GTX - Garrett Motion

[5xEBITDA]

I actually think that fast growing tech companies with 90% gross margin trading at 35-40x P/FCF isn't expensive because they don't scale in a linear fashion.  A 10% top line growth creates more than 10% bottom expansion.

 

You are correct. Due to the exponential rate at which cash flow grows once a tech business hits scale, the 50x P/FCF business in T+0 might actually be 10x P/FCF in T+2 or 3, which is an opportunity if things play out like that. This is a much more significant discount than something trading at 15x P/FCF in T+0 which, if things go right, may be 12x P/FCF in T+2 or 3 which is where I see more traditional value types hanging around these days.

 

People figured this out back in 2012/2013 and made a killing. I was not one of them. But, I have grown to respect the investment process for VC/growth equity/public tech investors a lot more since taking the time to really dig into the reasons why so much capital has flown into that asset class. I have found it especially useful to port some of those lessons over to my own investment process.

 

GTX was always a pass on day 1 from me, at least the equity. I mean, like you said it is a red headed stepchild who really only exists to carve-out liability from Honeywell. The business is just ok, I don't think they're a leader in the space or anything, and they have a lot of debt. You need a lot of things to go right with something like this. To your comment on GTX attracting value types...I certainly think this type of setup tends to attract "contrarian for contrarian's sake" type of investors.

 

I think the issue with the 50x P/FCF is explaining to your investors why you are buying these companies after selling them on a value strategy.  In your PA, it's easier to pivot.

 

Perhaps a difficulty for a value strategy now pivoting towards tech, but in general the spirit of value investing is still within the bounds of what I described above. There aren't many value funds out there who actually have limitations on only investing in things with valuation multiples below a certain threshold. Sometimes you do get "busted" tech companies that look more like traditional value investments, Vector Capital is a fantastic firm that does this. But, for the billions of LP dollars that have poured into the tech space over the last five years, including into "value" firms, I think investors are able to grasp the "tech thesis" just fine.

[hasilp89]

OTC trading has been bullish last few days. Stock is back above $2. Anyone hearing anything?

[5xEBITDA]

OTC trading has been bullish last few days. Stock is back above $2. Anyone hearing anything?

 

There is a formal ad-hoc shareholder group formed, represented by Jones Day. I suspect they will try to push for the appointment of an equity committee. Below info is from the group's Form 2019 statement filed with the court.

 

Baupost Group - 3.6 million shares

Cyrus Capital Partners - 10.2 million

FIN Capital Partners - 0.4 million

Hawk Ridge Master Fund - 2.2 million

Keyframe Capital Partners - 1.5 million

Newtyn Management - 2.8 million

Owl Creek Asset Management - 0.8 million

Sessa Capital - 6.9 million

Warlander Asset Management - 0.9 million

[hasilp89]

OTC trading has been bullish last few days. Stock is back above $2. Anyone hearing anything?

 

There is a formal ad-hoc shareholder group formed, represented by Jones Day. I suspect they will try to push for the appointment of an equity committee. Below info is from the group's Form 2019 statement filed with the court.

 

Baupost Group - 3.6 million shares

Cyrus Capital Partners - 10.2 million

FIN Capital Partners - 0.4 million

Hawk Ridge Master Fund - 2.2 million

Keyframe Capital Partners - 1.5 million

Newtyn Management - 2.8 million

Owl Creek Asset Management - 0.8 million

Sessa Capital - 6.9 million

Warlander Asset Management - 0.9 million

 

thank you for sharing. very helpful to know

[BG2008]

OTC trading has been bullish last few days. Stock is back above $2. Anyone hearing anything?

 

There is a formal ad-hoc shareholder group formed, represented by Jones Day. I suspect they will try to push for the appointment of an equity committee. Below info is from the group's Form 2019 statement filed with the court.

