STATES OF - Omni€¦ · financial projections and business and security valuations prepared by debtors and their ... plans and other benefits; (8) ... in which they declined to enter

UNITED STATES BANKRUPTCY COURTFOR THE \ilESTERN DISTRICT OF NORTH CAROLINA

Charlotte Division

IN RE: Case No. 10-BK-31607

Chapter 11

Jointly AdministeredDebtors.l

DECLARATION OF BRADLEY M. RAPP

I, BRADLEY M. RAPP deposes and says as follows:

1. I submit this Declaration at the request of counsel for the Official

Committee of Asbestos Personal Injury Claimants (the "Committee") in connection with

this Court's consideration of whether to confirm the Modified Joint Plan of Reorganizafion

of Garlock Sealing Technologies LLC and OldCo LLC, as amended (the "Plan"). It is

my understanding that Committee counsel will rely upon this Declaration in advocating

that the Plan meets the requirements of section 1129(a)(7) of the Bankruptcy Code (the

ooCode"), often referred to as the "best interests" test. I have accepted this assignment as

part of the ongoing engagement of my firm, Charter Oak Financial Consultants, LLC

("Charter Oak"), as financial advisor to the Committee, which engagement has been

approved by the Court.

I The debtors in these jointly administered cases are Garlock Sealing Technologies LLC ("Garlock"),Garrison Litigation Management Group, Ltd. ("Garrison"), and the Anchor Packing Company (collectivelywith Garlock and Garrison, the "Garlock Debtors"), and OldCo, LLC ("Coltec"), successor by merger toColtec Industries, Inc.

GARLOCK SEALING TECHNOLOGIESLLC, et al.,

)))))))

DOC# 2439489

Case 10-31607 Doc 5917 Filed 05/08/17 Entered 05/08/17 18:19:56 Desc Main Document Page 1 of 35

2. This Declaration explains my analysis of a hypothetical liquidation of

Garlock's assets pursuant to chapter 7 of the Code.2 Exhibit I sets forth the quantitative

analysis. It is my opinion that the reasonably predictable proceeds of such a liquidation

would fall well short of the fundingthaf the Debtors and their parent company, EnPro

Industries, Inc. ("EnPro"), are to contribute under the Plan to a trust for the benefit of

asbestos creditors. Based on my qualifications summarized below, I respectfully submit

that this is a subject on which I am qualified to express an expert opinion.

3. I am a member and senior managing director of Charter Oak and have

served in those capacities since June 2007. My professional resumé is attached to this

Declaration as Exhibit 2. I have over twenty-five years of experience as an investment

banker and financial advisor. For the past 15 years, I have provided financial advisory

services to asbestos creditors' committees in over 20 asbestos-related chapter 11

proceedings. My work in those cases has included (1) the analysis of financial statements,

financial projections and business and security valuations prepared by debtors and their

financial advisors; (2) valuing debtors and their affiliated companies; (3) monitoring the

operating performance of debtors and their affrliates; (4) reviewing plans of reorganization

and consulting on the negotiation of plan terms; (5) reviewing financial schedules and

disclosures set forth in disclosure statements, including liquidation analyses; (6) reviewing

and commenting on non-ordinary course activities of debtors, such as proposed

acquisitions and dispositions; (7) reviewing compensation packages and employee pension

plans and other benefits; (8) reviewing and participating in the negotiation of equity and

2 Hereinafter, all chapter and section references are to the Code

a- L-


debt instruments, including bankruptcy exit financings; (9) providing litigation support

services to counsel in connection with adversary proceedings and contested matters; and

(10) providing such other services as have been requested by counsel to asbestos creditors'

committees.

4. Prior to my work in asbestos bankruptcies, I was engaged as a financial

advisor in several other bankruptcies by debtors, creditors' committees and governmental

agencies. In addition to providing financial advisory services in bankruptcy cases, my

work has included engagements on behalf of clients in connection with raising debt and

equity capital, mergers and acquisitions, corporate restructurings, strategic planning, the

issuance of faimess and solvency opinions, and the valuation of debt and equity securities.

I have performed numerous business valuations in connection with chapter 11 cases and

related proceedings. In terms of employment, prior to co-founding Charter Oak I worked

as a financial advisor at L. Tersigni Consulting, P.C. (2002-2007), as an independent

financial consultant (1995-2002), as an investment banker at Whitman Heffeman Rhein &

Co. (1991-1995) and Commercial Union Capital Company (1985-1987), and as an

associate attorney at Cahill Gordon & Reindel (1982-1985). I hold the academic degrees

of Bachelor of Science in Fundamental Sciences (Lehigh University, 1974), Master of

Business Administration (Harvard Business School, 1978), Juris Doctor (Fordham Law

School, 1982), Master of Laws in Taxation (New York University Law School, 1985), and

Master of Laws in Bankruptcy (St. John's Law School, 2009). I also hold the professional

designation "Chartered Financial Analyst" and formerly held the "Certified Insolvency and

Restructuring Advisor" designation (retired in 2016).

-J


5. The statements and analyses made in this Declaration are based on my

review of audited financial statements and unaudited consolidating financial statements of

the Garlock Debtors, and other source documents listed in Exhibit 3.

