CASE PROFILE: GST AutoLeather dives into Chapter 11 with USD 40m DIP as stalking horse talks with lenders continue - Debtwire

CASE PROFILE: GST AutoLeather dives into Chapter 11 with USD 40m DIP as stalking horse talks with lenders continue

03 October 2017 - 12:00 am

GST AutoLeather filed for Chapter 11 relief today with USD 196m in funded debt amid ongoing sale discussions with prepetition lenders.

 

The company filed its case alongside five debtor affiliates in the US Bankruptcy Court for the District of Delaware. Judge Laurie Silverstein is assigned to the case. Though the debtors have no plan or restructuring support agreement, prepetition lenders have agreed to provide a USD 40m debtor-in-possession financing facility and are in talks to serve as a stalking horse bidder.

 

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CLICK HERE to view all GST AutoLeather Chapter 11 filings in Debtwire Dockets.

 

The company

 

The Southfield, Michigan-based interior automotive leather supplier was founded in 1933 under the name Garden State Tanning. Japanese private equity firm Advantage Partners purchased the company from Citibank Venture Capital in 2008 for USD 310m. A minority portion of the equity is owned by Pacific Alliance Group and certain members of management. GST acquired Seton Company in 2011.

 

The company partnered with Toyota Motor Corp in 1980 to become the first American supplier to implement the Toyota production system, according to a first-day declaration from Chief Restructuring Officer Jonathan Hickman of Alvarez & Marsal.

 

GST expanded throughout the 1990s, opening leather cutting and finishing facilities, and acquiring another leather supplier, in Mexico. Seton acquired operations in Germany and South Africa during this time as well. GST also opened facilities in Shanghai and Zhongshan, China and Seton launched distribution in Korea.

 

In 2014, GST entered into a joint venture with Indian leather products manufacturer Tata International. The joint venture – JV Automotive Leather Company – is headquartered in Mumbai and has operations in Dewas, India.

 

The debtors employ about 5,600 people across the globe. The company provides leather to “virtually every major” original equipment manufacturer in the auto industry, including AudiBMW/MiniDaimlerFiat ChryslerFordGeneral MotorsHyundaiHondaPorschePSANissanKia, Toyota and Volkswagen, according to Hickman.

 

GST reported net sales of USD 540m in 2016, including USD 273m in North America, USD 142m in Europe, USD 70m in Asia and USD 55m in South Africa.

 

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The debt

 

GST’s total funded debt amounts to about USD 196m, which includes USD 164m owed on a senior credit facility and USD 32m owed on a mezzanine loan. The debtors have fully drawn the senior credit facility and entered into a forbearance agreement on 6 September, which was extended through 2 October.

 

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The descent

 

The debtors neared insolvency in 2011 after acquiring Seton, unable to cover working capital and integration costs. In May 2014, Advantage weighed its options to monetize its investment in the portfolio company, considering a sale or refinancing in the high yield market to pay itself a dividend, as reported by Debtwire.

 

A month later, Royal Bank of Canada (RBC) launched a USD 180m-equivalent refinancing loan for GST, composed of a USD 30m five-year revolver and USD 150m six-year term loan, as reported by Debtwire. The new RBC loan refinanced USD 124.9m in leveraged loans, including a 20% all-PIK mezzanine arranged by ING Bank in 2012, and allowed Advantage to pay itself a dividend.

 

In 2015, GST received an unsolicited offer to purchase the company from a foreign strategic buyer, but those talks collapsed in June 2016.

 

The company has suffered from market-related price reductions, a drop in the leather content in new vehicles, and issues with certain new customer launches in Europe, according to Hickman. Additionally, the decline in new vehicle manufacturing has been hastened by the popularity of ride-sharing services, including Uber and Lyft, he noted.

 

GST has made “significant cash outlays” in recent months to address out-of-contract demands from a critical supplier and working capital investments to fend off risk supply chain disruption to customers, Hickman added. Those include a troubled relationship with a Chinese supplier and GST’s ongoing effort to build its own finishing facility in Jiaxing, China. The debtors expect the facility to be completed by the end of 2017 and operational by early 2018.

 

The company recently retained Alvarez & Marsal and Lazard as contracts with major auto suppliers wavered, placing pressure on the company’s earnings and causing trading levels on its revolver to drop to the low 80s by the end of July from the mid-90s a few weeks earlier, as reported by Debtwire. Around the same time, a lender group hired law firm Paul Hastings.

 

Despite continued discussions this summer with potential buyers, no binding offer was made. The debtors brought in Kirkland & Ellis to oversee workout options, as reported by Debtwire. As of 11 September, GST was operating in violation of a maintenance covenant, without a waiver, and attempting to shop itself around for a sale. As liquidity dwindled, the company approached its prepetition lenders to discuss an in-court marketing process and provide a stalking horse bid.

 

The DIP

 

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GST has lined up a USD 40m debtor-in-possession financing facility from RBC. The debtors will seek access to USD 25m of that amount on an interim basis at a first-day hearing.

 

The lenders are in the midst of discussing a prepetition lender acquisition of the company and expect to a motion for bid procedures and stalking horse protections “in the near term,” according to the DIP motion.

 

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CLICK HERE to view the petition.
CLICK HERE to view Hickman’s declaration.
CLICK HERE to view the DIP motion.