 

Baupost Group - 3.6 million shares

Cyrus Capital Partners - 10.2 million

FIN Capital Partners - 0.4 million

Hawk Ridge Master Fund - 2.2 million

Keyframe Capital Partners - 1.5 million

Newtyn Management - 2.8 million

Owl Creek Asset Management - 0.8 million

Sessa Capital - 6.9 million

Warlander Asset Management - 0.9 million

 

thank you for sharing. very helpful to know

 

Now this is getting interesting! I take some of my snide comments back

[BG2008]

Up 27% today

[5xEBITDA]

Up 27% today

 

Some additional color. A competing Junior DIP from Oaktree / Centerbridge was overruled in favor of the lenders' original Priming DIP (with certain, aggressive milestone dates removed). Centerbridge is rumored to be mulling a topping bid vs. KPS. Equity up on the news (what I suspect) is more premium being assigned to the equity being in the money. On a more aggressive case, one may want to do the math on a topping bid which puts equity in the money, and then provide to the pre-petition common shareholders a range of 0.1% - 5.0% of post-petition equity value. This would be consistent with prior cases where equity got a bone thrown to them over an original low ball valuation.

[hasilp89]

Anyone hearing anything new here.

[5xEBITDA]

Nothing new. Interim DIP has been granted for initial funding, but Oaktree/Centerbridge still litigating over their Junior DIP proposal. Not really relevant to the equity which I haven't seen any developments on. 

[hasilp89]

Two developments filed towday

 

https://www.businesswire.com/news/home/20201019005846/en/Garrett-Motion-Auction-Process-Yields-Improved-Bids

 

http://d18rn0p25nwr6d.cloudfront.net/CIK-0001735707/25d4cbd9-5744-46cb-a62c-45851d8c1386.pdf

 

1. KPS increased bid to $2.6B and list newco with existing equity holders retaining ~24%.

2. Oaktree and Centerbridge propose a reorg instead of sale working with Honeywell. They will offer $1.1B convert pref A Stock to pay down debt, Honeywell will be take a pref B stock with defined payments, equity holders not wiped out?

 

Seems like the oaktree offer would result in a debt free capital structure and current equity would sit behind Convert A Stock and Honeywell B Stock. Potentially a good outcome depending on the convert terms - but could screw current equity holders if majority of equity value goes to Convertibles that only institutional companies get to participate in.

 

Garrett's response to the offer is priceless "As you know, GMI is a Delaware corporation with a large number of creditors and thousands of shareholders, most of whom do

not have access to sophisticated restructuring counsel. It is the value received by the stakeholders that are not part of the bidding consortium that is

meaningful to the Board of Directors."

 

areseholes should have thought of that before agreeing to sell/liquidate the company to KPS for nothing...

 

[hasilp89]

Seeing that kps offer was approved. Anyone else hearing anything?

[5xEBITDA]

Seeing that kps offer was approved. Anyone else hearing anything?

 

The KPS offer was approved as a stalking horse bid. There are still opportunities for higher bids to come in, but they need to pay the $84 million breakup fee to KPS. I'm not familiar with the fine print of the KPS offer, but the lawyer at Jones Day (counsel for the ad-hoc group of shareholders) said that recoveries to shareholders are contingent on the outcome of the Honeywell litigation, which isn't really a great outcome for them.

[wabuffo]

but the lawyer at Jones Day (counsel for the ad-hoc group of shareholders) said that recoveries to shareholders are contingent on the outcome of the Honeywell litigation, which isn't really a great outcome for them.

 

Well GTX is definitely suing Honeywell but I would say winning or losing that suit is probably a secondary consideration. 

 

The primary consideration is the corporate structure of GTX and which subsidiaries are on the hook for which liabilities (eg indemnity, MTT, credit facilities).  The declaration by the GTX CFO (document 15 in the Court Docket) lays out the legal strategy they are following. 

http://www.kccllc.net/garrettmotion/document/list/5347

 

If GTX's legal strategy is sound and the Judge agrees with it then it almost doesn't matter if GTX wins their suit against Honeywell (that just becomes further upside to the equity).  Of course, if GTX's legal strategy is defeated, then winning the lawsuit against Honeywell becomes really important or the common is likely a zero.

 

Its hard to handicap the various scenarios.  Its above my pay grade, that's for sure.

 

wabuffo

[hasilp89]

comparison of CB and KPS proposals submitted by CB. Looking more and more like there will be some recovery for equity here. not sure if they announce Q3 earnings but imagine things are picking up based on auto results announced thus far.