Introduction

6. Under the Plan, a total of $480 million will be contributed to an asbestos

personal injury trust (the "Trust") for the benefit of asbestos claimants. Garlock or

Garrison will contribute $370 million just before the effective date of the Plan, and Coltec

will contribute $30 million on the same date. Coltec will also make a deferred contribution

of $60 million payable no more than one year after the effective date of the Plan, and will

also issue an option to the Trust to purchase $20 million worth of the stock of EnPro, the

Debtors'ultimate parent, for $1.3

7. By comparison, the liquidation of Garlockos assets pursuant to chapter 7

would result in proceeds ranging from $317.6 million to $368.5 million, before taking into

account administrative expenses.a

The Chapter 7 Trustee Would Not Be Able to Sell Garlock as a Going Concern

8. The role of a chapter 7 trustee is to monetize the assets of the estate in an

orderly fashion and to distribute such assets to creditors and interest holders according to

chapter 7's statutory scheme. In a hypothetical liquidation of Garlock, the chapter 7 trustee

3 The $80 million ofdeferred consideration to the Trust should be discounted to reflect the present value ofthe consideration as of the effective date of the Plan. I estimate that the discount would be in the $2 millionto $3 million range, resulting in a net present value range of consideration of $477 million to $478 million.The discounting does not impact the conclusions reaçhed under this Declaration,a Garrison's frnances are inseparable from Garlock's because Garrison is dependent upon Garlock forfinancing and has contractually assumed responsibility for the defense and payment of Garlock's asbestos

liabilities. I have therefore assumed that, in the event of the Debtors' liquidation under chapter 7, Garrisonwould be substantively consolidated into Garlock, with no resulting net increase in the value of Garlock'sestate.

4


would be motivated to sell the assets of the estate at the greatest possible amount. To that

end, the trustee would want to sell Garlock as a going concern; in my opinion, however,

this goal would not be achievable. To the best of my knowledge, there has never been a

sale of an asbestos-tainted company as a going concern out of a chapter 7 bankruptcy estate.

The reason for this is straight-forward: from the perspective of a potential purchaser of an

asbestos-tainted company, the risk of successor asbestos liability is preclusive because the

liability could well overwhelm any benefits from the acquisition. I do not believe a rational

purchaser would subject itself to this risk in the circumstances of Garlock's case, and

therefore the chapter 7 trustee would not succeed in selling Garlock as a going concem.

9. I understand that in a chapter 7 proceeding, neither a discharge from

asbestos liabilities nor relief from asbestos claims under section 52aG) is available. In my

experience, potential acquirers of asbestos-tainted companies always require section

52aG) protection. An example of that occurred early in Garlock's own chapter 1l case,

roughly seven months after the petition date, as documented in correspondence. An

investor group expressed interest in purchasing Garlock out of chapter 1 1, explicitly stating

that it would require protection under section 52aG) ("Solicitation of Interest"). In

responding to the Solicitation of Interest, the company acknowledged that protection from

asbestos liability under provisions of the Code would be a condition to any plan of

reorganization, thereby confirming the importance of section 52a@) to any potential sale

or bankruptcy restructuring. Committee counsel has informed me that the Solicitation of

Interest went no further and that no other third-party expressions of interest in purchasing

Garlock have been reported during its seven years in bankruptcy.

5


10. While potential successor asbestos liability alone would deter the sale of

Garlock as a going concern, several other factors lead to the same conclusion. First,

Garlock's business is closely intertwined with the other businesses under the EnPro

umbrella. Garlock was not managed as a legal entity but instead as part of a larger business

segment that was often referred to as ooGarlock Sealing Technologies." Over the years,

EnPro's presentations to the investor community often made references to this Garlock

Sealing Technologies business segment; moreover, several indirect subsidiaries of Coltec

in which Garlock has no equity interest incorporate ooGarlock" as part of their company

names (e.g., Garlock France SAS and Garlock GmbH, a German entity). From a strategic

viewpoint, extracting Garlock from this larger business segment would impair the value of

Garlock. This point was driven home in the Debtors' response to the Solicitation of

Interest, in which they declined to enter into discussions for a sale of Garlock and explained

that Garlock could attain its highest value by remaining as part of the EnPro family of

companies.

11. From an operational point of view, Garlock's reliance upon its parent

companies for administrative support would further complicate any potential sale by the

chapter 7 trustee to a third-party purchaser. Garlock's cash management system and

accounting systems are controlled at the parent entity level. Furthermore, Garlock has

shared insurance and intermingled pension plans with EnPro/EHL Thus, any potential

acquirer of Garlock would need to unravel the operational dependencies that Garlock has

on its parents. This would be a daunting task even in a consensual acquisition with all

parties cooperating; however, a potential purchaser of Garlock from the chapter 7 trustee

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would presumably be a future competitor of EnPro, which would thus have no incentive to

facilitate such a sale. At the same time, the chapter 7 trustee would have difficulty in

retaining key employees of Garlock to assist in a potential sale. Historically, many of

Garlock's key executives have held other positions in the EnPro organizational structure,

and it is reasonable to anticipate that those employees would seek out employment

opportunities with EnPro. All of this would present a challenging due diligence

investigation from the perspective of a third-party purchaser, thereby reinforcing the

conclusion that a going-concem sale of Garlock out of chapter 7 would not be possible.

12. Finally, Garlock does not appear to be an attractive target for third-party

acquirers. In my experience, potential growth of revenues and eamings before interest,

taxes, depreciation and amortization ("EBITDA") is one of the most sought-after attributes

for a target company. On this mark, Garlock would not rank high on the list of prospective

targets. The following table shows Garlock's revenues and adjusted EBITDA for the years

2014 through 2016:

($ millions) 2014 2015 2016

Revenue 240.6 2r7.6 195.8

Adj. EBITDA 53.4 44.2 36.4

-7 -


13. From 2014to2016, Garlock's revenues declined by 18.6% and its adjusted

EBITDA fell by 31.8%. This declining operating performance would cause Garlock to be

an unattractive acquisition target.

14. The factors discussed in paragraphs 9 through 13 above reinforce the

conclusion I reached in paragraph 8: the chapter 7 trustee would not be able to sell Garlock

as a going concern to a third-party purchaser.

