Business Context and Reporting Period
This Form 8-K, dated September 12, 2018, reports on Garrett Motion Inc.'s entry into material definitive agreements in connection with its complete legal and structural separation (Spin-Off) from Honeywell International Inc. The filing also discloses the commencement of a private offering of senior notes.
Key Financial Metrics and Agreements
- Debt Financing: Commenced a private offering of €450 million aggregate principal amount of senior notes due 2026.
- Liability Cap: Entered an Indemnification and Reimbursement Agreement with Honeywell capping annual payments at the Euro-to-U.S. dollar exchange rate equivalent of $175 million (exclusive of late fees).
- Liability Scope: Garrett is obligated to reimburse Honeywell for 90% of asbestos-related liability payments (primarily Bendix business) and certain environmental liabilities, net of insurance receipts.
- Tax Obligations: Under the Tax Matters Agreement, Garrett is responsible for all taxes relating to its business, including a mandatory transition tax payable to Honeywell in five annual installments of 8%, followed by three installments of 15%, 20%, and 25%.
Material Changes and Covenants
The filing details significant restrictions on Garrett's financial flexibility post-Spin-Off:
- Payment Deferrals: Payments under the Indemnification Agreement may be deferred if they trigger an event of default or violate financial covenants (e.g., maximum total leverage ratio, minimum interest coverage ratio) under Garrett's principal credit agreement.
- Dividend and Repurchase Restrictions: Garrett's ability to pay dividends or repurchase capital stock is restricted in any quarter until amounts payable to Honeywell are settled.
- Transaction Limitations: Honeywell's prior written consent is required for Garrett to amend its credit agreement, enter new credit agreements, or engage in strategic transactions (mergers, acquisitions, refinancing) that could adversely affect Honeywell's rights.
- Tax-Free Status Restrictions: For two years post-Spin-Off, Garrett faces restrictions on share issuances, redemptions, and asset sales to preserve the tax-free nature of the separation under Section 355 of the Internal Revenue Code.
Outlook, Risks, and Contingencies
Management commentary is limited to the terms of the agreements. Key risks and contingencies include:
- Long-Term Liability: The indemnification obligation continues until December 31, 2048, or until three consecutive years of payments fall below the $25 million equivalent threshold.
- Global Settlement Risk: In the event of a global settlement of asbestos claims, Garrett must pay $175 million annually until the total settlement obligation is satisfied, potentially exceeding the annual cap if deferred amounts are included.
- Strategic Flexibility: The requirement for Honeywell's consent on significant transactions may limit Garrett's ability to pursue value-maximizing opportunities or refinance debt on favorable terms.
- Market Conditions: The size, timing, and terms of the €450 million note offering remain subject to market conditions.
Investor Verification Checklist
- Verify the exact Euro-to-U.S. dollar exchange rate used to calculate the $175 million annual cap and $25 million threshold.
- Review the full text of the Indemnification and Reimbursement Agreement (Exhibit 2.1) for specific definitions of "asbestos-related liability" and "environmental-related liability."
- Confirm the final terms and pricing of the €450 million senior notes due 2026 once the private offering concludes.
- Assess the impact of the two-year tax restrictions on Garrett's ability to execute capital structure changes or strategic M&A.
- Monitor quarterly reports for any deferrals of payments to Honeywell and their impact on liquidity and covenant compliance.