 

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

[wabuffo]

comparison of CB and KPS proposals submitted by CB. Looking more and more like there will be some recovery for equity here. not sure if they announce Q3 earnings but imagine things are picking up based on auto results announced thus far.

 

I think there's a very high probability that the GTXMQ equity is money-good.  GTX is pursuing a bankruptcy strategy (that if successful) will zero out the Honeywell Indemnity (and Tax) liability completely.

 

The key to GTX's strategy is in the CFO's declaration (Document 15).  In it he clearly lays out what they are going to do. 

 

In simple form, GTX is made up of two major subsidiaries - GTI (contains the IP and the US Operations) and ASASCO (contains most of the foreign operations).  ASASCO is the old Allied Signal Aerospace Systems Co that once housed Bendix (the original sub that had the asbestos liabilities from its manufacture of brake linings).  GTI is the old Garrett Turbochargers and never got involved in any asbestos.  ASASCO is on the hook for the indemnity agreement (and also the credit agreement), GTI isn't a party to the indemnity agreement but does cross-guarantee the credit facilities and term loans that ASASCO is liable for.  Honeywell tied the the indemnity agreement to ASASCO probably because that is the former corporate entity that had the original asbestos liability somewhere deep in its corporate genealogy.

 

In order to force ASASCO to make its payments, Honeywell tied the entire corporate structure together in terms of obligations through the corporate debt issued by the ASASCO subsidiaries to pay Honeywell its spin-off dividend.  All of the other subs plus the parent are tied to ASASCO's credit facilities via guarantees.  If ASASCO doesn't pay its indemnity obligations, it triggers a cascade of cross-defaults in the debt up and down the corporate subsidiary structure.

 

This is where Chapter 11 comes in.  GTX is appointing two directors (one for GTI and one for ASASCO) to independently value each subsidiary in order to determine a percent split for the 363 sales proceeds.  So there will be two boxes.  The first box (ASASCO) is liable for the debt and the indemnity + tax obligations.  The second box is liable only to the extent that the first box can't completely pay off the debt (but not the indemnity + tax liabilities).  But because the debt is senior in priority to the indemnity, its likely that the GTI box gets to keep the entirety of its portion of the sales proceeds, while the ASASCO sub will be insolvent.

 

It all comes down to how they decide to split the proceeds.  But whatever portion of the cash is allocated to GTI will largely be available to distribute to GTXMQ shareholders (after some general unsecured claims that are left over after the buyer of the business takes most of the payables due - but not  the indemnity or credit agreement liabilities).

 

Here is the corporate org chart (p.115 from Doc 15) that clearly lays out which subsidiaries are on the hook for which long-term liabilities and which ones are not (or are simply co-guarantors of the debt).

 

Click on chart for full-size view:

 

wabuffo

[Foreign Tuffett]

but the lawyer at Jones Day (counsel for the ad-hoc group of shareholders) said that recoveries to shareholders are contingent on the outcome of the Honeywell litigation, which isn't really a great outcome for them.

 

Well GTX is definitely suing Honeywell but I would say winning or losing that suit is probably a secondary consideration. 

 

The primary consideration is the corporate structure of GTX and which subsidiaries are on the hook for which liabilities (eg indemnity, MTT, credit facilities).  The declaration by the GTX CFO (document 15 in the Court Docket) lays out the legal strategy they are following. 

http://www.kccllc.net/garrettmotion/document/list/5347

 

If GTX's legal strategy is sound and the Judge agrees with it then it almost doesn't matter if GTX wins their suit against Honeywell (that just becomes further upside to the equity).  Of course, if GTX's legal strategy is defeated, then winning the lawsuit against Honeywell becomes really important or the common is likely a zero.

 

Its hard to handicap the various scenarios.  Its above my pay grade, that's for sure.

 

wabuffo

 

I'm not going to pretend that I know much at all about this situation, but I feel like much of the long thesis here veers on the begging the question fallacy.

 

Imagine a scenario in which the GTX loses its lawsuit against Honeywell. Honeywell being left with a indemnification agreement claims against a hived-off liquidating trust with little to no assets while shareholders received a distribution? So basically GTX shareholders win no matter what? Why would a judge allow that?

