Register, or Login to view the article
January 26, 2021 – The Debtors' Official Committee of Equity Securities Holders (the “Equity Committee”) has filed a motion requesting termination of the Debtors’ Plan exclusivity periods so that they could be in position to file a competing Plan.
On January 22, 2021, the Debtors filed an Amended Chapter 11 Plan which abruptly shifted from a Plan centered around a $2.9bn sale to KPS Capital Partners ("KPS") to a Plan that embraces a proposal from a consortium of stockholders led by Centerbridge Partners and Oaktree Capital (and with Honeywell Inc, the "COH Group") and that reorganizes the Debtors through a series of transactions that includes a settlement with former parent company Honeywell Inc (the "Honeywell Settlement"). Under the COH Group Plan all creditors, other than the Debtors' former parent Honeywell, are to be made whole, with even equity holders receiving a recovery.
Far from being indicative of a generous Plan, however, the Equity Committee argues, that the equity recovery is grossly inadequate, siphoning off $1.1bn of value from smaller shareholders not otherwise members of the COH Group to those hedge funds that are. The very fact of an equity recovery, the Equity Committee pushes further, is a sign that the Debtors were never insolvent in the first place and that the Debtors' management have failed demonstrably as to their fiduciary duties (as they have reliably done from the outset; the adoption of the COH Group Plan "but the latest in a series of baffling and value destructive decisions that the Debtors have made throughout the Chapter 11 Cases"), first by filing for bankruptcy and then by botching everything that came thereafter, including by rejecting a superior offer from KPS (with the result that in place of that superior $2.9bn offer, the Debtors have own-goaled their way to the obligation to pay KPS an $84 million break-up fee, a figure representing 20% of the Debtors' current market cap) and then abruptly joining the COH group in what the Equity Committee argues is an inexplicable and unholy alliance.
How, the Equity Committee wonders aloud, did the Debtors go from a Plan that was filed in order to settle litigation with its former parent Honeywell and which was centered on a $2.1bn sale to KPS (a Petition date agreement which came with what others considered a bid-chilling break-up fee, rising to $84.0mn as the KPS bid rose from $2.1bn to $2.9bn)…to embrace what they had previously described as "a ‘coercive,’ ‘sweetheart’ deal with a subset of the GMI shareholders, handing them the voting power and residual economic value of GMI, and settling Honeywell’s claims without any judicial determination concerning their merit?"
To back up assertions made throughout the auction process that they stood willing to step in with "a stand-alone plan if it presented a higher and better value to the Debtors’ estates than the proposal declared to be the winner at the conclusion of the auction," the Equity Committee is now offering a competing Plan which they insist leaves each stakeholder group, including Honeywell, in an at least as advantageous a position; with the Debtors and their shareholders doing demonstrably better. That deal, the "Stand-Alone Plan" is, the Equity Committee states, "backstopped by $800 million of non-convertible, redeemable preferred stock financing committed by Atlantic Park and up to $1.85 billion of senior secured financing offered by major financial institutions on a ‘highly confident’ basis – is far superior to the COH Plan adopted by the Debtors."
The Equity Commitee's motion reads: “The Equity Committee seeks to terminate exclusivity because the Debtors’ plan needlessly transfers $1.1 billion of value away from thousands of shareholders owning 42% of GMI (many of which are small, retail investors) to a handful of hedge funds – members of the COH Group – that own a slim majority. The Debtors’ purported justification for this value-destructive path is a settlement with Honeywell that the Debtors vehemently opposed since the outset of the Chapter 11 Cases. The Debtors do not have a coherent explanation for their abrupt abandonment of the Honeywell litigation, which was their primary rationale for filing Chapter 11 in the first instance. Now, with the Debtors’ imprimatur, the COH Plan exploits the COH Group’s settlement with Honeywell by siphoning value away from the minority shareholders through a highly dilutive preferred stock offering and by blocking better plan alternatives in the process because the Honeywell settlement is purportedly exclusive to them.
While settlement is a laudable goal, it should not come at the price of massive and clearly unnecessary shareholder dilution. This is the precise scenario that the Equity Committee has sought to avoid. Since its formation, the Equity Committee has worked tirelessly to find the optimal solution to maximize value for all GMI shareholders by largely eliminating the dilution in the proposals made to the Debtors. The Equity Committee, which was formed in November of 2020, participated actively in the auction process, but informed the Debtors that it would continue to pursue a stand-alone plan if it presented a higher and better value to the Debtors’ estates than the proposal declared to be the winner at the conclusion of the auction. The Equity Committee’s stand-alone plan proposal (the ‘Stand-Alone Plan’) does exactly that.
