March 9, 2021 – The Debtors filed a further Third Amended Chapter 11 Plan and a related Disclosure Statement, with each attaching blacklines showing changes to the versions filed on February 15, 2021 [Docket Nos. 993 and 994, respectively].
March 10th has long loomed large on the Debtors' calendar, with the Debtors set to face off against their deeply unhappy official committee of equity security holders (the "Equity Committee"), but that has changed dramatically overnight with the Equity Committee now signing up to the Debtors' Plan Support Agreement and withdrawing their objections ("The resolution between the parties resolves the Equity Committee’s objections to the Plan, Disclosure Statement and PSA/BCA Motion, as well as the Equity Committee’s Exclusivity Termination Motion and proposed plan of reorganization"). The breakthrough moment follows Court-ordered mediation overseen by Judge Sean Lane and the amended Plan documents reflect a global consensual resolution that has turned the March 10th hearing from a moment of reckoning into an oft-delayed hearing on the adequacy of the Debtors' Disclosure Statement.
Much of the amended language in the Plan documents relates to the consensual resolution, which is summed up as follows: "Following certain discussions among the Debtors and other parties-in-interest with respect to Plan issues following the February 16 Hearing, the Debtors, the Equity Committee, the COH Group and certain additional parties agreed to proceed with court-approved mediation and on February 23, 2021, the Court entered the Order Establishing Terms for Plan Mediation [D.I. 954], under which Judge Sean H. Lane was appointed mediator.Through the mediation, the Debtors, the Equity Committee, the COH Group, and the additional parties to the mediation, with Judge Lane’s assistance as the mediator, reached a consensual resolution regarding certain aspects of the Plan, and on March 9, 2021, the Plan Support Agreement was subsequently amended and restated to provide for, among other things:
(i) a direct equity investment of $668.8 million by Centerbridge and Oaktree to purchase Convertible Series A Preferred Stock,
(ii) enlarged rights offerings in an aggregate amount of $632 million (including the Backstop Allocation), consisting of the 1145 Rights Offerings and the Accredited Investor Rights Offering subject to the terms of the Equity Backstop Commitment Agreement, the Rights Offering Procedures, and the Plan Support Agreementand fully backstopped by the Equity Backstop Parties in exchange for the Backstop Allocation, with up to $270 million of such Rights Offerings available to Holders of Existing Common Stock other than members of the COH Group, and
(iii) an increase of the conversion price to common stock of the Convertible Series A Preferred Stock from $3.50 to $5.25.
On an as converted basis and accounting for the increase in an aggregate amount of Series A Preferred Stock, holders of Series A Preferred Stock will represent 76.5% of the total common equity of reorganized Garrett as compared to 82.5% of the total common equity of reorganized Garrett under the prior COH Plan. The increased conversion price results in a 5.9% reduction in dilution to existing common equity holders on an as converted basis assuming no shareholder exercises its Cash-Out Option.
Assuming no shareholder exercises its Cash-Out Option and each shareholder participates fully in the Rights Offering, the COH Group in the aggregate will hold 236,917,221 shares of reorganized Garrett on an as converted basis, representing 73.2% of the total common equity of reorganized Garrett on an as converted basis.The resolution between the parties resolves the Equity Committee’s objections to the Plan, Disclosure Statement and PSA/BCA Motion, as well as the Equity Committee’s Exclusivity Termination Motion and proposed plan of reorganization."
The Debtors have filed an 8-K covering the developments, with that filing attaching (i) the Second Amended and Restated Plan Support Agreement and (ii) the Replacement Equity Backstop Commitment Agreement, each dated as of March 9, 2021.
