GTAT Advanced Technology (GTAT) Files For Bankruptcy
GTAT Advanced Technology (GTAT), manufacturer of the sapphire displays for the Apple iWatch and solar equipment, made headlines with a surprise bankruptcy today.
This latest surprise for investors came not too long after the last one: investors were expecting the company’s sapphire glass to be used by Apple in at least one of its new iPhone displays, but instead, only the Apple Watch will include the product for now.
GTAT has been falling all month, following the iPhone disappointment.
But the stock was really killed today–down from $11.05 over 93% to finish trading at $0.80 on over 15x the usual volume. At substantial portion of buying today was probably due to shorts buying back shares. According to Yahoo, 48.5% of the float was short as of Sept. 15, 2014. The bankruptcy filing is a windfall for shorts as GTAT’s market cap collapsed from about $1.5 billion to $110 million.
Latest information from Martin Blanc at BidNess Etc.:
The company has communicated to the court that it wants to conduct business as usual, while a reorganization plan is formulated and implemented. Many investors assume that the company filed for Chapter 11 because it ran out of cash and was facing an extreme liquidity crunch. However, the company reported it had $85 million in cash as of September 29. But the bankruptcy filing indicates that the current cash position is inadequate to fulfill short-term liquidity needs of the company. Therefore, the company will seek additional funds in the form of debtor-in-possession (DIP) financing. DIP financing is unique because it has a senior claim to equity and all other liabilities of the company. GTAT will use the additional cash to pay wages and conduct day-to-day business.
[...]
It is yet unclear as to what forced the company to take such drastic measures. The business update, which was due last week, was probably delayed by the company due to this development. The company is a supplier of parts for the Apple Inc. (AAPL) Watch. Many investor had taken a position in GTAT to gain some exposure to the highly-anticipated Apple Watch. However, following the reorganization, they might find the value of their investments significantly decreased. Shareholders of Centrus Energy Corp (USU) walked away with just 5% of the company after it went through Chapter 11 reorganization.
Full article here.
Analysts are suggesting that Apple might be calling in loans in response to GTAT failing to meet performance agreements. Tiernan Ray at Barron's notes that Gilford Securities removed its buy rating and Jonathan Dorsheimer at Canaccord Genuity suspended coverage (a hold rating).
Nimal Vallipuram at Gilford writes:
Apple may have asked for some of its money back, he muses:
"While this is utterly unexpected we believe this is tied to possibly Apple requesting prepayment of some loans due to GTAT not meeting performance targets related to sapphire manufacturing. When Apple announced its new products on 9/9/2014, it was clear that GTAT might have to revise down their revenues from sapphire in 2014 as sapphire was used in watches and not in phones. But even after accounting for this, this outcome is radical and totally unanticipated. We believe that Apple may have requested some payment earlier than expected as some unmet performance targets by GTAT. However, what we do not understand is why the two companies did not restructure the agreement to buy some time for GTAT and how did this relationship potentially breakdown to this extent..." (GT Advanced Plunges: Has Apple Asked for Money Back? Asks Gilford)
Update on GTAT from Bloomberg: Apple Sapphire Supplier Breaks, by Matt Levine.
Excerpt:
That's from a risk factor in GT Advanced Technologies's annual report. Basically the story is that Apple loaned GTAT a bunch of money -- call it $439 million1 -- so that GTAT could get to work producing sapphire to put into Apple products,2 and GTAT planned to pay that money back in the form of discounts on the sapphire over five years starting in 2015. But there was one tiny flaw in GTAT's plan, which was that Apple could demand all the money back, in cash, at any time, including right now, "under certain circumstances." And GTAT didn't have the money.
Those "certain circumstances" are not, let us say, spelled out with crystal clarity. Here is the heavily redacted agreement that GTAT filed publicly; you'll notice that most of the circumstances have been replaced with "[***]."3
Today [***] seems to have occurred. GTAT filed for bankruptcy this morning, for reasons that are a little mysterious but that everyone assumes came down to Apple being displeased with GTAT.4 The press release puts a brave face on it -- saying that bankruptcy "provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet" -- but all in all you'd have to say that today was a [***] day for GTAT...
Disclosure: None.
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