 

 

[wabuffo]

Imagine a scenario in which the GTX loses its lawsuit against Honeywell. Honeywell being left with a indemnification agreement claims against a hived-off liquidating trust with little to no assets while shareholders received a distribution? So basically GTX shareholders win no matter what? Why would a judge allow that?

 

Good points.  But there are two legal issues - not one.

1) Was the indemnity agreement a legally acceptable and binding in the eyes of the Court?  Let's say yes to this.  GTX loses its suit and is still on the hook.

2) Who was the other party to the indemnity agreement with Honeywell?  There's no doubt on this - its ASASCO (Allied Signal Aerospace Systems CO).  Not GTX parent, Not GTI (US subsidiary).

 

https://www.sec.gov/Archives/edgar/data/1735707/000095012318006198/filename8.htm

This INDEMNIFICATION AND REIMBURSEMENT AGREEMENT (as may be amended, restated, supplemented or otherwise modified from time to time, this “Agreement”), dated [•], 2018, by and among (i) AlliedSignal Aerospace Service Corp., a corporation organized under the Laws of the State of Delaware (“Indemnitor”), (ii) Honeywell Asia Pacific Inc., a corporation organized under the Laws of the State of Delaware (“Indemnitee”), and (iii) Honeywell International Inc., a corporation organized under the Laws of the State of Delaware (“Honeywell” or the “Claim Manager” and, together with Indemnitee and Indemnitor, the “Parties” and each, a “Party”).

 

This was amended slightly as part of the Separation Agreements related to the Spin (this agreement used the final GTX corporate structure for the spin and tied the indemnity agreement to ASASCO Inc and ASASCO Inc 2):

https://www.sec.gov/Archives/edgar/data/1735707/000119312518273578/d626772dex21.htm

 

This separate sub strategy is embedded in the Stalking Horse Bid proposal that the BK Judge just accepted and allowed to go forward.  In it there's is a sales proceeds waterfall that lays out the sequence of how cash will flow through both subs and ultimately to the equity holders (who will hold an equity interest in a GTX Liquidating Trust after the 363 sale of the operating biz assets).  See Doc 282 (pp 161-175).

 

I think the only part Honeywell can object to is the valuation splits - in terms of how much of the net sales proceeds (after DIP and administrative claims) gets allocated to ASASCO vs how much gets allocated to GTI so as to maximize their liability claim in bankruptcy court. 

 

Just because you have a legal contract, doesn't prevent that contract from being rejected and/or turned into an unsecured claim in bankruptcy court.  And the value of that claim is subject to a waterfall recovery based on an absolute priority rule that the Court must follow.

 

But I'm not a lawyer so of course, I'm talking out my hat and could be wrong.

 

wabuffo

 

[Foreign Tuffett]

Imagine a scenario in which the GTX loses its lawsuit against Honeywell. Honeywell being left with a indemnification agreement claims against a hived-off liquidating trust with little to no assets while shareholders received a distribution? So basically GTX shareholders win no matter what? Why would a judge allow that?

 

Good points.  But there are two legal issues - not one.

1) Was the indemnity agreement a legally acceptable and binding in the eyes of the Court?  Let's say yes to this.  GTX loses its suit and is still on the hook.

2) Who was the other party to the indemnity agreement with Honeywell?  There's no doubt on this - its ASASCO (Allied Signal Aerospace Systems CO).  Not GTX parent, Not GTI (US subsidiary).

 

https://www.sec.gov/Archives/edgar/data/1735707/000095012318006198/filename8.htm

This INDEMNIFICATION AND REIMBURSEMENT AGREEMENT (as may be amended, restated, supplemented or otherwise modified from time to time, this “Agreement”), dated [•], 2018, by and among (i) AlliedSignal Aerospace Service Corp., a corporation organized under the Laws of the State of Delaware (“Indemnitor”), (ii) Honeywell Asia Pacific Inc., a corporation organized under the Laws of the State of Delaware (“Indemnitee”), and (iii) Honeywell International Inc., a corporation organized under the Laws of the State of Delaware (“Honeywell” or the “Claim Manager” and, together with Indemnitee and Indemnitor, the “Parties” and each, a “Party”).