Piecemeal Sale of Garlock's Assets

15. Unable to market Garlock as a going concern, the Chapter 7 trustee would

be forced to liquidate Garlock's assets on a piecemeal basis. The remainder of this

Declaration addresses the amounts I project could reasonably be realized from the

hypothetical liquidation of the assets. The starting point for this analysis was the book

carrying amounts for the assets as set forth in the Garlock Debtors' combined 2016 audited

financial statements, excluding the assets of Garlocks' non-bankrupt subsidiaries.s For

these subsidiaries, the starting point was the net book value of Garlock's equity interests in

the subsidiaries. I then assigned a range of recovery rates for each of the assets, which

rates were based on a review of other liquidation analyses, an interview by Charter Oak

with a liquidator, and other factors I deemed relevant to the analysis. The projected

recoveries were then determined by multiplying the carrying value of each asset by its

projected range of recovery rates. The final step in the analysis was to deduct certain

identifiable liabilities to arrive at a net liquidation amount for Garlock before taking into

account bankruptcy administrative expenses. Exhibit I summarizes these calculations.

s The operating subsidiaries are Garlock of Canada, Garlock de Mexico, and an Australian entity, GarlockPty.

-8-


Below I discuss the liquidation of items in the various asset classes in the same order as

they are listed in Exhibit 1.

Cash and Equivalents, Investments, and Asbestos Insurance Receivables

16. Determining the liquidation values for assets in this category is a straight-

forward process. I have assumed a l00Yo recovery rate for Garlock's cash and equivalents

($23.9 million) as well as for its investment securities ($250.3 million), which are all U.S.

Treasury securities. As to Garlock's asbestos insurance receivables, at December 3 1,2016,

Garlock had agreements with insurers providing for the payment of $13 million in2017

and $11 million in 2018. According to Garlock's 2016 audited financial statements,

Garlock anticipates an additional $38 million to become collectible at the conclusion of its

chapter l1 proceeding. For purposes of the liquidation analysis, there would be no

successful conclusion to the chapter 11 proceeding, and a conversion of Garlock's case to

chapter 7 would create uncertainty regarding the collectability and timing of the payments

described above. I have therefore assigned a5Yoto 15% discount to the recovery of the

asbestos insurance receivable, resulting in a range of recovery from $52.7 million to $58.9

million.

17. The resulting total liquidation range of recovery from this category of assets

(cash and equivalents, investments, and asbestos insurance proceeds) is $326.9 million to

$333.1 million.

Operating Assets

18. Accounts Receivable - At December 31, 2016, Garlock had $14.8 million

of accounts receivable. Determining a recovery rate range for accounts receivable is a fact-

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intensive exercise. Under ideal circumstances, one would have access to an aging of the

accounts receivable and an analysis of how concentrated those receivables are (i.e,, whether

any one or a few customers account for a large percentage of the accounts receivable). Not

having access to that information, I have assigned a range of recovery from 70Yo to 90Yo,

which reflects typical liquidation recoveries I have seen in my experience as a financial

analyst. Applying this recovery rate range to the accounts receivable balance results in a

recovery range of $10.4 million to $13.3 million.

19. Inventories - At December 31, 2076, Garlock had $7.3 million of

inventories. As with accounts receivable, determining a recovery range is a fact-intensive

exercise. Generally speaking, finished goods inventory and raw materials inventory will

have a greater liquidation value than work-in-process inventories. Footnote 5 to the audited

financial statements shows that approximately 60% of Garlock's inventories are finished

products. In my experience, inventories almost always have lower recovery values than

accounts receivable, with a 50%o recovery being a reasonable assumption. Here, given the

relatively high proportion of finished goods inventory as a percentage of total inventories,

I have assigned a range of recovery rates from 50Yo to 70%. Applying that range to the

inventories carrying value results in a recovery range of $3.7 million to $5.1 million.

20. Property. Plant and Equipment - At December 3 1, 2016, Garlock had $36.9

million of gross property, plant and equipment ("PP&E"), net of accumulated

depreciation. Accumulated depreciation represents approximately 65Yo of the gross PP&E,

which means that, on whole, the PP&E is significantly aged. Once again, a detailed

determination of the potential liquidation value of PP&E would take into account the

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location of land and buildings and the market for the various types of equipment, among

other factors. In the absence of more specific information, I have assigned a recovery rate

range of 40o/o to 600/0, which is likely a generous assessment. Applying this range of

recovery rates to the $36.9 million carrying value results in a recovery range of $14.8

million to $22.1 million.

21. Other Assets. At December 31,2076, Garlock had $4.3 million of other

current assets and other assets, which are not otherwise described in the financial

statements. Without further information regarding these other assets, I have assigned them

no recovery value.

22. The resulting total liquidation range of recovery from operating assets

(accounts receivable, inventories, PP&E, and other assets) is $28.8 million to $40.6

million.

Equity in Subsidiaries

23. Garlock owns the equity interests in three non-bankrupt subsidiaries, which

operate respectively in Canada, Mexico, and Australia. Three considerations make it

unlikely that Garlock could sell its interests in these foreign companies to third parties.

First and foremost, the subsidiaries, like Garlock itself, appear to be closely integrated into

EnPro's business; to the extent that they constitute captive distributors for that business, it

seems doubtful that unrelated entities would view them as attractive acquisition targets.

Second, it is unclear whether these subsidiaries in foreign lands would be viable on a stand-

alone basis if their parent, Garlock, were being liquidated. Third, I am informed that

Garlock of Canada has a substantial history of marketing asbestos-containing products;

- 11-


that Garlock itself paid certain asbestos-related claims involving this Canadian affiliate

before filing bankruptcy; and that Garlock has agreed to make a substantial additional

payment for Canadian asbestos claims pursuant to a settlement that is a condition of the

Plan. Separately and in combination, these considerations seem likely to rule out a sale of

the subsidiaries' stock to unrelated purchasers. In view of the first consideration, however,

I have made the conservative assumption that EnPro would be willing to purchase the

equity securities of Garlock de Mexico and Garlock Pty, which reportedly have no legacy

of asbestos claims. The absence of third-party purchasers, however, would place the

trustee in a poor bargaining position, so it is reasonable to assume EnPro would not

willingly pay more for those two companies than the book values of the equity interests in

them as reflected on Garlock's balance sheet. Accordingly,I have included 100% of those

book values ($48.1 million) in the proceeds of Garlock's hypothetical liquidation, while

attributing no value to Garlock of Canada because I do not believe that EnPro or anyone

else would buy it at the risk of succeeding to asbestos liabilities.

