The curious case of the Garrett Motion rights offering

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….

Garrett Motion Inc price graph

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

55 thoughts on “The curious case of the Garrett Motion rights offering

  1. RC

    2 days or 2 business days? I picked up additional shares 12 March (Friday). Didn’t occur to me that I may not be able to tender them or participate in the rights offering. The 8k had only just come out.
    Do you have any thoughts on rights vs tender for non-U.S. holders?

    Reply
    1. Alpha Vulture Post author

      Two business days. Unfortunately I believe you will not be able to tender or participate in the rights offering with the shares you bought on Friday.

      I don’t think there are major differences if you are a US or non-US holder, unless you are from a country that is regularly excluded from corporate actions (read: Japan, Australia, New Zealand etc). With those you never know. And as a foreign investor getting accredited investor status might be a little bit more difficult (will have to see how that works out myself as well!).

      Reply
      1. Alpha Vulture Post author

        But perhaps you will be lucky with your purchases. Gabelli is apparently already arguing in court that the March 15 record date should be the date on which you are still eligible to purchase the shares and participate in the rights offering, not the date the trade needs to be settled.

        See: http://www.kccllc.net/garrettmotion/document/2012212210315000000000012

        Given that the judge has shown a willingness to protect the shareholders unaffiliated with the COH group he might just agree with Gabelli.

        Reply
          1. Scott

            Hey RC, did you end up receiving rights for these shares? Long story, but my broker made a clerical error and is using the record data and T+2 settlement as a technical out for themselves.

      2. Mike

        Hi there, I don’ think there is anything that need to tender. The right gives the option to subscribe to the pref stocks or cash out your underlying at $6.25.

        Timeframe to subscribe March 19 to April 2021. (as per 8-k).

        Reply
          1. Mike

            Yes. During the time frame (Mar-19 to Apr 16), one could tender (i.e. exercise the Cash-Out option) to receive $6.25 OR exercise right to subscribe to the prefs stocks. If I understand it probably.

            The conversion price on the prefs stock is $5.25 into the underlying ?

            Would you know if one were to exercise the rights to subscribe to the prefs, is there an exercise price to pay to do that ?

        1. Mike

          Thank you.

          So once I exercise my rights to subscribe to the pref shares, my (old-BK) common shares will be swapped into the pref shares.?

          And when I were then to exercise the pref shares, I will be swapped (converted) into the (new post-BK) common shares at $5.25 / share ?

          Reply
      3. Greg

        Any thots on foreign shareholder getting accredited investor status as per Investor Questionnaire (as part of the subscription form) ?

        Do we need to present all the items from (A) to (C) to be qualified as Accredited Investor or just the net worth (assets) requirement (A) is sufficient for foreign shareholder?

        Reply
    1. Andrew Glenn

      You do not get $6.25. You only get the right to keep your common stock, subject to dilution by the preferred stock issued under the rights offering.

      Reply
  2. george ball

    Can you help me? owned gtxmq before the deadline. trying to understand what will get assuming do not tender for $6.25. Am accredited investor. Do i have the opportunity to end up with 1.44 shares of the cvt.pfd for each share i own now? Looks to be as if that is (not legally, but directionally)designed to get to a $7.50 value if the assumption above is correct. Has anyone tried to look at the possible price/value/worth of the common going forward.
    fwiw, am chairman of sanders morris harris, a pvt.investment/merchant bank in Hou. would be appreciative of any guidance. got into this as more or less accidental risk arb intellectual interest investment.
    My phone is 713-250-4280 in case you’d be willing to talk. Thanks.

    Reply
    1. Alpha Vulture Post author

      I cannot offer investment advice for obvious reasons, but realize that you will need to pay approximately $7.50 to get those 1.44 of preferred shares. What you pay for them is of course not necessarily what they are worth.

      Reply
      1. RC

        Can someone confirm they yield 11%? I don’t usually get this deep in the weeds. From 8k:
        “Series A Preferred Stock: $1,301M of Series A Preferred Stock is assumed. Projections include cash coupon payments of 11%, which flow through the Cash Flow Statement and are assumed to be non-tax-deductible. No Series A conversion is assumed over the projection period.”

        Reply
        1. David Seen

          They don’t make it easy! You want to check out the “Restructuring Term Sheet” (Exhibit A in the link below) and underneath the heading “General Provisions Regarding The Restructuring” they cover the specifics of the Convertible Series A Preferred Stock.

          But, if you don’t want to go through that, the short answer is yes- 11% dividend. But its possible it could change if the term sheet is amended before April.16

          https://www.sec.gov/Archives/edgar/data/1735707/000119312521075463/d115224dex101.htm

          Reply
    2. David Seen

      Hey George, after reading EXHIBIT H-1 of the Disclosure Statement (Court Docket #1019), that is my understanding as well. Accredited investors are eligible to receive for each common stock owned: 1 subscription right in the 1145 Rights Offering and .44 of a subscription right in the Accredited Investor Rights Offering.