 

This was amended slightly as part of the Separation Agreements related to the Spin (this agreement used the final GTX corporate structure for the spin and tied the indemnity agreement to ASASCO Inc and ASASCO Inc 2):

https://www.sec.gov/Archives/edgar/data/1735707/000119312518273578/d626772dex21.htm

 

This separate sub strategy is embedded in the Stalking Horse Bid proposal that the BK Judge just accepted and allowed to go forward.  In it there's is a sales proceeds waterfall that lays out the sequence of how cash will flow through both subs and ultimately to the equity holders (who will hold an equity interest in a GTX Liquidating Trust after the 363 sale of the operating biz assets).  See Doc 282 (pp 161-175).

 

I think the only part Honeywell can object to is the valuation splits - in terms of how much of the net sales proceeds (after DIP and administrative claims) gets allocated to ASASCO vs how much gets allocated to GTI so as to maximize their liability claim in bankruptcy court. 

 

Just because you have a legal contract, doesn't prevent that contract from being rejected and/or turned into an unsecured claim in bankruptcy court.  And the value of that claim is subject to a waterfall recovery based on an absolute priority rule that the Court must follow.

 

But I'm not a lawyer so of course, I'm talking out my hat and could be wrong.

 

wabuffo

 

Let's take off out amateur legal theorist hats and put on our common sense hats for a moment. ASASCO is a subsidiary of Garrett. There isn't any sense in talking about it like it is 'it's own thing' separate from Garrett.

 

I also continue to be confused about why shareholders should expect to get a recovery when the asbestos indemnification question (which everyone agrees is very important) is still unresolved. You are basically asking the BK judge to make a de facto judgement on the GTX-Honeywell litigation by allowing shareholders to step in front of Honeywell's claim.

 

[W51W52]

In terms of splitting the assets between ASASCO Subsidiaries and U.S. Acq. Subsidiaries, we can take a look at a few things to get to a tentative estimate.  First of all, United States + Other International (i.e. Brazil) sales run out of Garrett Transportation I Inc. (U.S. Acq. Subsidiaries), and that accounts for 15.8% of LTM sales.  Secondarily, based on the cash management motion (Docket 14), we know that every single dollar of sales out of Garrett, be it in Europe, Asia, or America, there is a 5% - 6% license of technology royalty paid to Garrett Transportation I Inc.  So at a minimum, I think at least 20% of the sales proceeds will be allocated to U.S. Acq. Subsidiaries.  One can argue that the loyalty revenue stream is worth more, so anywhere between 20% to 35% is within the realm of reason.  Honeywell would be the only party that fights against this allocation because the DIP, the Pre-petition Credit Facilities, and the Senior Subordinated Notes are all (presumably) getting paid in full, so they won't care where the money is coming from (Sr. Sub. Notes might argue for a make-whole, but that's small dollar amounts).

 

What's more nuanced, however, is the allocation of debt liabilities to the two different "boxes."  Now, we know that Garrett ASASCO Inc., the Indemnity and Tax Claim payor, itself is probably worthless (all it got are intercompany receivables and payables).  That is why in the documents for the initial KPS bid for $2.1 billion, this entity is excluded.  So, all of the value is at subsidiaries of ASASCO and GTI. The DIP and Prepetition Credit Facilities have secured liens and guarantees on all material subsidiaries of ASASCO and GTI.  The Senior Subordinated Notes have unsecured guarantees on all material subsidiaries of ASASCO and GTI.  Is it really fair, then, for the purposes of repaying the debt from an equitable perspective, to go after the subsidiary values of ASASCO first, and THEN the subsidiary values of GTI.  Or is it more fair and equitable to allocate the debt liabilities in a pro-rata fashion based on the allocation of the $2.6 billion.  So, say, GTI is allocated 20% of the $2.6 billion, then 20% of the DIP, the Pre-Petition Credit Facilities, and the Sr. Sub. Notes, should be allocated to GTI as well (with 80% allocated to ASASCO subsidiaries). 

