Garrett Motion entered bankruptcy last year, and is now on the cusp of coming out of it. The company filed an amended plan of reorganization last week that has the support of all major parties. The part of the plan that was strongly contested was the rights offering for convertible preferred shares that will shore up the balance sheet of the company. The COH group that owns 47% of all outstanding shares tried to keep this mostly to themselves, and only after some good work of the equity committee of unaffiliated shareholders the plan got adjusted to share the pie (a bit) more equally.

However, the COH group has pulled out all the stops in creating a structure in which unsuspecting shareholders lose their rights without getting anything in return. If you own Garrett Motion shares as of the record date you are eligible to participate in the rights offering, or tender your shares for $6.25/share in cash. The record date is today, so in order to be eligible for this you would have needed to buy the shares two days ago.

So to repeat: if you buy today, you are not getting anything besides the shares. You cannot tender them for $6.25/share and you will not be able to participate in the rights offering. But the tricky part is, if you sell today, you will also not be able to do that. According to the plan:

The 1145 Subscription Rights are not detachable or transferable separately from the Existing Common Stock held by 1145 Eligible Holders (the “1145 Eligible Shares”), other than those held by Equity Backstop Parties in accordance with the Equity Backstop Commitment Agreement or those held by Honeywell3, Centerbridge4 or Oaktree5 in accordance with the Plan Support Agreement. Rather, such 1145 Subscription Rights will trade together with the underlying 1145 Eligible Shares and be evidenced by the underlying 1145 Eligible Shares, until the Subscription Expiration Deadline.

The only way to keep your rights is to keep your stock till the expiration deadline. Everybody who sells today is throwing away these rights and giving them away to the COH group because they provide the backstop for the rights offering (and there are no oversubscription rights). If you don’t want the rights, you can just tender your shares for $6.25 at the end of the month. Selling your shares for less today is foolish, but nevertheless, the stock traded as low as $4.50/share just a few hours ago. Remember, nothing on the blog is investment advice. But really, do not sell your shares if you already owned them on the record date. In a rational world not a single share of this stock should trade between the record date and the expiration date. But we don’t live in that world, and of course, it does trade….

An additional complication is that the rights offering is for a part only for accredited investors. There are the “1145 subscription rights” that give every shareholder the opportunity to subscribe for one preferred share for every existing common share held as of the record date. Accredited investors have an additional opportunity to subscribe for 0.448951 shares for every existing share. It sounds like some law made it impossible for the company to offer more shares to regular investors, but at the same time, it is a very convenient feature for the group that is very motivated to get as much as the preferreds as they can get their hands on.

Disclosure

Author is long Garrett Motion