“Monday news broke that took almost everybody in the Apple investor ecosystem by surprise. Apple’s appointed Sapphire supplier, GT Advanced Technologies (GTAT), filed for Chapter 11 bankruptcy and announced its intention to seek debtor in possession financing,” Gregg Rosenberg writes for Seeking Alpha. “GTAT common shareholders need to know that Chapter 11 bankruptcy is intended to help a business reorganize for the benefit of its creditors. The creditors are given new equity positions in the company, and in almost all cases their first act is to zero out the old equity. Therefore, the old equity owners of a company which files for Chapter 11 get wiped out, except in very rare instances where they are merely massively diluted.”
“GTAT’s current board and management have become “debtors in possession”, which means they get to run the company under supervision of a bankruptcy court for a few months while they put together a reorganization plan. This holds off the creditors for a little while. Apple is currently GTAT’s largest single creditor, having loaned GTAT approximately $400M in prepayments to set up large scale Sapphire manufacturing, and having entered into a long term lease with GTAT on the AZ manufacturing facility,” Rosenberg writes. “A new lender who provides debtor in possession financing will be i) given priority in the line of creditors over all old lenders, including Apple; and ii) be allowed to secure their loan with a claim against all the company’s assets, physical and intellectual. If GTAT acquires debtor in possession financing with a lender other than Apple, it would hurt Apple in a few ways.”
“The cost to Apple would be just the value of the first three loan payments to GTAT, assuming the selloff of its non-Sapphire assets nets enough to pay off the smaller creditors,” Rosenberg writes. “This makes it relatively cheap in the bigger picture, especially given the alternative of accepting a large loss as a secondary creditor in a bankruptcy re-org. From that point, the market should perhaps expect Sapphire iPhones or Sapphire laminated iPhones from Apple in September 2016, in time for the iPhone 7.”
Read more in the full article here.
Related articles:
Investors stunned over GT Advanced bankruptcy filing – October 7, 2014
GT Advanced files for chapter 11 bankruptcy court protection – October 6, 2014
Apple and GT Advanced rampup sapphire production in Mesa – August 11, 2014
GT Advanced expects sales of sapphire production tools to boost profit; shares surge – August 5, 2014
Apple and GT Advanced open second sapphire plant in Salem, Massachusetts – June 19, 2014
Apple patents method for embedding sapphire displays in LiquidMetal device chassis – May 27, 2014
This is what I was talking about yesterday when the first articles on this subject were posted:
Speculation, not investment…
Does this: “therefore, old equity owners of a company which files for Chapter 11 get wiped out” refer to shareholders? Is the idea that the stockholders end up with worthless paper and the creditors become the new owners? If not, who are the “equity owners” who get wiped out? If so, why would the price be around $1 now instead of $0.02?
In the statement that I quoted, the “old equity” refers to the current shareholders. The creditor(s) assume control over the existing equity as recompense for the unpaid loans. When it comes to distributing company assets in a bankruptcy, creditors come first (in an establish chain of priority), followed by preferred stock, then common stock. In a bankruptcy, the remaining assets are generally less than the company owes to creditors, so the creditors face a loss. In those cases, there is nothing left over to split among the stockholders.
Why did GTAT rebound from $0.80 to $1.00 rather than tanking further? I am not the right person to ask – seek professional guidance.
If I had to guess, I would think that the following three factors play a significant role in supporting GTAT’s current stock price:
1) Investment speculation based upon the combination of a completely unexpected bankruptcy announcement, a sudden 90% decline, and the lack of details regarding the reasons driving the announcement. Most bankruptcies play out in a slow, predictable manner.
2) Apple’s involvement and ongoing financial involvement with GTAT. Materials suppliers to Apple generally do pretty well, and most people expect sapphire to be the next big feature on high-end iOS devices. So they expect GTAT to survive (note that this result would not necessarily mean that GTAT’s current shareholders would retain any equity).
3) The odd nature of this bankruptcy. This is not how bankruptcy proceedings generally start. As a result, some people may be speculating that the end result of this bankruptcy process may be atypical – that substantial assets may remain that are worth more than 10% of the company’s original market cap and/or that the company’s value will rebound quickly after (hopefully) exiting Chapter 11.
