UPDATE 1: Garrett Motion Maintains $3.1B Enterprise Valuation, Files Financial Projections, Liquidation Analysis in Amended Disclosure Statement

UPDATE 1: 10:37 p.m. ET 1/27/2021: The Garrett Motion debtors filed an amended disclosure statement tonight which attaches a valuation analysis reiterating a $3.1 billion enterprise value, financial projections and a liquidation analysis. The valuation analysis notes that the $3.1 billion enterprise value implied by the plan’s common stock cash-out option “is within both” the valuation ranges calculated “solely for purposes of the disclosure statement” by Morgan Stanley and Perella Weinberg, the debtors’ investment bankers. As of Dec. 14, 2020, assuming a March 31, 2021 effective date, Morgan Stanley estimated enterprise value at $2.5 billion to $3.3 billion, and Perella Weinberg, at $2.6 billion to $3.6 billion.

Financial Projections

The financial projections now attached to the DS as appendix D include the following income statement, summary cash flow statement and balance sheet:

 

 

Liquidation Analysis

The DS now includes a liquidation analysis and the following summary supporting the debtors’ view that the plan satisfies the best interests of creditors test:

 

 

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Original Story 3:53 a.m. UTC on Jan. 25, 2021

Garrett Files Plan Based on COH Group PSA; Plan Provides for Sale of $1.2B in Series A Preferred Stock, $1.5B Exit Financing and $1.2B Honeywell Settlement

Relevant Documents:
Amended Plan
Disclosure Statement
PSA/Backstop Motion

The Garrett Motion debtors filed an amended plan and disclosure statement late Friday, Jan. 22 in furtherance of their Jan. 11 plan support agreement with Oaktree, Centerbridge, Honeywell International, a group of shareholders represented by Jones Day and the ad hoc group of senior noteholders. The debtors also filed a motion to authorize entry into the PSA and a rights offering backstop agreement with the COH group.

Under the PSA, plan and backstop agreement, members of the COH group would purchase approximately $1.05 billion in convertible series A preferred stock ($690.8 million for Centerbridge and Oaktree as plan sponsors and $360 million for the remaining members of the PSA group). The group would also backstop a $200 million rights offering of additional series A preferred stock for existing shareholders that choose not to cash out their shares, in exchange for $25 million in expense reimbursement. The debtors would further procure $1.5 billion in exit financing.

Senior lenders, noteholders and all unsecured creditors except Honeywell would be paid in full (including a disputed $15 million make whole premium for noteholders). Honeywell would receive $375 million in cash on the effective date and series B preferred stock entitling it to an additional $834.8 million in payments through 2030 (subject to the debtors’ right to redeem the preferred shares at a 7.25% discount to present value) to settle approximately $1.95 billion in disputed indemnification and tax claims.

Existing shareholders would have the option to exchange their shares for common stock in the reorganized debtors and participate in the $200 million series A rights offering, or cash out at $6.25 per share.

Counsel for the debtors has indicated that the COH group proposal reflects an enterprise value of between $3 billion and $3.1 billion. The debtors’ original plan, filed Jan. 8, contemplated a sale of the majority of reorganized equity to stalking horse bidder KPS Capital at a plan valuation of $2.9 billion, with a $250 million reorganized equity rights offering for existing shareholders. Under the KPS plan, Honeywell would have received different treatment depending on the estimation of its claim after a February trial, which has now been stayed pending consideration of the COH group plan.

The disclosure statement asserts that the Honeywell settlement is an “integral and nonseverable component” of the COH group recapitalization, and is not “portable” to any other restructuring. This appears to be directed at any potential alternative plan proposed by the official equity committee, which has attacked the COH group PSA and has indicated it is pursuing its own standalone plan.

In addition to seeking approval of the $25 million reimbursement for the COH group as part of the backstop agreement, by the PSA motion the debtors seek approval of the “no shop” provisions of the PSA, which contain a fiduciary out for the debtors to accept unsolicited alternative offers. The equity committee has suggested that management breached its fiduciary duties by agreeing to the no-shop provisions. According to the debtors, however, the no-shop provisions are appropriate because the debtors “have more than adequately canvassed the market and there is no need at this point to continue to solicit bids for alternative transactions.”

The disclosure statement does not include a valuation analysis, financial projections or liquidation analysis.

A hearing on approval of the disclosure statement, the $25 million backstop expense reimbursement for the COH group and the no-shop provisions is set for Feb. 16 at 11 a.m. ET.

