Garrett Motion files for Chapter 11 protection amid ‘stalking horse’ bid

December 2020 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

December 2020 Issue

With a heavy debt burden due to the COVID-19 pandemic and an ongoing dispute with former parent Honeywell International Inc over asbestos liabilities, auto-parts supplier Garrett Motion Inc has filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Southern District of New York.

The company, based in Rolle, Switzerland, has also entered a $2.1bn ‘stalking horse’ agreement with KPS Capital Partners with respect to a potential purchase of its business. The stalking horse agreement would imply that any other bids that come in must be higher than the offer made by KPS. The agreement is subject to court approval, among other customary conditions.

The company anticipates emerging from Chapter 11 and completing the sale process in early 2021. Upon closing of the transaction, Garrett will operate as a private company. Throughout the reorganisation process, Garrett expects to operate without interruption.

In its bankruptcy filing, the company listed both assets and liabilities in the range of $1bn and $10bn. Garrett designs, manufactures and sells turbocharger, electric-boosting and connected vehicle technologies for original equipment manufacturers and the aftermarket. The company was formed in October 2018, as a spin-off of the transportation systems business of Honeywell.

“Although the fundamentals of our business are strong and we have continued to try to develop our business strategy, the financial strains of the heavy debt load and liabilities we inherited in the spin-off from Honeywell – all exacerbated by COVID-19 – have created a significant long-term burden on our business,” said Olivier Rabiller, president and chief executive of Garrett.

“This proposed transaction will provide a capital structure and institutional support to ensure our long-term viability and set the foundation for the next phase of Garrett’s growth. Our goal is to emerge from this process in early 2021 with a strengthened financial position, new and supportive ownership, and renewed energy and resources to continue to provide exceptional service to our customers, be a strong and reliable partner to our suppliers and other stakeholders, and act as a stable and desirable employer. I look forward to continuing to work with Garrett’s talented team and serving our customers with our advanced technologies.”

Garrett has sought court approval for a $250m debtor-in-possession (DIP) financing facility, however this initial proposition was criticised by the company’s shareholders and Honeywell, in part because it contained deadlines that could rush the potential sale to KPS. Though the deal had the support from holders of 61 percent of its outstanding senior secured debt, it did not include a plan to resolve the asbestos liabilities, which sit behind other forms of debt in line for repayment.

Honeywell objected to the KPS deal, as it would relieve Garrett of its responsibility for the asbestos payments, and Garrett had agreed to consider a rival financing deal submitted by Oaktree and Centerbridge.

On 29 September, a class action lawsuit was filed against Garret on behalf of investors that purchased Garret securities between 1 October 2018 and 18 September 2020. The lawsuit alleges that the company made materially false or misleading statements and failed to disclose a number of key details about the company’s balance sheet risks.

The most egregious claims, according to shareholders, were that the company failed to disclose to investors that the company had taken on a significant and unsustainable level of debt due to its agreement to reimburse Honeywell for certain asbestos-related liabilities.

On 26 August 2020, the company disclosed: “Garrett's leveraged capital structure poses significant challenges to its overall strategic and financial flexibility and may impair its ability to gain or hold market share in the highly competitive automotive supply market, thereby putting Garrett at a meaningful disadvantage relative to its peers.” On the release of this news, the company’s share price fell significantly, causing economic harm to investors.

Richard Summerfield