GST AutoLeather is operating in violation of a maintenance covenant and without a waiver while also attempting to shop itself for a sale, according to three sources familiar with the matter. The volatile dynamic, which is exacerbated by an earnings decline trend, has prompted management to enlist counsel Kirkland & Ellis to explore workout options, the sources added.
Should the auction process, run by advisor Lazard, turn unsuccessful, the automotive supplier is likely to restructure its balance sheet in Chapter 11, the sources continued. The grace period for the covenant trip expired at the end of August, and the company has not procured a waiver. However, lenders at this point aren’t pushing for action. On a lenders call last week with management, “the company didn’t ask for a waiver, and lenders weren’t pushing for it,” one of the sources said.
GST’s financial condition has been negatively impacted by a reduction in business from its major customers in the automotive supply chain. The macro backdrop has been unforgiving, with auto sales for August down nearly 2% year-over-year. The company is also facing headwinds driven by pricing pressure in the North American leather market, one of the sources noted.
GST’s USD 30m revolving credit facility due 2019 is quoted 75.9/80.9, down from 78.9/81.9 at the beginning of the month, according to Markit. The remainder of the company’s capital structure comprises a USD 150m TLB and an 11% cash/2% PIK mezzanine subordinated-loan.
For their part, GST’s lenders have engaged Paul Hastings and FTI as advisors. In addition to Kirkland and Lazard, GST is also being advised by Alvarez & Marsal.
GST, Advantage, and Kirkland did not respond to requests for comment.