Related-P arty Notes Receivable

24. The 2016 audited financial statements have amounts relating to notes

receivable from EHI and one of its subsidiaries with a total combined principal and interest

balance of $328.5 million (the "2010 Notes"). Given the large amounts at which Garlock

carries these notes on its balance sheet, they are its most important non-operating assets.

25. The 2010 Notes comprise two instruments: (1) a note in the original

principal amount of $73,381,000 issued in 2010 by Coltec Industries Inc to Garlock; and

(2) a note in the original principal amount of $153,865,000 issued by Stemco L.P. in 2010

-12-


to Garlock. Because these two notes have substantially the same provisions (other than

principal amounts), I will discuss them together without differentiating between them. The

2010 Notes were amended and restated notes that were originally issued on March 1 I , 2005

in connection with a restructuring ("2005 Restructuring") pursuant to which three

businesses were transferred from Garlock to its then-parent, Coltec Industries Inc, and a

sister company in exchange for predecessor notes ("2005 Notes") that collectively had the

same original principal amount as the 2010 Notes. Exhibit 4 sets forth the major

provisions of the 2010 Notes. As discussed below, their terms and conditions have very

signihcant implications for the hypothetical liquidation of Garlock. It is my opinion that

no third-party would buy the 2010 Notes, although the trustee might be able to sell a portion

of the cash interest stream associated with these instruments.

26. Purchasers of financial instruments are typically risk'averse investors. Any

potential purchaser of the 2010 Notes would have at least two threshold requirements for

making an investment in a debt security. First, the provisions of the debt security would

have to clearly identify the timing and amount of principal and interest payments. This

information is required for the potential purchaser to analyze the investment's cash flows.

After considering all of the potential risks associated with the issuer of the debt instrument,

the other provisions of the debt instrument, and general market conditions, the debt investor

would determine a discount rate6 to apply to the debt security's cash flows to establish the

value of the debt instrument. V/ithout a well-defined stream of cash flows (i.e., principal

and interest payments), a potential investor would be unable to value the debt instrument.

6 The discount rate is the investor's required rate ofreturn after taking into account all risks associated withthe debt instrument.

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27. Second, investors in debt securities typically require some means of exiting

their investments, and therefore require that debt instruments be liquid. "Liquidity

describes the degree to which an asset or security can be quickly bought or sold in the

market without affecting the asset's price."7 At a minimum, an investor would require that

there be no contractual restriction on the transfer of the debt security.

28. The 2010 Notes fail to meet both of these minimal requirements. A key

term precludes their transfer or assignment without the makers' consent (the "Restricted

Transfer Provision"), Another term entitles the issuers to set off against their payment

obligations under the 2010 Notes any loss, damage, liability, or expense they incur and pay

relating to asbestos liabilities of Garlock under any derivative theory (the "Asbestos Offset

Provision").

29. The Restricted Transfer Provision would be anathema to a potential

purchaser of the 2010 Notes since it would render these interests illiquid. The obligors on

the 2010 Notes would have no incentive for consenting to their transfer. From their point

of view, no doubt, it would be preferable having a hitherto compliant Garlock as the payee

under the Notes rather than a more aggressive third party.

30. The Asbestos Offset Provision would make it impossible for a potential

purchaser to value the 2010 Notes with any reasonable assurance because it leaves

uncertain and indeterminate the amount of any ultimate principal payoff on these

instruments. Due diligence would reveal both the fact of uncertainty and the potential

magnitude of the potential set-off. EnPro's 2016 10-K sets forth the historical expenses

7 Investopedia, www.investopedia.com/terms/l/liquidity.asp.

-t4-


and representations, affirmative and negative covenants, conditions, events of default and

remedies that collectively mitigate potential risks for the holders of the debt instrument

("Market Protections"). The 2010 Notes are almost completely devoid of these Market

Protections, offering only the most rudimentary protections.

35. For all of the foregoing reasons, I conclude that the 2010 Notes could not

be sold by a chapter 7 trustee in a hypothetical liquidation.

36. While I believe the express terms and conditions of the 2010 Notes would

themselves preclude a sale, it is worth noting that further due diligence would only

underscore sound reasons to avoid the risks inherent in these instruments. Inquiries would

reveal, for example, that in connection with the 2005 Restructuring and the refinancing

effected in 2010 by the 2010 Notes, no fairness opinion was ever issued to establish that

these transactions were fair from the standpoint of Garlock's interests, as distinct from the

interests of its related counterparties. "A fairness opinion involves a total review of a

transaction from a financial point of view. The f,rnancial advisor must look at the pricing,

terms and consideration received in the context of the market" for similar transactions.12

Although the Debtors can point to reports by Standard & Poor's Corporate Value

Consulting in2004t3 and by Duff & Phelps in 2010 ("D&P Report")ra as the basis for

how the interest rates were determined for the 2010 Notes and the 2005 Notes they

replaced, both of these reports explicitly state that they should not be construed as faimess

t2 Lee, Timothy R. and Heinz, Nicholas J., Mercer Capital Business Valuations and Financial AdvisoryServices, mercercapital.com/article/the-importance-of-faimess-opinions-in-transactions/.13 EnPro Industries, Inc., Valuation Services in Relation to the Issuance of a Subordinated Debt Instrument,dated as ofSeptember 30,2004.ra Garlock Sealing Technologies LLC, Valuation Services in Relation to the Renewal of Subordinated DebtInstruments, dated as ofJanuary 1,2010.