The Stand-Alone Plan – backstopped by $800 million of non-convertible, redeemable preferred stock financing committed by Atlantic Park and up to $1.85 billion of senior secured financing offered by major financial institutions on a ‘highly confident’ basis – is far superior to the COH Plan adopted by the Debtors. The Stand-Alone Plan equals or exceeds the treatment afforded to all creditors in the COH Plan, including the proposed settlement with Honeywell. However, the Stand-Alone Plan substantially eliminates the massive dilution to existing GMI shareholders proposed by the COH Plan, which could transfer as much as $1.1 billion of value from existing GMI shareholders to the sponsors of the COH Plan. The COH Plan offers GMI shareholders the right to participate in only a $200 million rights offering of the $1.25 billion in preferred stock (the remaining $1.05 billion is reserved solely for the COH Group), which will in turn convert into 82.5% of the reorganized common stock. In other words, the COH Group members can buy up to 93.3% of this highly dilutive convertible preferred stock, but the 42% of shareholders outside the COH Group can only buy 6.7%. By contrast, because the preferred stock backstopped by Atlantic Park is not convertible into common stock, the only potential dilution it would cause would be through at-the-money warrants offered to Atlantic Park and all qualified GMI shareholders that participate in the preferred stock via a rights offering. Other than a 25% minimum participation by Atlantic Park, the remaining amount of this preferred stock would be available to all GMI shareholders on a pro rata basis. Thus, it is significantly less dilutive than the COH preferred stock and far more democratic and fair. Using the COH Group’s own valuation at emergence, the Stand-Alone Plan would provide GMI shareholders with net distributable value of $1.1 billion, while the COH Plan would offer GMI shareholders only $562 million of net distributable value on a fully diluted basis."
The motion continues, “The Debtors are still committed to the COH Plan despite the clear and obvious benefits of the Stand-Alone Plan, and even though it enjoys the support of substantially all GMI shareholders who are not participating in the COH Plan. None of the Debtors’ purported justifications for supporting the COH Plan over the Stand-Alone Plan hold water.
First, the Debtors expressed doubt whether the Equity Committee could secure equity financing and senior debt financing for the Stand-Alone Plan. Those misgivings have now been dispelled.
Second, the Debtors touted the Honeywell settlement embedded in the COH Plan as providing clarity and avoiding expensive litigation. The Stand-Alone Plan, however, prescribes the exact same treatment for Honeywell and accomplishes the very same thing.
Third, the Debtors expressed concerns over the amount of first-lien exit financing envisioned by the Stand-Alone Plan. Yet the Debtors are supporting a plan that has a debt and preferred equity annual service cost that is, on average, $15 to $20 million higher than the Stand-Alone Plan due to its significantly higher quantum of more expensive junior capital.
In short, the Debtors’ rejection of the Stand-Alone Plan is not a reasonable exercise of business judgment. Nor can the Debtors exploit Honeywell’s contractual support of the COH Plan to argue that the COH Plan is superior to any alternative. The Stand-Alone Plan provides Honeywell with the exact same treatment, and its contractual support of the COH Plan is a ruse to foreclose alternatives, not because other parties cannot create the exact same value proposition. Indeed, the Equity Committee expects that a fair and objective assessment of Honeywell’s concerns should render it neutral between the plans, as it receives the same economic treatment under either plan. Furthermore, the Equity Committee stands ready to work with Honeywell to ensure proper post-reorganization governance is established to ensure the full payment of Honeywell’s claims and maximize shareholder value for all shareholders – goals that are inextricably linked and completely symbiotic – and thus do not require a massive transfer of value from minority shareholders to a hand-picked few. As the Court has recently observed, ‘it would be an interesting conundrum for Honeywell if somebody else proposed a plan that had the exact settlement terms . . . as to Honeywell but different terms as to other people as to how exactly Honeywell would explain that that was improper.’
The Debtors’ support of the COH Plan is but the latest in a series of baffling and value destructive decisions that the Debtors have made throughout the Chapter 11 Cases.
First, the Debtors filed bankruptcy for a solvent company, supposedly on the basis that their obligations to Honeywell must be limited through litigation, and commenced an estimation proceeding that the Debtors described as a ‘gating’ issue that ‘is mandatory under the Bankruptcy Code.’ Now, over four months later, and after incurring over $300 million of projected fees and expenses, the Debtors have abandoned this ‘gating’ issue to pursue what is at best a modest reduction in the Honeywell claim.