The disclosure statement includes the following confirmation timeline:

• Plan objection deadline: March 24 at 8 p.m. ET;


• Balloting deadline: March 24 at 8 p.m. ET; and


• Confirmation hearing: April 6 at 10 a.m. ET.

Plan and Disclosure Statement

Treatment of Claims and Interests

The disclosure statement includes the following table summarizing the classification, impairment status and voting rights of each class of creditors and shareholders under the plan:

 

The plan sets forth the following treatment for holders of allowed claims and interests:

• Class 1 - Other secured claims: Unimpaired, deemed to accept.
  
  
  
  • Treatment: Each holder of an allowed other secured claim would receive, at the option of the plan sponsors, payment in full in cash, delivery of the collateral securing its allowed other secured claim and payment of any required interest, reinstatement or such other treatment rendering its claim unimpaired.
  
  
  
  


• Class 2 - Other priority claims: Unimpaired, deemed to accept.
  
  
  
  • Treatment: Each holder of an allowed other priority claim would receive payment in full in cash or such other treatment rendering its allowed other priority claim unimpaired.
  
  
  
  


• Class 3 - Secured tax claims: Unimpaired, deemed to accept.
  
  
  
  • Treatment: Each Holder of an allowed secured tax claim would receive, at the option of the plan sponsors, either payment in full in cash or equal semi-annual cash payments commencing on the effective date and continuing for five years in an aggregate amount equal to such allowed secured tax claim plus interest at the applicable rate under non-bankruptcy law.
  
  
  
  


• Class 4 - Prepetition credit agreement claims: Impaired, entitled to vote.
  
  
  
  • Treatment: Each holder of an allowed prepetition credit agreement claim would receive on the effective date payment in cash in an amount equal to such holder’s allowed prepetition credit agreement claims.
  
  
  • The disclosure statement notes that “Prepetition Credit Agreement Claims are classified as ‘impaired’ under the Plan, and votes on the Plan are being solicited from Holders of Claims in Class 4 (Prepetition Credit Agreement Claims), in accordance with the terms of” the debtors’ original Sept. 20 restructuring support agreement with senior lenders.
  
  
  • If the Sept. 20 RSA is terminated, the disclosure statement notes, the debtors “reserve the right, subject to and in accordance with the terms of the Plan Support Agreement and the proposed treatment of Prepetition Credit Agreement Claims provided therein, to seek to classify the Prepetition Credit Agreement Claims as ‘unimpaired,’ not entitled to vote, and presumed to accept the Plan.”
  
  
  
  


• Class 5 - Senior subordinated noteholder claims: Impaired or unimpaired, entitled to vote.
  
  
  
  • Treatment: Each holder of an allowed senior subordinated noteholder claim would receive on the effective date payment in cash in an amount equal to such holder’s allowed senior subordinated noteholder claim.
  
  
  • The disclosure statement provides that under the plan, noteholders would receive $15 million on account of their make whole premium claims.
  
  
  • The disclosure statement notes that subordinated noteholder claims would be “conditionally solicited” in accordance with the terms of the debtors’ Sept. 20 RSA.
  
  
  
  


• Class 6 - Honeywell plan claims: Impaired, entitled to vote.
  
  
  
  • Treatment: Honeywell would receive: (a) a payment of $375 million in cash on the effective date and (b) new Series B preferred stock, which would provide for payments to Honeywell in the amounts and at the times set forth in the following schedule from the PSA:
  
  
  
  

 

 

• Under the PSA, if the reorganized debtors’ annual adjusted EBITDA on a consolidated basis falls below $425 million in any year, the annual amortization payment for that year would be deferred and paid in equal installments over the subsequent two years following the payment year of such deferred payment, in addition to any amortization payments arising during such following years.


• The amortization would be callable by the reorganized debtors at any time with a lump sum payment calculated as the present value of the remaining amortization payments discounted at 7.25%.


• If the reorganized debtors’ adjusted EBITDA on a consolidated basis for the prior 12 months reaches $600 million for two consecutive quarters, a change of control occurs, the reorganized debtors or the new board asserts in writing that any portion of the Series B preferred stock is invalid or unenforceable, indebtedness outstanding under the credit facilities is accelerated, or the reorganized debtors or any of their material subsidiaries files for bankruptcy or similar creditor protection, then in each case Honeywell would have the right to cause the reorganized debtors to pay all of the remaining amortization upon written notice at an amount equal to the call price.