-t7 -


opinions. The D&P Report concerning the 2010 Notes did not mention, much less consider

the impact of, the Asbestos Setoff Provision, Subordination Provision and Restricted

Transfer Provision, nor did it take any notice of the absence of Market Protections in the

2010 Notes, even though all of these distinctive aspects of the 2010 Notes stood in contrast

to the publicly traded debt securities D&P used as "comparables." Given the limited scope

and purpose of the D&P Report and the predecessor report by S&P, they would be largely

irrelevant, and of little comfort, to well-advised investors considering a purchase of the

2010 Notes.

37. Due diligence would also lead potential purchasers to the Committee and

Future Claimants' Representative's proposed complaint setting out causes of action for

fraudulent conveyance, breach of fiduciary duty, unjust enrichment, piercing the corporate

veil, and successor liability against Garlock's parents and affiliates based on the

transactions in which the 2005 Notes and the 2010 Notes were created.ls According to

their allegations, those transactions constituted an improper attempt to shift value from

Garlock to affiliates so as to place it beyond the reach of asbestos claimants.l6 Inquiry

would reveal that the Bankruptcy Court never evaluated the merits of those claims, but

simply allowed them to be preserved against the lapse of time. Potential investors would

not take these matters lightly, but would regard them as red flags signaling that dealing in

the 20i0 Notes would entail substantial risks of litigation and potential losses, further

reinforcing my view that no third party would purchase the 2010 Notes.

rs See Proposed Complaint cited in n. 9 above.16 See Proposed Complaint tTT 16-19, 31-39,69-70,84-91and Memorandum 4-12, both cited in n. 9 above.

- 18 -


38. While the chapter 7 trustee would be unable to market the 2010 Notes in

toto, I can conceive of one possibility for him to monetize some value from the Notes. It

might be possible for the trustee to find an investor with a large appetite for risk who would

consider purchasing the annual cash interest payments under the 2010 Notes for a limited

period of time, such as two to five years. Such an investor would require a high rate of

return on its investment to compensate for the high degree of risk. Assuming a required

rate of return of 25o/o, and a two to five year interest payment stream, I estimate that the

Trustee could recover 10%o to 20Yo of the total carrying value (interest and principal) of the

2010 Notes ($328.5 million), resulting in a range of recoveries from $32.9 million to $65.7

million for the 2010 Notes.

Intangible Assets

39. At December 31, 2016, Garlock carried on its balance sheet $19.7 million

of goodwill and other intangible assets. Goodwill and intangible assets typically only have

value in the context of a going concem; accordingly, they are usually valued at" zero in a

liquidation analysis unless there is some clearly identifiable value associated with an

intangible asset that could be sold to a third party. I am unaware that Garlock has any such

marketable intangible asset, and therefore assign a zero value to the goodwill and other

intangible assets.

40. At December 31,2016, Garlock had defened income tax assets totaling

$125.2 million. Defened tax assets arise as a result of differences in the book carrying

value for an asset and the tax basis for such asset. Garlock's deferred tax asset relates

primarily to its asbestos obligations. While Garlock incurred expenses on its income

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statement for recognized asbestos liabilities, for tax purposes it was unable to take

deductions until such asbestos liabilities were actually paid. These timing differences gave

rise to the deferred tax asset. From the point of view of a chapter 7 trustee in a liquidation

scenario, these deferred tax assets would have no value.lT I have therefore assigned azeÍo

recovery for deferred tax assets in the liquidation analysis.

4L The chapter 7 trustee would also have the option of pursuing claims of the

estate against various parties, including EHI, EnPro, and other nonbankrupt affiliates of

Garlock. Indeed, given that the 2010 Notes would prove unsaleable, as discussed above,

the trustee would have strong reason to investigate the origins of those notes in Garlock's

2005 transfers of businesses to affìliates and the revision and extension of the notes in 2010

as Garlock was preparing for bankruptcy. The trustee would also wish to examine whether

Garlock's corporate history and intercompany dealings include instances of abuse by its

parent companies for which monetary recoveries might be available for Garlock's estate or

creditors. Claims of that kind would undoubtedly be complex, costly to pursue, time

consuming, and vigorously defended, and prospects for successful prosecution of them

would be uncertain. For these reasons, I do not think it appropriate to assign a monetary

value to these potential claims for purposes of my hypothetical liquidation analysis.

Instead, my analysis lists potential causes of action against affiliates as a contingent asset

with a question mark denoting that I am unable to ascertain the value of this asset with

reasonable assurance at this time.

r7 The value of a deferred tax asset lies in the expectation that the book/tax timing differences giving rise tothe asset will reverse in a subsequent period. If Garlock were in liquidation, such reversal would never takeplace, so the asset would have no value.

20


Gross Liquidation Proceeds and Deductions Therefrom

42. As shown in Exhibit I, the expected gross liquidation recoveries lie in a

range from $436.6 million to $487.5 million. There are certain priority obligations that the

chapter 7 would have to pay that would reduce the amount that is ultimately available to

unsecured creditors. Each of these is discussed in tum.

43. Garlock Tax Obligation to Parent - During the pendency of Garlock's

chapter 11, its direct or indirect parents have paid the income taxes on Garlock's taxable

income. At December 31, 2016, the balance owed by Garlock to its parents was $119.0

million. This is an administrative obligation that I have separately stated here because the

amount of the obligation is substantial and reasonably certain.

44. Administrative Expenses - In a chapter 7 liquidation, the trustee would have

to pay all the unpaid chapter 1l administrative expenses as well as the chapter 7

administrative expenses, which would include outlays by the trustee for counsel, financial

advisors, liquidators, and other professionals. I am unable to project the amount of these

expenses with any certainty, so I have noted them as being not available ("N/4") in Exhibit

i.

