Garrett Motion Inc. Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K, dated June 12, 2020, details a material definitive agreement entered into by Garrett Motion Inc. (GTX). The filing addresses the company's response to the financial impact of the COVID-19 pandemic, specifically regarding its ability to comply with financial maintenance covenants under its existing credit facility.
Key Financial Metrics and Debt Structure
The filing outlines the structure of the amended Senior Credit Facilities and new financial covenants effective during a "Relief Period."
- Term B Facility: Seven-year term consisting of €375 million and $425 million.
- Term A Facility: Five-year term in the aggregate principal amount of €330 million.
- Revolving Facility: Five-year facility in the aggregate principal amount of €430 million.
- Minimum Liquidity Requirement: $125 million through March 31, 2021, increasing to $200 million thereafter during the Relief Period.
- Maximum Cash Restriction: Average available unrestricted cash must not exceed $165 million.
Material Changes Versus Prior Period
The primary change is the suspension of the original total leverage ratio and interest coverage ratio covenants from the 2018 Credit Agreement due to anticipated non-compliance caused by the pandemic. These have been replaced by temporary covenants:
- Net Secured Leverage Ratio: A temporary ratio schedule is in place, peaking at 11.75 to 1.00 for the quarter ending March 31, 2021, before declining to 3.50 to 1.00 by June 30, 2022.
- Interest Rate Margins: Margins on the Term B Facility increased by 75 basis points. Margins on the Revolving and Term A Facilities increased by 25 basis points until the Relief Period concludes.
- Additional Restrictions: Tightened baskets for incurring additional indebtedness, creating liens, and making investments.
Guidance, Outlook, and Risks
Management does not anticipate a "Covenant Relief Termination Event" prior to 2022 based on current forecasts. The Relief Period is set to conclude on the earlier of June 30, 2022, or the date the company certifies compliance with the original covenants for four consecutive fiscal quarters.
Risks and Contingencies:
- Credit Rating Trigger: If Moody's rating falls to B2 or lower (or is withdrawn) AND S&P rating falls to B+ or lower (or is withdrawn), loan margins will increase by an additional 25 basis points.
- Termination Event: The Relief Period ends immediately if the company makes a payment under the Subordinated Indemnity (excluding Q2 2020 payments).
- Forward-Looking Statements: The filing cautions that actual results may differ due to the ongoing impact of the COVID-19 pandemic and other uncertainties.
Investor Verification Checklist
- Verify the company's current unrestricted cash balance against the $125 million minimum liquidity threshold.
- Monitor credit rating actions by Moody's and S&P to assess potential margin increases.
- Review the company's ability to meet the escalating Net Secured Leverage Ratio targets, specifically the peak of 11.75x in Q1 2021.
- Confirm no payments have been made under the Subordinated Indemnity that would trigger an early end to the Relief Period.
- Assess the impact of the increased interest margins on future interest expense and EBITDA.