Summary of the Plan
The revised Disclosure Statement [Docket No. 994] now reads: “The principal features of the Plan are set forth in the Plan Support Agreement (as amended, the ‘Plan Support Agreement’) among Centerbridge Partners, L.P. (‘Centerbridge’), Oaktree Capital Management, L.P. (‘Oaktree’), Honeywell International Inc. (‘Honeywell’), certain shareholders represented by Jones Day (the ‘Additional Investors,’ and collectively, the ‘COH Group’), certain senior noteholders (the ‘Consenting Noteholders’), who collectively hold more than 88% of the Senior Notes and 58% of GMI’s Common Stock, and certain senior secured lenders, who collectively hold no less than 47% of the outstanding loans under the Senior Credit Facilities. The Debtors entered into the Plan Support Agreement to maximize the value of the Debtors’ estates following the Debtors’ extensive auction process and after hard fought, arm’s-length negotiations among the parties thereto. The Plan and Plan Support Agreement, as further described in this Disclosure Statement, provide for the following restructuring transactions:
- the infusion of significant debt and equity commitments to support the Debtors’ go forward operations and payments under the Plan as follows:
- committed direct equity investments by Centerbridge and Oaktree in the amount of $668.8 million in the aggregate to purchase Convertible Series A Preferred Stock from the Reorganized Debtors;
- rights offerings for an aggregate amount of $632 million of Convertible Series A Preferred Stock (including the Backstop Allocation, as defined below), available to Holders of Existing Common Stock subject to the terms of the Plan Support Agreement and the Rights Offering Procedures (as defined below), which is fully backstopped by the Equity Backstop Parties, and of which approximately $270 million is available to Holders of Existing Common Stock who are not Plan Sponsors, Honeywell or an Equity Backstop Party; and
- committed debt financing of $1.55 billion;
- payment in full in cash, plus accrued and unpaid interest at the non-default contractual rate, plus additional interest of 1.00% per annum on all outstanding principal and other overdue amounts under the Prepetition Credit Agreement from the Petition Date to the Effective Date for Holders of Prepetition Credit Agreement Claims (such additional interest estimated to be approximately $9 million);
- payment in full in cash, plus accrued and unpaid interest in cash at the non-default contractual rate through the Effective Date plus $15 million in cash in resolution of claims related to the Applicable Premium, for Holders of Senior Subordinated Noteholder Claims;
- payment in full in cash for all other secured and unsecured creditors, except Honeywell, who has agreed to its treatment;
- a global settlement with Honeywell, who will receive on the Effective Date $375 million in cash and Series B Preferred Stock issued by the Reorganized Debtors pursuant to which the Reorganized Debtors will pay Honeywell a total of $834.8 million in the aggregate through 2030, subject to the various put and call rights set forth therein (the ‘Honeywell Settlement’); and
- Holders of Existing Common Stock will have the option to receive a number of shares of GMI Common Stock equal to the number of shares of Existing Common Stock held by each such Holder and each such Holder’s Pro Rata share of the Subscription Rights or, at such Holder’s election (unless such stockholder is a party to the Plan Support Agreement), receive cash in the amount of $6.25 per share in exchange for cancellation of their shares.
The consensual global resolution of Honeywell’s claims against the Debtors, and treatment thereof, is an integral, non-severable component of the Plan. Honeywell contractually agreed through the Plan Support Agreement to convert its claims into preferred equity at a significant discount to the amount at which Honeywell believes its claims are worth. Honeywell also has agreed to forgo having special governance rights on account of its Series B Preferred Stock and to limit its representation on the Company’s seven-member (or larger, with Honeywell consent) board to a single director. Honeywell’s agreement to accept the foregoing treatment and remain in the Debtors’ capital structure on these terms, however, is predicated on Centerbridge and Oaktree serving as the Plan Sponsors, including their investment in, and associated control of, the Reorganized Debtors as contemplated by the Plan Support Agreement. Centerbridge and Oaktree have committed to invest a significant amount of new equity capital in the Reorganized Debtors in the form of Convertible Series A Preferred Stock and, through this investment, they will have the right to nominate a majority of the members to the New Board. Honeywell’s willingness to settle its claims and remain in the capital structure is based, in significant part, on its trust and confidence in the Plan Sponsors and the members of the New Board to act as exemplary corporate stewards in guiding the direction of the Debtors’ business post-emergence. Accordingly, the Honeywell Settlement is not ‘portable’ to any alternative plans.