45. As shown in Exhibit 1, the net liquidation proceeds available to the chapter

7 trustee in a hypothetical liquidation of Garlock, before taking into account chapter 11 and

chapter 7 administrative fees, fall in a range from $317.6 million to $368.5 million. The

administrative fees, which would be substantial, would further reduce this range.

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Summary and Conclusion

46. Based on the foregoing analysis, it is my opinion that the proceeds of

liquidating Garlock's assets in chapter 7 would fall substantially short of the $480 million

that the Debtors are to contribute to the Trust for asbestos creditors under the Plan.

I declare under penalty of perjury that the foregoing is true and correct. Executed

on May 8,2017.

/s/ Rradlev M. RaooBradley M Rapp

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EXHIBIT 1


Exhibit I

Garlock Sealing Technologies, LLC

Hypothetical Liquidation Under Chapter 7 of the Code as of December 31,2016($ millions)

t2/3U16Book Value

Recovery RateLow High

Recovery AmountLow Hish

Assets with High Monetization ValuesCash and cash equivalents

Inve stment securities

Asbestos insurance receivables

Subtotal

Operating Assets

Accounts receivable

InventoricsProperty, plant and equipment, net

Other assets

Subtotal

Investment in Non-Bankrupt SubsidiariesCanada

Mexico/Australia

Subtotal

Related Party Notes ReceivableColtec and Stemco Notes (incl interest)

Intangible Assets

Goodwill and other intangible assets

Defened income taxes

Potential claims against affi liates

Subtotal

Total Liquidation Recoveries, Gross

Less:

GST tax obligation to parent

Chapter 7 administrative costs

Chapter 11 administrative costs

Net Liquidation Recovery for Garlock

336.2

23.92s0.3

62.0

l00o/o

l00o/o

85o/o

70o/o

50o/o

40o/o

0%

0o/o

l00o/o

l00o/o

l00o/o

95%

90o/o

70o/o

60%0o/o

0o/o

100o/o

23.9

250.3

52.7

23.9

250.3

58.9

326.9 333.1

14.8

7.3

36.94.3

10.4

3.7

14.8

13.3

5.1

22.1

63.3 28.8

48. I

40.6

48.128.8

48.1

76.9

328.5

19,7

125.22 ,

20%

0%0%

?

10%

0o/o

0%,

48.1

32.9

?

48.1

6s.7

144.9

949.8 436.6

317.6

(11e.0)

N/AN/A

487.5

(l le.0)N/AN/A

368.5



EXHIBIT 2


Exhibit 2

CURRICULUM VITAE

BRADLEY M. RAPP, MBA,ID, LL.M, CFA (Tax), LL.M. (Bankruptcy)

PROFESSIONAL SUMMARY

Mr. Rapp has over 30 years experience providinglegal, investment banking and

financial advisory services to a diversified client base, as well as expert witness

testimony and litigation support services on complex financial and valuation issues.

Over the past L5 years, Mr. Rapp has spent the vast majority of his time representingasbestos creditors' committees in many of the largest asbestos bankruptcies in the

United States, including Armstrong World Industries, Babcock & Wilcox, Burns & Roe,

Congoleum, Federal-Mogul, GJ Holdings, Inc., Kaiser Aluminum Corporation, Owens

Corning, Pittsburgh Corning Corp., Garlock Sealing Technologies, LLC, USG, W.R'

Grace & Co., Bondex/Specialty Products Holding Corp., Durabla Manufacturing,Flintkote, Global Investment Technologies/North American Refractory Co., Leslie

Controls, and United Gilsonite.

Mr. Rapp's financial advisory services to the asbestos creditors' committees has

included the review and analysis of debtors' financial statements and financialprojections, the review of disclosure statements and plans of reorganization from afinancial point of view, the valuation of equity and debt instruments and other business

interests, the review of debtor business plans and proposed actions during the

pendency of the bankruptcies, due diligence in connection with the business operations

and financial affairs of the debtors, the review of financial and other documents inconnection with providing litigation support services to counsel to the asbestos

creditors' committees, including fraudulent conveyance litigation.

Mr, Rapp's business and legal educational background has facilitated the supportservices he has provided to asbestos creditors'committees. He received a M.B.A. fromThe Harvard Business School and has achieved the Charter Financial Analyst and

Certified Insolvency and Restructuring Analyst designations. Mr. Rapp has also

studied business valuation through courses offered by the American Society ofAppraisers as well as through independent study. Mr. Rapp's legal education includes

a J.D. from Fordham Law School, a LL.M (Taxation) from New York University LawSchool and a LL.M. (Bankruptcy) from St. John's University Law School. The breadth of

Mr. Rapp's educational endeavors has afforded him the ability to understand the often-complex issues that arise in Chapter 11 proceedings.

May 2017


EDUCATION

Lehigh University - B.S. in Fundamental Sciences - 1974Harvard Business School - MBA -1978Fordham Law School - J.D. -1982New York University Law School - LL.M. (Taxation) - 1985St. John's University Law School - LL.M. (Bankruptcy) - 2009

PROFESSIONAL DESIGNATIONS AND BAR ADMISSIONS

Chartered Financial AnalystCertified Insolvency and Restructuring AnalystBar Admissions:

New YorkNew Jersey

INVESTMENT BANKING AND FINANCIAL ADVISORY ASSIGNMENTS

Reorganizatio4fRestructuring Assignments Prior to 2002

Provided financial advisory services to one of the nation's largest independent softdrink bottling companies in connection with its successful Chapter 11" financialreorganization. Worked with the company's chief financial officer in developing a

financial reorganization plan. Performed a valuation of the company that wasutilized in determining the reorganization value of the entity.

Provided financial advisory services to a nationwide restaurant chain in connectionwith its successful Chapter LL reorganization.

Assisted attorneys in the development of a prepackaged plan of reorganizationfor a

company that provided electronic in-store advertising for supermarket chains.

Represented a creditor's committee of senior secured lenders in connection with thereorganization proceedings of a major life insurance company.