 

From the looks of things (based on Docket 15 - Global Restructuring Term Sheet), it looks like the DIP and the Pre-Petition Credit Facilities will be allocated in a pro-rata fashion.  Otherwise, the "DIP Financing Claims" and the "Prepetition Credit Agreement Claims" would not show up as claims for both ASASCO Debtors and U.S. Debtors.  Now, the Company appears to be trying to to jam the Sr. Sub. Note by only allowing its claims against ASASCO Debtors, and forcing the release of Sr. Sub. Notes guarantees via Section 9.02 and 9.14 of the Inter-creditor Agreement.  This is maybe subject to change now that there's an improved bid (whereas the terms of the Restructuring Term Sheet were drafted under the $2.1 billion bid), but I'm not sure that the Sr. Sub. Noteholders would be on board with that.

 

Now, the counter-factual to all arguments against marshaling is one word: subrogation.  See below:

 

https://www.abi.org/abi-journal/marshaling-against-guarantors-not-a-fools-errand

 

If subrogation was in full effect, then the allocation of liabilities to the two boxes would be moot, and pretty much all value attributed to GTI would flow upstream to the GMI shareholders.  However, subrogation has always been hotly contested in bankruptcy court, and there have been numerous instances in the past where subrogation claims are equitably subordinated.  So, that'll will ultimately be up to the judge to decide.  Is it equitable to benefit common shareholders at the expense of an unsecured creditor at a subsidiary?  What if that unsecured creditor holds a claim that is subject to fraudulent conveyance / transfer dispute?  If GTI subrogation claims are allowed, should those claims follow the waterfall stipulated within the intercreditor agreement (i.e. senior to Honeywell Indemnity claims), or would they be pari passu with the Honeywell claims? 

 

So, overall, there are 3 toggles for shareholder recovery:

 

1) Auction process that increases the purchase price (I think anywhere between $2.6 billion to $3.2 billion is reasonable.  Garrett is an okay but not fantastic business.  It has slightly higher margins relative to BorgWarner, but it is expected massively under-invest in the business (CAPEX % of Revenue) next year, so I think 7.5x to 9x EV/2021E EBIT is reasonable). 

 

2) Allocation of proceeds to GTI/U.S. Debtors (see above, anywhere between 20% to 35% is reasonable)

 

3) Elimination of Honeywell Indemnity and Tax Claims via fraudulent conveyance/transfer. 

 

Now, #3 is hard to handicap because fraudulent conveyance cases in the past have always been loud on bark, puny on bite.  Here, I think Garrett has a reasonable case to say that the company was inadequately capitalized from inception (negative book value of $2.8 billion as of 06/30/18 PF), and the culprits are BOTH the indemnity/tax obligations, AND the size of debt to fund the dividend to Honeywell.  However, since this is a spin-off, it is going to be hard to argue that the original shareholders were "irrevocably" harmed by the spin-off.  You owned HON before, and you own HON + GTX after, so even if there is a massive transfer of value from GTX to HON, net net you are not harmed.  Now, Honeywell itself is acting like the indemnity and tax claims are subject to a huge haircut.  That's why the claims went from:

 

a) $175 million per year for 30 years ($5.25 billion, indemnity) + $240 million Tax Claim (less $278 million or so already paid to Honeywell for indemnity and tax from spin-off to Petition Date) = $1.341 billion on B/S as of 06/30/20

 

to

 

b) Docket 233: $275 million cash payment at emergence + $1.175 billion of Series B Preferred ($100 million per year from 2023 to 2033, and $75 million in 2034, can be called @ NPV using 7.25% discount rate) = $959 million PV as of 03/31/21

 

to

 

c) Docket 273: $684 million face of Series B Preferred + no cash payment at emergence

 

Honeywell is a ~$115 billion market value company.  If it wants to fight to the death on this, it definitely has the cash, time, and patience to do so.  It will argue for substantive consolidation (google that if you don't know what that is, it has a very high legal standard, and it will most likely will fail) and if that fails, as little allocation to GTI as possible.  The fact that it is willing to take a big haircut right off the bat and started to buy equities as a hedge is an indication of the strength of its hand.  Of course, REZI is another ticking time bomb for Honeywell since it was spun off with the same type of structure (indemnity + tax claims), but in this case REZI does have positive book value.  So Honeywell is a bit screwed either way.  Either a) Garrett is overly conservative in its NPV value of indemnity + tax claims, then the actual amount should be a lot less than the book value shown as of 06/30/20, but that still leaves Garrett Motion inadequately capitalized at spin off even at a reduced figure due to the size of the dividend alone or b) REZI is too aggressive in its NPV value of indemnity + tax claims, then it'd be two companies with fraudulent conveyance claims against Honeywell instead of one.  Either way, Honeywell will need to open the books as to its details of asbestos claim calculations, as well as why Honeywell felt comfortable levering Garrett at a higher Debt / EBITDA relative to Resideo at spin, and I don't think Honeywell would want to do that.   