Honeywell’s agreement to the proposed treatment of its claims facilitates and crystallizes recoveries for Holders of Existing Common Stock by providing such Holders with a substantial, minimum cash recovery option without the threat that Honeywell’s claims could significantly reduce or eliminate recoveries to common stockholders. The Debtors determined in their business judgment that the Honeywell Settlement incorporated into the Plan is in the best interests of their estates based upon (a) the relative merits of each parties’ respective litigation positions, (b) the time and cost required to continue litigation against Honeywell, (c) the possibility that continued litigation could result in one or more adverse rulings, (d) potential confirmation litigation around the treatment of Honeywell’s claims in any alternative plan, and (e) all other facts and circumstances in the Chapter 11 Cases, including the likelihood of generating stakeholder support for, or executing on, any alternative transaction. Further, the Debtors and the board of directors of each of GMI, Debtor Garrett ASASCO Inc. (‘ASASCO’), and Garrett Motion Holdings Inc. (‘GMHI’) have determined that the Plan Support Agreement and the Honeywell Settlement incorporated therein (including the size of the Honeywell Plan Claims and their treatment under the Plan), are fair, equitable, and reasonable. Resolving Honeywell’s claims and all related litigation also removes a material impediment to confirmation of the Plan and allows the Debtors to expeditiously move the Chapter 11 Cases to completion with the support of a majority of their stakeholders.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
- Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
- Class 3 (“Secured Tax Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
- Class 4 (“Prepetition Credit Agreement Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,466,710,090 and expected recovery is 100%. Each Holder of an Allowed Prepetition Credit Agreement Claim shall receive on the Effective Date payment in Cash in an amount equal to such Holder’s Allowed Prepetition Credit Agreement Claims.
- Class 5 (“Senior Subordinated Noteholder Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is €350.0mn and the estimated recovery is 100%. Estimated Allowed Claims represent aggregate outstanding principal, and do not include any interest, fees or expenses constituting such Allowed Claims.
- Class 6 (“Honeywell Plan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A. Honeywell shall receive: (a) a payment of $375.0mn in Cash on the Effective Date (which payment shall be allocated first to the Allowed Honeywell Plan Claims arising from the Tax Matters Agreement up to the full amount owing under that agreement) and (b) the Series B Preferred Stock issued on the Effective Date. Honeywell’s estimated recovery under the Equity Committee Plan estimated as $958.7mn, reflecting $375.0mn of cash and the payment to Honeywell by New GMI in a hypothetical exercise of the Series B Preferred Stock call option as of the Effective Date. Such recovery may not reflect actual market value of the Series B Preferred Stock.
- Class 7 (“General Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
- Class 8 (“Intercompany Claims”) is impaired/unimpaired, presumed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
- Class 9 (“Intercompany Interests”) is impaired/unimpaired, presumed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
- Class 10 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
- Class 11 (“Existing Common Stock”) is impaired and entitled to vote on the Plan. Each Holder of Existing Common Stock shall receive (a) its Pro Rata share (determined with respect to all Holders of Existing Common Stock) of the Subscription Rights and (b) either (i) a number of shares of GMI Common Stock equal to the number of shares of Existing Common Stock held by such Holder, or (ii) if such Holder of Existing Common Stock timely exercises its Cash Out Option, its Cash-Out Consideration, provided, however, that any Holder of Existing Common Stock that timely exercises its Cash-Out Option may not exercise its Subscription Rights, and any delivery of a Subscription Form or any consideration will be deemed null and void and not accepted (and such consideration promptly returned to the Holder of Existing Common Stock).
Prior to the amendments, the proposed treatment for Class 11 was as follows:
Each Holder of Existing Common Stock shall receive (a) (i) a number of shares of GMI Common Stock equal to the number of shares of Existing Common Stock held by such Holder, and (ii) its Pro Rata share (determined with respect to all Holders of Interests in Class 11) of the Subscription Rights or (b) if such Holder of Existing Common Stock timely exercises its Cash-Out Option, its Cash-Out Consideration; providedthat only those Holders of Existing Common Stock who vote to accept the Plan are eligible to exercise the Cash-Out Option.
Proposed Key Dates:
- Voting Deadline: April 12, 2021
- Confirmation Objection Deadline: April 13, 2021
- Confirmation Hearing: April 21, 2021
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