Second, the Debtors vociferously opposed the COH Group’s proposal since the beginning of the Chapter 11 Cases, describing it as a ‘coercive,’ ‘sweetheart’ deal with a subset of the GMI shareholders, handing them the voting power and residual economic value of GMI, and settling Honeywell’s claims without any judicial determination concerning their merit. The Debtors spent months pursuing an auction process to frustrate the COH Group’s proposal, only to immediately overturn the results of that auction – and the selection of KPS’s far superior bid – to embrace the barely modified COH Group proposal.
Third, the Debtors agreed at the outset of the Chapter 11 Cases to an $84 million breakup fee, which the Debtors argued was ‘necessary to preserve the value of estate assets,’ to secure the KPS $2.1 billion stalking horse bid. The Debtors now acknowledge that that bid was far from a sufficient price for the Debtors’ assets, having rejected an improved $2.9 billion bid from KPS. That demonstrably wasteful break-up fee will come out of shareholders’ recoveries and represents nearly 20% of the current market capitalization of the Debtors – an enormous transfer of value away from shareholders.
Fourth, the Debtors exhibited lack of reasonable business judgment during the course of the auction, most egregiously in their support of the COH Group’s proposal even though it was significantly worse than the KPS Bid and the OWJ Group Bid, both of which included unfettered ‘go-shop’ provisions that expressly allowed the Equity Committee to continue exploring a superior plan. Notably, KPS improved its bid from $2.6 billion (which at the time, the Debtors declared to be the highest and best, including over the COH Group’s proposal) to $2.9 billion – an increase in absolute value of $300 million, which would have inured directly to the benefit of shareholders. By contrast, the COH Group made only minor enhancements to its original proposal, offering a cash-out option to shareholders of $6.25 per share, which materially undervalues the company and is nominally lower than the value of its original proposal where it claimed the value to shareholders was $6.28 per share. The only other ‘improvement’ the COH Group offered in its revised final proposal was an increase in the rights offering from $100 million to $200 million for all shareholders (including the insider shareholders in the COH Group) who do not exercise the cash-out option, which does not translate into significant value since no more than 42% of it is available to shareholders outside the COH Group. Moreover, the incremental cash raised through the increased rights offering is given directly to Honeywell through a higher upfront cash payment on emergence…
The Debtors have thus abdicated their fiduciary duties to their shareholders – the true party in interest in these solvent Chapter 11 Cases – at every critical juncture.
While terminating exclusivity will not prejudice the Debtors, maintaining exclusivity will cause GMI shareholders potentially irreparable harm. If the Debtors are correct that the COH Plan is superior, unconflicted shareholders will support it and the Court will confirm it despite the competition from the Stand-Alone Plan. But denying this motion could make that a fait accompli because the Equity Committee may never have the opportunity to solicit the StandAlone Plan. While the Equity Committee does not believe that the COH Plan is confirmable given the disparate treatment it affords to existing GMI shareholders, there is no guarantee that, in the absence of alternatives that have been presented to and reviewed by all shareholders, the Court will not confirm the COH Plan despite the Stand-Alone Plan’s superiority. Second, if the Equity Committee awaited the outcome of the confirmation hearing on the COH Plan, it could forfeit its ability to propose a plan to cram down Honeywell in the event that it does not vote in favor of the Stand-Alone Plan. The RSA negotiated by the Debtors requires the Debtors’ secured lenders to vote in favor of any plan that provides for payment of principal and simple interest (they have waived default interest), provided that the disclosure statement for such a plan is approved on or before February 22, 2021. The Equity Committee intends to meet this deadline (assuming it is not extended) with the Court’s assistance to retain the senior lenders as an impaired accepting class. There is no guarantee that the senior lenders will agree to waive their default interest – which would result in savings of $0.23 per share (assuming emergence on April 30, 2021) – and support the Stand-Alone Plan if the Equity Committee does not meet existing RSA deadlines. Against long odds and without the tools afforded to the Debtors, the Equity Committee has found the best alternative for the estates and shareholders. The only thing standing in the way is the Debtors’ plan exclusivity. Exclusivity is intended to be a shield to allow the Debtors adequate time to formulate and advance a plan, not a sword to prevent superior alternatives. Because exclusivity should not be used to stifle a value-maximizing plan, the Court should terminate it now.”
About the Debtors
According to the Debtors: “Garrett Motion is a differentiated technology leader, serving customers worldwide for more than 65 years with passenger vehicle, commercial vehicle, aftermarket replacement and performance enhancement solutions. Garrett’s cutting-edge technology enables vehicles to become safer, and more connected, efficient and environmentally friendly. Our portfolio of turbocharging, electric boosting and automotive software solutions empowers the transportation industry to redefine and further advance motion.”
Read more Bankruptcy News