      Cowen calculated the implied total equity value under this plan at $2.482b (last page Court Docket #726), which would come out to roughly $7.40- $7.70 per share after the 76.5% dilution. I think this estimate is on the more conservative side, because they used BorgWarner’s 2017-2019 average enterprise value multiple of 6.54 and currently it’s closer to 8.5.

      Reply
  3. Avi

    Hey all

    Do you know when the rights offering is happening and by what date we need to exercise? Want to ensure I don’t miss out (I realise the eligibility date has passed, that isn’t a concern, I was holding and still hold those shares).

    Thanks

    Reply
      1. Heon

        I have not participated any proxy voting or claimed proof of claim against the debtor.
        Am I still eligible for subscription for offered shares? I called my broker and they do not have much information yet.

        Reply
        1. Alpha Vulture Post author

          You will have to ask them for the subscription form. Also note that they will require additional documentation as well such as a form W8/W9 (and if applicable documentation supporting that you are an accredited investor).

          Reply
  4. Patrick Irish

    I am a part of this headache too and am an accredited investor. I got these options from my broker

    Option 1 – Take no action
    Option 2 – Backstop Parties: Participate in the 1145 rights offering
    Option 3 – Non-Backstop Parties: Participate in the 1145 rights offering
    Option 4 – Backstop Parties: Participate in the Accredited Investor Rights Offering
    Option 5 – Non-Backstop Parties: Participate in the Accredited Investor Rights Offering
    Option 6 – Cash Out Option: receive 6.25 USD per share, holders participating in this option cannot participate in the rights offering and must submit all shares owned for the cash out (see Beneficial Holder Ballot)

    I know you can’t give any financial advice so do you know the difference between Options 3 and Option 5? I’m pretty sure I’m not a backstop party (or can I be? would someone want to be if they had spare cash?) putting Option 2 and 4 out of reach.

    Or can I actually do both Option 3 AND Option 5? All of these preferred and rights are very confusing which I’m sure is the point. Thanks for any help in figuring this out.

    Reply
    1. Alpha Vulture Post author

      If you go for option 5 you can also participate in the non accredited rights offering (would actually make no sense to do 5, but not subscribe for the 1145 shares).

      Reply
      1. Patrick Irish

        Thanks and apologize my confusion in this. So if I go option 5 and lets say I have 10,000 shares, I have 10,000 rights and can subscribe for
        10,000 + (10,000 * 0.448915) = 14,489 shares of the 1145 stock?

        Do I have that right or am I missing something? Thanks again for the help here.

        Reply
        1. Alpha Vulture Post author

          That’s the amount of preferred shares you can buy. 10000 of those will be 1145 preferred shares and the rest will be accredited investor shares (not identical because they have additional transfer restrictions).

          Reply
          1. Patrick Irish

            Thanks for the help here. Now I get the fun of figuring out if I register everything in my corporate brokerage account or do I fill out the W9 as an individual since its an S corp. I’m sure some calls to GTX agent or my broker will help me figure out the forms but what a pain.

            Again, really appreciate your article and help in the comments. Take care.

  5. Wen

    On March 30,2021 plan

    There are now 9 options
    In basic terms what is the difference between
    Option 1 & Option 2?
    Holders accept the plan versus
    the Holders reject the plan?
    Thank you
    Wen

    Reply
  6. Shane

    Does anyone know about implications of doing the Accredited Investor shares within an IRA account?

    The Subscription form indicates that the AI shares must be held and maintained by the New GMI registrar. I have to give a name under which they will be held.

    Trying to get in touch with IBKR and Fidelity for information on how to deal with this.

    Reply
      1. Bill

        I submitted 2k shares in an IRA at IB last week via the accredited offering, and 2897 rights are already showing (along with language that says “restricted: new contract”)

        Reply
    1. Alpha Vulture Post author

      There are some proforma numbers in the bankruptcy docket.

      Will be something like $3 Billion in debt (including the $1.3 billion of pref A’s and $580 million of pref B’s). Number of shares will jump from 76 million to 323 million (assuming full conversion of the pref A’s).

      Reply
  7. iddelz

    my broker IBKR offers an online form for allocating my shares through their “corporate action” page but the options there don’t quite match the instructions for the rights plans (page 489)

    http://www.kccllc.net/garrettmotion/document/2012212210312000000000010

    i wonder if people who just fill out forms on their broker websites will actually get the allocations they want? it seems like you need to follow these very specific instructions in the plan.

    Reply
    1. Alpha Vulture Post author

      You need to do both, as IB also clearly communicated. You need to fill in all the required forms, and sign up for the corporate action using the corporate action tool. Deadline for doing so is today at 13:00 New York time, so if you haven’t done so, you have limited time left to complete all the paperwork.