Those are my guesses.
This is a move to try and force Apple to put in more money to stay at the front of the debtor line. The front money Apple provided was covered by bonds (I think, not equity positions). But most of GTATs value comes from things purchased with Apples money and the valuation of future revenue from Apple contracts. This is a flat out failure on the part of GTAT management and a poor choice of partners on Apples part (so much for “Made in America”). I suspect that Apple was presented with the problem and declined to throw good money after bad. Hope they have two or three other Asian sources.
How does–assuming that working with GT Advanced wasn’t a good idea, despite this bankruptcy filing the game isn’t over yet–somehow imply that there’s something wrong with “Made In America?”
Back to my basic question “What did they do with the money Apple fronted them?”. When “Made in America” fails, it’s usually attributable to incompetent, greedy management, far more than the workers they let down. There is a pretty extensive record of management failing their workers and the nation while gaining outsized salaries and bonuses for themselves, with no consequences. This will be a tangled path when the story is eventually unraveled. I will predict, no matter what the story turns out to be, no GTAT executive bonuses or salaries will be harmed.
More business succeed in America than anywhere in the world. That being said, most new businesses fail (more than half). You might have a well deserved bias against American businesses but more likely you are just bitter than you never had the capital or risk taking balls to start your own.
Where is the “Made In America” stuff coming from? No matter what is going on with GT Advanced, why are you applying it to an entire country, as opposed to just GT Advanced?
By your logic, Germans shouldn’t buy VW’s because they worked with the Nazis in the past or Argentines shouldn’t buy Ford’s because their cars were really popular with Pinochet and his killers.
Which goes back to my main point, which how does what’s happened to GT Advanced reflect upon making anything in America, besides being an American company, that is.
I may have missed something. Did Arizona go ahead and secede? GTAT are the Made in America I was talking about. Nothing “happened to” GTAT. They took a boatload of Apples money, they are supposed to provide critical components for several of Apples flagship product lines and have now taken action that could interrupt their delivery of those components.
Why would GTAT do that? Is Apple over a barrel and this is their ploy to get more money from them? When I started this, I did not know that Apple actually owns the Arizona facility. I would say the game is much deeper that I we know.
So what GT Advanced is an American company? What I was wondering was why it was in the least relevant to your point.
As far as I can tell, it’s not.
By way of clarification–if it’s still needed–the last time I checked Samsung’s actions don’t reflect upon every Korean company, and nor should it because they’re different.
Yet you somehow see the need to impugn “Made In America” because of the actions of GT Advanced, which not only isn’t fair for reasons already stated, but doesn’t make sense because we don’t know all the details around what’s going on GT Advanced.
You mistook my statement. It was made in sorrow. Guess it wasn’t clear.
That is a snap judgment, quivran, based upon very little information. Wait a few weeks before assigning blame and responsibility.
Even if this does not turn out well for Apple, it does not necessarily constitute a “failure” in the way you appear to be defining it. All risks involve the potential for failure and, in the business world, risk is generally associated with potential return. In business, if failure (at a reasonable scale) is not an option then failure is sure to follow in the long run. Excessive conservatism leads to stagnation and failure. Do you think that this would be the first half-billion that Apple has lost reaching for a new technology, product, or system? I seriously doubt it.
If you think GTAT filed for bankruptcy without Apple knowing full well what was happening and begin on board with the strategy, you’re insane.
Apple will have to secure their material source and it’s IP. If not, this very valued feature that is uniquely part of iOS devices will be everywhere. Time to step up and get this done Apple!
I have no doubt that Apple has the inside track on GTAT’s IP. Apple is notoriously tight with its money and would not put $578M into GTAT without some safeguards. Relax.
Have people forgot this is actually quite common in tech and high innovation industries. This is why folks always need to read all the footnotes in financial statements. When a company makes the kind of investment in arms-length company such as GT the risk of that investment most be modeled and beyond certain threshold a reserve contra balance is taken. Apple is already covered in that sense. The only cost here would be opportunity.
Why do I, for some reason, smell a rat in this situation? My instincts can’t get two or three other companies covert activities out of my mind!