• Class 7 - General unsecured claims: Unimpaired, deemed to accept.
  
  
  
  • Treatment: Each holder of an unsecured claim would receive, at the option of the plan sponsors, reinstatement of such allowed claim, payment in full in cash or such other treatment rendering such general unsecured claim unimpaired.
  
  
  
  


• Class 8 - Intercompany claims: Impaired or unimpaired, deemed to accept or reject.
  
  
  
  • Treatment: Each allowed intercompany claim would be either reinstated or canceled, as reasonably agreed between the debtors, Honeywell, the plan sponsors and the requisite additional investors, and released without any distribution.
  
  
  
  


• Class 9 - Intercompany interests: Impaired or unimpaired, deemed to accept or reject.
  
  
  
  • Treatment: Each allowed intercompany interest would be either reinstated or canceled, as reasonably agreed between the debtors, Honeywell, the plan sponsors and the requisite additional investors, and released without any distribution.
  
  
  
  


• Class 10 - Section 510(b) claims: Impaired, deemed to reject.
  
  
  
  • Treatment: Each Holder of an allowed section 510(b) claim, if any, would be entitled to receive a pro rata share of the aggregate cash payments received or recoverable from any insurance policies covering such claims and, solely to the extent that such payments are less than the amount of its allowed 510(b) claim, such treatment that is consistent with section 1129 of the Bankruptcy Code and otherwise acceptable to the debtors and the commitment parties in accordance with their consent rights under the PSA.
  
  
  
  


• Class 11 - Existing common stock: Impaired, entitled to vote.
  
  
  
  • Treatment: Each holder of equity interests in Garrett would have the option to elect to either (i) retain its equity interest in reorganized Garrett via issuance of new reorganized equity and participate in the rights offering for new series A preferred shares or (ii) receive the cash-out consideration under the cash-out option (but the holder may only choose the cash-out option if it votes to accept the plan). The failure to make an election to receive the cash-out consideration would result in the holder retaining its equity interest in the reorganized debtors. The cash-out consideration is $6.25 per share.
  
  
  
  

The estimated allowed amount of claims in each class and estimated recovery for each class remain bracketed in the disclosure statement.

Series A Preferred Stock

Under the plan term sheet incorporated in the PSA, the debtors would issue $1.2508 billion in convertible Series A preferred stock, with $1.05 billion for the COH group and $200 million for existing shareholders that elect to keep their shares and participate in the rights offering rather than cash out. The plan term sheet includes the following allocation of the Series A preferred stock:

The plan sponsors and additional investors (members of the group of majority shareholders represented by Jones Day) also agree to backstop the rights offering. The plan sponsors would backstop 63.6% of the $200 million rights offering with the additional investors backstopping the remaining 36.4%.

Under the PSA, the debtors would pay an 11% dividend on the Series A preferred stock quarterly in cash or PIK at the debtors’ election, except that dividends would be paid in kind during any period in which adjusted EBITDA falls below $425 million. Holders of Series A preferred stock would also participate in any common stock dividends on an as-converted basis.

Series A preferred stock would be convertible into common stock at each holders’ election at a price of $3.50 per share with a $1 per share liquidation preference no earlier than two years after the effective date. Series A preferred stock would be automatically converted into common stock with the approval of a majority of holders or “on the first date on or after the date that is two years from the Effective Date on which (A) $125 million or less of Amortization remains outstanding on the Series B Preferred Stock; (B) the common stock of reorganized Garrett has a 75-day volume-weighted average price per share that is greater than or equal to 150% of the Conversion Price; and (C) the Reorganized Debtors’ Adjusted EBITDA on a consolidated basis equals or exceeds $600 million for two (2) consecutive quarters (on an LTM basis).”

The Series A preferred stock would have a liquidation preference of $1 per share and would be entitled to vote as a class of common stockholders. The Series A preferred stock would also bear a 3x EBITDA financial covenant.

Cash Out Option

The disclosure statement notes the COH plan proposal gives stockholders who are not parties to the PSA the option to tender their shares for $6.25 per share in cash. Put differently, the debtors say, the COH group is offering through the plan proposal group to acquire all the stock held by shareholders who are not participating in reorganized Garrett Motion through the reinstatement of their shares at an equity valuation of $475 million, based on the option to receive $6.25 per share and approximately 76 million outstanding shares.