 

Oaktree + Centerbridge tried to pull a fast one by submitting its proposal as superior to that of KPS.  But anybody can slap a multiple on historical EBITDA and call it a "better recovery to shareholders."  In this day and age, nothing is better than cold, hard cash.  So if Oaktree + Centerbridge thinks Garrett is worth $3.9 billion on an EV basis, put up the money or shut up.

 

Overall, given the 3 toggles, I still think the equity is cheap here as of right now.  However, as toggles #1 and #2 become etched in stone, I'd see where the stock trades then and size the position accordingly. 

 

 

       

[wabuffo]

Let's take off out amateur legal theorist hats and put on our common sense hats for a moment. ASASCO is a subsidiary of Garrett. There isn't any sense in talking about it like it is 'it's own thing' separate from Garrett.

 

This is not unusual.  In any bankruptcy - there are debtor and non-debtor subsidiaries within the same holdco and Courts accept that.  But being skeptical about all this is the right mind-set.

 

You are basically asking the BK judge to make a de facto judgement on the GTX-Honeywell litigation by allowing shareholders to step in front of Honeywell's claim.

Honeywell seems to have forgotten rule no 1 in negotiations - "never negotiate against yourself".

 

To wit:

1) they joined the Oaktree consortium where they were willing to take cash and a preferred at a valuation just slightly below where they had marked the receivable on their own balance sheet.

2) then the Oaktree consortium fails, and in a disclosure on Friday night, they very publicly write down the value of their receivable from $1.3b to $1b.

3) they also allow their consortium partners to file a document contrasting the proposal by KPS with a scenario that places a 75% haircut to their receivable as a possible scenario.

4) this week they buy the common of the company with which they are in a lawsuit.

 

Does that sound like a defendant confident in their legal position?

 

wabuffo

[wabuffo]

Great post W51W52.

 

wabuffo

[Foreign Tuffett]

Let's take off out amateur legal theorist hats and put on our common sense hats for a moment. ASASCO is a subsidiary of Garrett. There isn't any sense in talking about it like it is 'it's own thing' separate from Garrett.

 

This is not unusual.  In any bankruptcy - there are debtor and non-debtor subsidiaries within the same holdco and Courts accept that.  But being skeptical about all this is the right mind-set.

 

You are basically asking the BK judge to make a de facto judgement on the GTX-Honeywell litigation by allowing shareholders to step in front of Honeywell's claim.

Honeywell seems to have forgotten rule no 1 in negotiations - "never negotiate against yourself".

 

To wit:

1) they joined the Oaktree consortium where they were willing to take cash and a preferred at a valuation just slightly below where they had marked the receivable on their own balance sheet.

2) then the Oaktree consortium fails, and in a disclosure on Friday night, they very publicly write down the value of their receivable from $1.3b to $1b.

3) they also allow their consortium partners to file a document contrasting the proposal by KPS with a scenario that places a 75% haircut to their receivable as a possible scenario.

4) this week they buy the common of the company with which they are in a lawsuit.

 

Does that sound like a defendant confident in their legal position?

 

wabuffo

 

Those are good points, and not things I was even aware of. You and W51W52 have clearly done much, much more work on this idea than the < 1 hour of time I've spent on it.

 

Best of luck with this idea. I will be on the sidelines, as this type of thing (high profile distressed equity) really just isn't in my wheelhouse.

[hasilp89]

Great post W51W52.

 

wabuffo

 

Ditto, very informative.

[writser]

Great post W51W52.

 

wabuffo

 

Indeed.

[Xerxes]

hey guys, silly question:

 

i own like few shares of this company. Very low dollar amount on a small position that i had on Honeywell, which i long sold.

the dollar value is really immaterial.

 

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.