Garrett Motion Inc (GMI) has set a record for having the highest number of shareholder groups that the Debtwire team can recall having seen in any other case. First off is GMI’s ad hoc group of fund shareholders, which updated its holdings in a Bankruptcy Rule 2019 statement filed late on 10 November, disclosing that the four-member group led by GAMCO Asset Management (Gabelli) holds 2.4% of GMI’s common stock. GAMCO holds close to half of the group’s total equity stake.
Three other shareholder groups include: (i) the Ad Hoc Committee of Equityholders, which consists of Owl Creek Asset Management, Warlander Asset Management and Jefferies, and is represented by Proskauer Rose; (ii) the shareholder group represented by Jones Day, which holds a 39% stake in GMI and is led by Cyrus Capital Partners; and (iii) the shareholder group represented by Kasowitz Benson Torres. And not to split hairs, but arguably, one could go so far as to say that a fifth ad hoc shareholder group exists if we include the ad hoc group represented by Milbank, which consists of Centerbridge Partners and Oaktree Capital Management who, in addition to holding 15% of the senior secured 5.125% notes due 2026, hold 9% of GMI’s common stock – almost 7% more than the fund shareholders group.
Neither Proskauer nor Kasowitz has filed a statement required by Bankruptcy Rule 2019, and therefore we do not know the number of shares that either group holds. Before defecting from the Jones Day group, Owl Creek and Warlander each disclosed ownership of 1% of GMI’s common stock. Also, according to a letter to the US Trustee requesting the appointment of an official equity committee that Kasowitz filed on 23 October, the Kasowitz group members included, as of that date: (i) Cetus Capital; (ii) Cohanzick Management; (ii) 507 Capital; (iii) Juris Partners; (iv) Gary Ribe and (v) Eric Furey.
These four, arguably five, equity groups have been advocating their interests from the outset of the case, sometimes attacking each other in the process. This is in addition to two other creditor groups; one of lenders and another of bondholders. Some harmony may have been achieved, however, now that Oaktree and Centerbridge—which the Proskauer group characterized as “new money investors” whose interests thereby diverge from other shareholders—have teamed up with Honeywell International to ask Judge Michael Wiles of the US Bankruptcy Court for the Southern District of New York to modify GMI’s exclusivity period, which is the first 120 days of the case and, during which, GMI has the exclusive right to file a Chapter 11 plan. Specifically, the Honeywell/Oaktree/Centerbridge group have asked Judge Wiles for permission to file, within GMI’s exclusivity period, a competing plan whereby Honeywell, Oaktree and Centerbridge would acquire GMI’s equity for USD 1.15bn and settle claims with Honeywell for USD 1.175bn in cash plus preferred stock to go to Honeywell through 2034. Under GMI’s proposed restructuring, on the other hand, stalking horse bidder KPS Capital Partners would acquire GMI for USD 2.6bn and the proceeds would be distributed pursuant to a waterfall that would fully repay, in cash, holders of claims under the senior credit facilities.
Whereas GMI’s restructuring proposal is supported by an ad hoc first lien lender group that controls 61% of the aggregate principal amount of loans outstanding under the prepetition senior creditor facilities, according to the Honeywell group, its restructuring transaction is supported by approximately 87% of the debtors’ 5.125% senior notes and about 54% of the debtors’ common equity. The ad hoc first lien lender group also provided the USD 200m debtor-in-possession financing.
GMI’s case serves as an example of how not all Chapter 11 cases are driven by secured and unsecured creditors and new money investors. Not only does GMI have a record number of equity groups, GMI’s shareholders and other stakeholders (i.e., Oaktree, Centerbridge and Honeywell) can be credited, in large part, with driving up KPS Capital’s bid for the company to USD 2.6bn from USD 2.1bn. The shareholders involved here are no strangers to making waves in Chapter 11 cases. For example, in the Chapter 11 case of Sears, Cyrus Capital bought USD 82m in notes from the debtor during the bankruptcy case and was heavily involved in negotiations to provide junior DIP financing, and, as a creditor of Toys’ R’ Us, led a bondholder group’s effort to acquire key non-US assets via the Chapter 11 process and sought to acquire other European assets via a bid on Toys’ French subsidiary. In addition, Warlander was a member of the official equity committee appointed in the 2016 case of Ultra Petroleum, a case that also had meaningful recovery prospects for equity holders, and Centerbridge made news in Speedcast International’s Chapter 11 case regarding its battle over the company with Black Diamond Capital Management.
In terms of GMI’s equity valuation, projected equity recoveries between the plans proposed by the Honeywell group and GMI are highly variable. As outlined in our Debtwire recovery analysis, under GMI’s plan, all excess proceeds under the USD 2.6bn KPS stalking horse bid that remain after payment of secured and unsecured claims would pool to equity holders. The recovery under GMI’s plan therefore is highly dependent on how the litigation against Honeywell goes, but we estimate shareholders under the KPS-based plan could receive between USD 0.69/share and USD 10.16/share. The KPS bid also provides existing equity holders to the right to co-invest up to USD 350m. Assuming maximum participation, this would give existing shareholders approximately 24% of the equity in the publicly listed reorganized entity.
The rival plan proposed by Oaktree, Centerbridge and Honeywell lacks the litigation risk of the first plan but could also leave equity holders heavily diluted. This plan proposes to reinstate equity but also issues new USD 1.15bn series A preferred shares, which are perpetual, pay a 12% dividend and are convertible into common stock at USD 3.50/share. The plan sponsors and other new money investors would fund USD 1.05bn, while the remaining USD 100m would be provided via a rights offering to existing shareholders. The recovery for shareholders outside of the new money group may be considerably less than what they would receive under GMI’s KPS-based plan due to dilution. However, the rival plan does resolve the Honeywell litigation upfront and therefore offers a faster and more predictable path through Chapter 11.
GMI’s stock has ranged between over USD 10/share at the start of the year to a low of USD 1.30/share in September. The equity currently trades at USD 4.17/share, which is a 29% gain since 23 October when the bid procedures for KPS were approved.
GMI commenced its bankruptcy case on 20 September, citing both the COVID-19 pandemic and a highly levered capital structure put in place as part of its spinoff from Honeywell International in 2018 as the primary drivers of the filing. Prior to its bankruptcy filing, Garrett commenced litigation against Honeywell seeking a ruling that its obligations under an indemnification agreement between the parties were unenforceable and a recovery of certain payments Garrett made to Honeywell thereunder. As previewed by the Debtwire legal analyst team, Garrett will attempt to reject the indemnification agreement in its bankruptcy case.
Debtwire’s 2019 Holdings Report (in Excel)
Debtwire Dockets: Garrett Motion, Inc
Debtwire Restructuring Database: Garrett Motion, Inc (access required)