Shares of auto supplier Garrett Motion Inc. fell by almost half after it warned of a possible balance-sheet restructuring and pointed the finger for its predicament at former parent company Honeywell International Inc.
Garrett, which makes automotive turbochargers, was spun out of Honeywell in 2018 and carried with it asbestos liabilities related to Honeywell’s old Bendix brake business. The former unit of the aerospace conglomerate said Wednesday it’s struggling to deal with more than $1 billion of those liabilities which prevent it from effectively competing in the auto-supply business.
Garrett blames Honeywell for putting it in this position through the disputed asbestos-indemnity agreement.
“These arrangements were a part of an inappropriate capital structure imposed by Honeywell on Garrett as part of its 2018 spinoff that has proven ill-suited to cope with any meaningful challenges at the macroeconomic level, much less those Garrett faces amid a global pandemic,” the company said in a statement.
Honeywell pushed back, saying in a statement that Garrett was spun off with a strong enough balance sheet to manage its liabilities even in an industry downturn.
“Garrett’s press release today appears to be a pressure tactic designed to encourage creditors to provide concessions, and Honeywell has no intention of being swayed by it,” the former parent company said.
Shares of Garrett Motion closed Wednesday's trading down 44.2 percent to $3.84.
The accusation is just the latest salvo in a dispute between the two companies over an indemnification agreement related to the asbestos liability. Garrett sued Honeywell last year, but its former parent called that lawsuit “meritless.”
The spun-off company said unspecified restructuring moves it is mulling could materially reduce the value of its stock or even result in the cancellation of shares, which fell as much as 44.6 percent in trading Wednesday in New York.
“Garrett sees a substantial risk that it will not be able to distribute value to its stockholders,” it said.
The company has several potential options, including issuing equity, which would “significantly” dilute existing shareholders, RBC Capital Markers analyst Joseph Spak wrote in a note.
Joel Levington, director of credit research for Bloomberg Intelligence, wrote in a note Wednesday that the dispute could prove to be a headache for Honeywell. “Garrett is a billion dollar lump in Honeywell’s comfy credit bed,” he said.
“Honeywell’s $1.1 billion receivable from former subsidiary Garrett Motion remains a risk to an otherwise stellar balance sheet,” Levington wrote of Honeywell’s balance sheet. “Though the auto-parts manufacturer received an amendment to its credit agreement, its elevated leverage and thin liquidity should be watched.”
Garrett Motion, of Rolle, Switzerland, ranks No. 67 on the Automotive News list of top 100 global suppliers with 2019 sales to automakers of $3.25 billion.