The disclosure statement describes the analysis of the $6.25 per share cash out option as “critical” for stockholders to understand in the context of evaluating the Honeywell settlement (discussed below) because, from the perspective of stockholders who are not participants in the COH group plan proposal, such stockholders are being offered consideration approximating what they would have received if the transaction that otherwise provided the highest value for the debtors’ assets had been accepted and consummated following the auction process and, in addition, Honeywell’s claims had been reduced from the filed amount of approximately $1.9 billion to approximately $730 million via the estimation proceeding.

Honeywell Settlement

The debtors note that they conducted “significant document discovery and expert analysis in connection with the litigation over Honeywell’s claims.” One critical factor in determining the allowable amount of the Honeywell claims, the debtors note, is the appropriate discount rate to apply to payments that may be due from the debtors over the 30-year life of the existing Honeywell indemnity agreement. According to the disclosure statement, contemporaneous discount rates from rating agencies, investment banks, analysts and other parties involved in the 2018 spinoff of the debtors from Honeywell applied discount rates to the company and/or the indemnity obligations ranging from 7% to 15.5%. Honeywell asserts that a discount (if any) should be at the low end of this range, while the debtors contend it should be between 11% and 13%.

According to the debtors, applying the debtors’ 11% to 13% range to Honeywell’s nearly $2 billion claims would reduce Honeywell’s allowable claim to approximately $1 billion to $1.07 billion, without crediting any of the debtors’ other state-law defenses. If the debtors could further reduce the claims by 30% to 36%, it would result in an allowable claim for Honeywell of $731 million. Although the debtors note that they believe such a reduction may be achievable through litigation, they acknowledge that litigation is inherently unpredictable and creates significant risks of loss, appeals, continued costs, and potential delays.

Thus, the debtors say, they believe that the Honeywell settlement value implied for those stockholders who are not participating in the COH group plan proposal is fair, reasonable, and in the best interest of the estate.

In addition, the debtors note that they considered numerous other factors relating to the Honeywell settlement, including:

• The voluntary agreement of Honeywell to finance a substantial portion of its recovery in the form of junior preferred stock that is subordinated, free of covenants, appropriate in amount for the company’s size, and repayable at the company’s option at any time without penalty;


• The risks, costs and expenses of continued litigation between the company and Honeywell;


• The nature and merits of the company’s affirmative causes of action against Honeywell;


• The absence of compelling evidence that ASASCO or the company were insolvent at the time of the 2018 spinoff;


• The specific entities to whom Honeywell has recourse on its claims;


• Evidence as to the substantially increased value of the ASASCO debtors resulting from the auction process and the work of the ASASCO and GMHI transaction committees as to the allocation of value between ASASCO and GMHI and the resolution of intercompany claims; and


• The risks to the company of a prolonged chapter 11 case and the costs avoided by prompt emergence.

The disclosure statement adds that the Honeywell settlement “is an integral and nonseverable component of the Final COH Group Plan Proposal and the Plan Support Agreement, and is not assignable, transferrable, or portable to any other chapter 11 plans.”

Pension Obligations

The Pension Benefit Guaranty Corp., or PBGC, has asserted that each of the debtors is either a contributing sponsor of the Garrett Motion Inc. pension plan or a member of the contributing sponsor’s controlled group and thus jointly and severally liable for all obligations of the pension plan. According to the disclosure statement, the PBGC filed proofs of claim against the debtors for underfunded benefit liabilities, the unliquidated unpaid minimum funding contributions owed to the pension plan and the pension plan’s insurance premiums owed to the PBGC.

The plan provides that on the effective date, the reorganized debtors would be deemed to have assumed the pension plan and would be required to comply with all applicable statutory provisions. In the event that the pension plan were terminated after the plan effective date, the plan indicates, the reorganized debtors would be responsible for the liabilities related to the pension plan.

Other Provisions

The plan includes typical release and exculpation provisions in favor of the debtors, the PSA parties, prepetition lenders, DIP lenders, the official committees and their respective representatives. The debtors would also exchange mutual releases with Honeywell as contemplated by the plan settlement.

Under the plan term sheet, the initial board of the reorganized debtors would have seven members, comprising two nominated by Centerbridge, two by Oaktree, one by the additional investors holding Series A preferred stock and one by Honeywell as holder of Series B preferred stock plus one executive.