Garrett creditors slam equity committee’s attempt to terminate exclusivity

By Sarah Lizee

Olympia, Wash., Feb. 9 – Garrett Motion Inc.’s official committee of unsecured creditors objected to the official committee of equity securities holders’ motion to terminate the company’s exclusive periods to file and solicit votes on a Chapter 11 plan, according to a Tuesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

The creditors committee said the debtors’ plan has the support of all major stakeholders, except for the minority equity holders represented by the equity committee, which instead support a stand-alone plan.

“While the debtors’ plan has support throughout the capital structure and positions the debtors for a quick emergence from Chapter 11, the equity committee plan will require months of protracted and expensive litigation,” the creditors committee said.

“This will delay confirmation and emergence, all at the expense of creditors.”

The debtors’ plan is premised on a settlement with Honeywell in which Honeywell has agreed to discount the amount of its asserted claim, and to accept satisfaction of that claim through a mix of cash and preferred stock in the reorganized company.

“While not clear, the equity committee plan seems to assume that the equity committee can cherry-pick the allowed claim amount for Honeywell from the settlement embodied in the debtor plan, and then force Honeywell to plug that amount into its capital structure and plan,” the creditor group said.

The equity committee states that its plan proposal provides Honeywell with the same cash and equity securities that it would be receiving under the debtors’ plan and argues that the recovery is therefore the “exact same treatment,” but the creditors committee claims this is not the case.

“Honeywell has been clear that it does not support the equity committee plan and will not agree to settle its claim in return for preferred stock in the equity committee’s reorganized debtor,” the creditors committee said.

“Moreover, the equity committee cannot even settle Honeywell’s claim through its plan.”

As a result, if the equity committee plan is approved, there would be no settlement with Honeywell and its claims will have to be litigated, the creditors committee said.

Equity committee’s plan

As previously reported, the official committee of equity securities holders filed its exclusivity termination motion on Jan. 26.

The group had said the debtors’ plan needlessly transfers $1.1 billion of value away from thousands of shareholders owning 42% of the company to a handful of hedge funds – members of the Centerbridge, Oaktree and Honeywell group (the COH group) – that own a slim majority.

The committee said its stand-alone plan is 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.

The group said the plan equals or exceeds the treatment afforded to all creditors in the COH plan, including the proposed settlement with Honeywell. However, the committee said the stand-alone plan substantially eliminates the massive dilution to existing shareholders proposed by the COH plan, which could transfer as much as $1.1 billion of value from existing 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,” the group said.

“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 shareholders that participate in the preferred stock via a rights offering, the equity committee said.

“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,” the group added.

Rolle, Switzerland-based Garrett Motion is a provider of passenger vehicle, commercial vehicle, aftermarket replacement and performance enhancement solutions. The company filed for Chapter 11 bankruptcy on Sept. 20, 2020 under case number 20-12212.

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