      Reply
        1. ZOILA

          I owe 175 shares. To benefit from the 1145RIGHTS OFFERING, I would need to purchase 175 shares at 6:25= $1093.75. By doing so, I will end up with 175+79=254 shares, using their calculating formula. Correct?
          Thank you,

          Reply
          1. Alpha Vulture Post author

            No, If you own 175 shares and you participate in the 1145 rights offering only you would own 175 common shares and 175 preferred shares (that have a $5.25 and not a $6.25 subscription price). But if you want to participate you will need to be quick, deadline for submitting the paperwork might already passed.

      1. Quinn

        I wish I read this post a month ago. I didn’t realize in time that shareholders needed to submit the subscription forms to secure subscription rights. I assume eligible accredited shareholders like myself who missed the deadline have given up all rights for the share offering? No way to get back in?

        Reply
  8. Mike

    Any idea when the GTX shares (swapped from GTXMQ to the new GTX shares) can start to trade again with the broker ??

    Reply
  9. Dale

    KCC sent me a form for my shares be included in the “Registration Rights Agreement” for accredited investors. Apparently, opting-in (registering my shares) would make my shares tradable, but it looks like the lock-up period is 90 days? I don’t know the consequences for opting-out.

    The form has a place for both common and preferred shares, and I’ve got both types. I wondered what happens if I DON’T register the preferred or DON’T register the common shares. The volumes of SEC documents and court filings are beyond my level of patience.

    Reply
  10. Nick

    I held my GTXMQ in an IRA and subscribed to both rights offerings. The 1145 rights (the accredited investors only rights) were recently rejected and the cash that had been removed from my account for those rights was returned. I clear through Pershing, LLC. Has anybody else with an IRA experienced this with the 1145 rights subscribed to through an IRA being rejected?

    Reply
    1. Alpha Vulture Post author

      Did you get a reason for the rejection? Could be that it was not related to the IRA, but for example your accredited investor documentation?

      Reply
      1. Nick

        I am trying to find out who said I wasn’t eligible. The response I got from the clearing firm wasn’t clear. It should be the accredited investor part because I am accredited and I properly filled out the form checking the boxes. I’ll let you know what I hear though.

        Reply
      2. Nick

        They told me that they didn’t receive my w-9 somehow and that was the reason for rejection of the 1145 shares.

        Reply
  11. Ravi

    I think I made a stupid mistake. Recently I received a Notice and Questionnaire to Accredited Investors form wherein I was asked to indicate the number of common shares and the number of Series A shares that I wish to be included in the Registration statement.

    I had 1000 common shares prior to the rights offering. I paid for 1448 shares (1145 shares) during the rights offering @$5.25 each. So I should have indicated that I wish to have 1000 common shares and 1448 Series A shares be included in the Registration statement. Unfortunately I think I made a mistake by indicating 1000 common and 448 Series A. So I have no idea what will happen to the 1000 Series A shares I missed indicating in the Registration statement. Can anyone provide any guidance on how I can rectify the situation? Thank you very much in advance.

    Reply
    1. Alpha Vulture Post author

      As far as I understood you only need te register what is defined as “Registrable Securities” in the registration statement. Common stock and preferred stock without transfer restrictions do not meet that definition, because only the Pref A’s issued in the accredited investor rights offering are registered with the transfer agent with a book-entry with a transfer restriction. The common stock and the pref’s issued in the 11445 rights offering are freely transferable already.

      So I think your mistake is putting to much common in the registration statement. No idea what kind of possible consequences that can have…

      “Registrable Securities” means any (a) Series A Shares issued to the relevant Investor on the Plan Effective Date pursuant to the Plan or (b) Common Shares (i) issued to the relevant Investor on the Plan Effective Date pursuant to the Plan, (ii) issued or issuable upon conversion of such Series A Shares and (iii) issued in respect of the securities described in clause (a) or clause (b)(i) or (ii) by way of conversion, dividend, stock split or other distribution, merger, consolidation, exchange, recapitalization or reclassification or similar transaction; provided, that any such Series A Shares or Common Shares, as applicable, shall irrevocably cease to be Registrable Securities to the extent: (v) such Registrable Securities have been disposed of pursuant to an effective Registration Statement, (w) such Registrable Securities have been disposed of pursuant to Rule 144; (x) such Registrable Securities shall have been otherwise transferred and are represented by certificates or book-entries not bearing a legend restricting transfer under the Securities Act; (y) with respect to Registrable Securities held by an Investor, such Investor and its Affiliates are able to dispose of all of their Registrable Securities without volume or manner of sale restrictions pursuant to Rule 144; or (z) the date on which the Registrable Securities cease to be outstanding.

      Reply

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