At the end of a continued hearing this afternoon Judge Michael Wiles approved $84 million in potential breakup fees and expense reimbursement to lock in the $2.6 billion
stalking horse bid of KPS Capital for the Garrett Motion debtors’ assets. The judge overruled the
objections of
alternative plan sponsors, the official committee of unsecured creditors and a newly formed shareholder group that earlier today
requested the appointment of an official equity committee.
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On Oct. 21, Judge Wiles deferred ruling on the stalking horse protections and
instructed the debtors to discuss the alternative plan with sponsors
Centerbridge, Oaktree,
Honeywell International and the
shareholder group represented by Jones Day. Andrew Dietderich of Sullivan & Cromwell, counsel for the debtors, told the judge today that after discussions with the sponsors and further deliberations, the debtors’ board concluded that the KPS bid “would be the winning bid” if an auction were held today and elected to continue supporting the stalking horse protections. After hearing further argument, the judge concluded that the board exercised reasonable business judgment in determining not to risk KPS walking away from its bid if the stalking horse protections were not approved by the Oct. 25 deadline.
The dollar amount of the stalking horse protections is large, Judge Wiles noted, but there is no evidence that “it is not worth it” to lock in a “floor” for a competitive bidding process. Further, the judge found, there was no support for the proposition that the stalking horse protections would impede a competitive process. “It’s beneficial to everybody that the competition continue, and I see no reason to believe the competition would end if I approve the protections,” the judge added. Today’s live blog of the hearing can be viewed
HERE.
Dietderich outlined several objections to the alternative plan that the sponsors would not compromise in discussions, including the “no shop” provision in the alternative plan proposal, the Honeywell indemnification claim settlement, the payment of a $15 million makewhole premium to bondholders, the absence of a cap on advisory fees for the sponsors, the absence of a pro rata equity rights offering for all shareholders and the distribution of preferred shares, instead of common stock, to the “new money” sponsors and Honeywell.
Andrew Leblanc of Milbank, counsel for Centerbridge and Oaktree, told the judge that the sponsors felt a lack of “meaningful engagement” from the debtors on their proposal. The debtors did not seem to be willing to move forward on their offer, Leblanc said, but instead sought to make an evidentiary record to support their decision at today’s hearing. Dietderich disagreed with Leblanc’s characterization of the discussions.
Judge Wiles said that there are aspects of the alternative proposal that are “very attractive,” but “there are problems too.” The judge noted that those who support the alternative plan - Centerbridge, Oaktree, Honeywell, the Jones Day group and
bondholders - “are in large part those who would benefit from it.” The judge seemed particularly troubled by the lack of an equity rights offering open to all shareholders. “Why can’t shareholders share pro rata in the full amount of the preferred stock?” the judge asked Leblanc. The sponsors who are funding the plan, Leblanc responded, are not prepared to make that economic concession.
Bruce Bennett of Jones Day, counsel for the alternative plan shareholder group, in turn argued that shareholder recoveries under the KPS sale plan are entirely contingent on the results of the Honeywell litigation. “That is a terrible outcome for this case,” Bennett said. “What the debtors are asking is to spend $84 million to create a platform for more litigation.”
Brian Pfeiffer of White & Case, counsel for the UCC, argued that the judge should adjourn the hearing and hold another evidentiary hearing next week to go through the merits of each offer. “We aren’t necessarily picking sides here,” Pfeiffer said, but “if you asked us right now, it looks to us like the alternative plan is the higher bid.” Nevertheless, Pfeiffer added, approval of the stalking horse protections “is too big of a decision to be made based on ‘on the fly’ judgments.”
Newcomer Andrew Glenn of Kasowitz, representing the shareholder group that requested an official equity committee, also supported a continuance. “There’s still an ongoing auction for the stalking horse position here,” Glenn said, “and until the bidders are exhausted, an adjournment would be appropriate.”
The judge, however, felt that a continuance would risk the loss of the KPS bid after Sunday’s deadline. “What if KPS walks away?” the judge asked Glenn. “We do want a competitive process,” Glenn responded.