most important one is that of Honeywell.  Essentially Honeywell is saying they would not vote in favor of the EC plan.  Their argument is that the offer by the EC may be nominally similar ($375m in cash + Series B preferreds with the same terms) but in HON's opinion, the capital structure is different and more leveraged.  This places less economic value and ascribes more financial risk on Honeywell's structurally subordinated Series B pfds given the two very different capital structures.

 

That objection is the one to watch as well as the rebuttals to it from the EC.  Its going to be an uphill battle for the EC's plan to get a shot.

 

wabuffo

[wabuffo]

The EC strikes back.  It files two objections to the Debtors' COH plan.  Its key argument is that pre-petition shareholders can't get diluted down to 30% unless a two-thirds majority of the non-COH shareholders vote in favor of it.

 

Here's Section 203 of DGCL:

https://simplifiedcodes.com/?page_id=191

 

The relevant legal language is right at the top:

 

§ 203. Business combinations with interested stockholders.

 

A corporation shall not engage in any business combination with any stockholder for a period of 3 years following the time that such stockholder (“the interested stockholder”) came to own at least 15% of the outstanding voting stock of the corporation (“the acquisition”), except if:

            The board had approved the acquisition prior to its consummation;

            The interested stockholder owned at least 85% of the outstanding [1] voting stock upon consummation of the acquisition, or

            The business combination is approved by the board, and by a 2/3 majority vote of the other stockholders in a meeting (i.e., not by written consent).

 

Well there it is in black and white.  So in effect, the EC is saying that the COH Series A preferreds are illegal according to Section 203 of Delaware law (where GTX is incorporated) unless they are approved via a vote by the other shareholders.

 

I'm no lawyer and really in over my head.  Most of the times I feel like I'm a spectator at a sporting event - cheering and booing.

 

Bill