Retained by a governmental agency in connection with the bankruptcy proceedingsof a specialty metals manufacturer. Services included the analysis of the financial

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statements and cash flows of the company and numerous subsidiaries, as well as thenegotiation of appropriate financial terms for a settlement agreement.

Retained by a governmental agency in connection with the bankruptcy proceedingsof a major investment bank. Services included the feasibility analysis of the plan ofreorganization and certain deferred payments to be made to the agency.

Developed financial restructuring plan for a major restaurant holding company inNew York City.

Provided financial restructuring advice to a specialty retailer of women's fashions

Provided financial restructuring advice to a manufacturer and distributor of fixturesfor department stores.

Proj ect Finance/lVlergers & Acquisitions

Analyzed several potential acquisition targets for an independent power producer.Services included the analysis of power purchase agreements, fuel supply and otherproject documents as well as the development of comprehensive project financingmodels.

Assisted an independent power producer in the negotiation of financing for theacquisition of a gas-fired electric generating facility.

Provided financial advisory and other consulting services to the developer of abiomass/geothermal power plant in Northern California.

ValuationÆairness Opinion Assignments

Performed numerous valuations in connection with Chapter l,L assignments andrelated fraudulent conveyance litigations.

Prepared a fairness opinion for the board of directors of an Israeli high-techcompany relating to the fairness of compensation paid to its parent company forcertain financial services.

Performed a valuation of a soft drink syrup manufacturer and a major fast-foodrestaurant chain in connection with the issuance of certain fairness opinions.

Performed a valuation of a minority-interest block of common stock in amanufacturer and distributor of high quality textiles for estate tax purposes

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Performed a valuation of certain interests in a domestic oil and gas productioncompany for estate tax purposes.

Performed valuations and other financial analyses of a national steakhouse chain inconnection with the issuance of a fairness opinion.

Retained by a governmental agency to value certain restricted Mexican pesos thatwere transferred in connection with a Mexican debt-equity swap fransaction.

Retained by a medical instruments company to perform a valuation of warrantsissued in connection with an offering of debt securities.

Business DevelopmentÆunding Assignments

Retained by high-tech company to develop financial projections and a business planin connection with an equity private placement.

Retained by a health services company to develop a financial model for the spin-offof ,its methadone addiction programs business.

Retained by a health care services company in the private placement of debt

Developed a business plan for a medical website startup venture.

Developed a business plan for an independent record label

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ESOP Assignments

Retained by a Fortune 500 company to perform annual ESOP valuations.

Retained by counsel for ESOP plaintiffs in an ERISA-related action against a majorcorporation and certain other parties. Assisted counsel in the due diligence reviewof corporate minutes, memoranda and valuation documents relating to the action.

Retained by a casualty insurance company and its life insurance subsidiary toprovide annual valuations of certain ESOP convertible preferred stock.

Retained by an ESOP trustee to analyze the terms and conditions of thedemutualization plan of a major insurance company.

Retained by an ESOP trustee to provide financial advice in connection with threeregional bank mergers.

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Liti gation Support Assi gnments

Provided litigation support services to plaintiffs in class-action suit involving a high-profile merger in the telecommunications industry.

Provided litigation support services in connection with a complex securitieslitigation between a major investment bank and a large consumer productscompany.

Retained by attorneys to determine the reasonableness of financial advisory servicesfees in connection with a merger and acquisition transaction.

Retained by attorneys to represent a major accounting firm in connection withaccountant liability litigation.

Retained by a governmental agency to perform forensic financial advisory servicesin connection with three separate litigations.

Retained as the chief valuation expert by counsel for plaintiffs in a class actionasbestos-related litigation matter. Prepared valuations of several differentoperating businesses in connection with fraudulent conveyance claims.

Retained by a commercial bank to value a portfolio of derivative securities inconnection with certain litigation.

Performed a settlement benefits analysis for a sponsor of real estate partnerships inconnection with certain litigation.

Retained by attorneys to analyze the fairness of compensation received by class-

action plaintiffs in connection with the acquisition of a semiconductor company.

Retained by attorneys to analyze tlne appropriate level of compensation for aninvestment banking firm in connection with the sale of a chain of steakhouses.

Retained by attorneys to examine executive compensation provisions of aninvestment firm in connection with certain litigation.

Retained by attorneys to assist in the negotiation of a split-up of a family-ownedfruit and produce company.

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Retained by a bankruptcy trustee to perform financial advisory services inconnection with fraudulent conveyance and preference claims in the Chapter 7

proceedings of a national clothing retailer.

Retained by attorneys to analyze the performance of several specialty chemicalcompanies in connection with a litigation settlement.

EMPLOYMENT HISTORY

Charter Oak Financial Consultants, LLCBradley M. Rapp & Co.L. Tersigni Conultin& P.C.Whitman Heffernan Rhein & Co.,Inc.Management ConsultantCommercial Union Capital CompanyCahill Gordon & Reindel

2007 - Present1995 -20072002 - 20071991, -19951987 -799'1,

1985 -79871982 - L985

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EXHIBIT 3


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Exhibit 3

Source Documents

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Garlock 2016 audited financial statements

Garlock 20 1 6 unaudited consolidating financial statements

Intercompany Waiver, Amendment, Assignment and Assumption Agreement, dated as ofDecember 3I,2076, by and among EnPro, Coltec, EHI, Oldco, Stemco LP, Garlock andGarrison.

Amended and Restated Subordination Agreement, dated as of April 26,2006, by Garlockin favor of Bank of America, as agent for itself and certain other senior lenders.

Stemco LP Promissory Note due January 1 , 2010.

Coltec Industries Inc. Promissory Note due January 1,2010

Stemco LP Amended and Restated Promissory Note due January 1, 201 I

Coltec Industries, Inc. Amended and Restated Promissory Note due January 1, 2018.

Amended and Restated Pledge Agreement (GGB/CIP), dated as of January I,2010

Amended and Restated Pledge Agreement (Stemco), dated as of January I,2010.

Amended and Restated Coltec Industries Inc. Guaranty Agreement in favor of StemcoLP, dated as ofJanuary 1,2010.

Amended and Restated Credit Agreement, dated as of August28,2014, among ColtecIndustries Inc and EnPro Industries, Inc., as borrowers, and Bank of American, as agentfor itself and certain other lenders.

a Third Amendment to Amended and Restated Credit Agreement, dated October 12,2016,among EnPro Industries, Inc. and Coltec Industries Inc., as Borrowers, and Bank ofAmerica, as agent for itself and Other Senior Lenders (lr{ote: need to check to see if thisamendment was publicly disclosed)

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EnPro's 2016 10-K

Standard & Poor's Report, "Valuation Services in Relation to the Issuance of aSubordinated Debt Instrument, dated as of September 30, 2004.

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Duff & Phelps Report, "Valuation Services in Relation to the Renewal of SubordinateDebt Instruments, dated as of January 1,2010.

Memorandum (redacted) of the ACC/FCR in Support of Their (1) Motion for Leave toControl and Prosecute Certain Claims as Estate Representatives, and (II) Motion to LiftInjunction to Permit Such Claims to Proceed, filed April 30, 2012, Doc 2151 (publicdocument), and accompanying proposed Complaint (redacted), Doc 2150-2.

January 2011 correspondence between an investor group representative and Debtor'scounsel relating to Solcitation of Interest.

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EXHIBIT 4


Exhibit 4

2010 Notes Description

The following sets forth the basic provisions of the 2010 Notes:

1. Original combined principal amount: 5227,246,000

2. Maturity date: January 1,20181

3. Interest: llYo per annum on the unpaid principal balance, payable annually on January

3 1 of each year for the prior calendar year; 4 .5%o of the I 1 % is payment-in-kind ("PIK")interest that, after becoming payable each January 31, is added to the principal balance

effective as of each January I immediately preceding the January 31 interest payment

date.

4. 2010 Notes are subordinated to all senior indebtedness ("subordination Provision") in

accordance with the Amended and Restated Subordination Agreement, dated as of April26,2006,by Garlock in favor of Bank of America, N.4., as agent for itself and certain

other senior lenders (as amended from time to time, the "subordination Agreement").

5. Subject to the provisions of the Subordination Agreement, in the event (a) the holder ofthe 2010 Notes (which includes Garlock and any registered assignees) is unable to pay

ordinary course operating expenses ofits business for at least ten business days due to

inadequate liquidity and (b) the holder is unable to borrow under any credit facility towhich it has access in order to fund the payment of such operating expenses, then the

holder can require the issuer of the 2010 Notes to pay to the holder in cash any accrued

PIK amounts required to pay such ordinary course operating expenses, subject to a

maximum monthly limit of 1% of the outstanding principal balance of the Notes and an

annual limitation of 4.5%o of the outstanding principal balance of the Notes. Operating

expenses excludes any losses, damages, liabilities, expenses or obligations related to

asbestos litigation affecting the holder of the 2010 Notes.

6. In the event that Coltec and/or Stemco LP suffers any loss or damage or incurs any

liability or expense relating to the asbestos liabilities of Garlock under any theory ofderivative liability, they can set off any such amounts against the principal and interest

amounts outstanding, but only to the extent of amounts actually paid for such losses,

damages and expenses ("Asbestos Setoff Provision").

I The original maturity date of the 2010 Notes was January 1 , 2017 . Pursuant to the Intercompany Waiver,

Amendment, Assignment and Assumption Agreement dated as of December 31,2016, by and among EnPro, Coltec,

EHI, OldCo, Stemco LP, Garlock and Garrison (the "Intercompany Agreement"), the maturity date was extended to

January 1,2018.


7. The obligations of Coltec under the 2010 Coltec Note are secured by a junior pledge ofColtec's equity interests in Coltec Industrial Products LLC ("CIP") and GGB LLC("GGB") ("Coltec Junior Pledge").

8. The obligations of Stemco LP under the 2010 Stemco Note are secured by Coltec's direct

and indirect equity interests in Stemco LP ("Stemco Junior Pledge"), as well as a Coltec

guaranty of such obligations ("Coltec Guaranty").

g. The Coltec Junior Pledge, Stemco Junior Pledge and Coltec Guaranty are subordinated to

Rank of America's collateral package under the Amended and Restated CreditAgreement, dated as of August28,20l4, among Coltec Industries Inc. and EnPro

Industries, Inc., as borrowers, and Bank of America, as agent for itself and certain other

lenders ("Credit Agreement"), pursuant to the provisions of the Subordination

Agreement.

10, The 2010 Notes cannot be transferred or assigned without the consent of the issuers ofthe 2010 Notes ("Restricted Transfer Provision").

1 l. Covenants - Coltec and Stemco LP covenant under their respective notes that they will(i) punctually pay interest and principal when due and (ii) do all things necessary to

maintain their entity existences.

12. Events of default (ooEvent of Default") under the 2010 Notes include:

a. Default in the payment of interest that continues for a period of 30 days;

b. Default in the payment of principal when due;

Default in the performance of any covenant or warranty by the issuers of the 2010

Notes that remains uncured for 60 days after notice of such default;

d. Entry of a decree by a court having jurisdiction adjudging the issuer(s) bankrupt

or insolvent that remains unstayed for 60 consecutive days; and

e. Actions taken or acquiesced by the issuer(s) to be adjudicated as bankrupt or

insolvent.

13. Remedy - Upon the occurrence of an Event of Default, the holder of the 2010 Coltec

Note or 2010 Stemco Note may declare the principal of each such note immediately due

and payable. Such acceleration is subject to the provisions of the Subordination

Agreement.

c.
