Thursday, Apr 19, 2018
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OC's woes tighten credit for ex-asbestos makers

Flooring and ceiling maker Armstrong Holdings, Inc., was negotiating its $450 million one-year credit line last month when Toledo's Owens Corning filed for bankruptcy protection from mounting asbestos claims.

Suddenly, terms for that credit changed for Armstrong, which like OC made products with asbestos and faces liabilities for people made ill by exposure to those products. Armstrong didn't agree to the banks' new terms, resulting in the credit line's denial and expiration.

That and the Lancaster, Pa., company's plummeting stock price are direct results of OC's bankruptcy and ongoing asbestos litigation, said Stan Steinreich, Armstrong spokesman.

Some industry experts contend a domino effect has started as the number of companies that can be targeted by asbestos lawsuits dwindles. Possible cash shortages created by credit problems and foundering stock prices signal potential disaster, in which other major firms could be swept into bankruptcy, they add.

A potential casualty is down the street from Owens Corning, at downtown Toledo's most recognizable skyscraper, the home of Owens-Illinois, Inc. O-I, which stopped making asbestos products in 1958 and maintains bankruptcy is not looming, will begin negotiating next year for a $4.5 billion credit line expiring at the end of 2001.

The Fortune 500 maker of glass and plastic containers works with a group of 81 lenders, led by Deutsche Bank, Bank of America, and Scotiabank. It expects to pay higher interest because of OC's bankruptcy.

“Obviously we'd rather not do that, but we have the ability to do that if necessary,” said O-I spokesman John Hoff.

Said Mr. Steinrich of Armstrong: “The world for companies like ours changed in the backdraft of the Owens Corning filing.”

“We're still assessing what the impact is going to be for us and for the entire industry,” he added. “We need to see how, over time, the impact plays out.”

Banks will continue lending money to former asbestos manufacturers, especially if they are financially strong and could successfully come out of bankruptcy, but the banks may impose stricter covenants, said Keith Leggett, a senior economist with the American Bankers Association.

Banks may demand secured positions, another industry expert said. None of the banks in OC's bankruptcy, which listed $6 billion in debts, had secured creditor positions.

“Given the fact that there is this overhang of asbestos lawsuits, creditors are going to be very cautious in regard to lending,” Mr. Leggett said. “Firms use bankruptcy as a defense mechanism to basically cap any contingent liability.”

O-I isn't in as deep trouble as Armstrong and other manufacturers and is at less risk for bankruptcy, one analyst said. O-I is in a strong financial position and stopped making asbestos products long before others, so its pool of potential sufferers is small and not likely to grow, said Eric Bosshard, an analyst with Cleveland's Midwest Research.

Symptoms of cancer and other lung illnesses caused by asbestos may not surface for as long as 40 years after exposure. O-I's claimants are 72 years old on average, said Joel Tiss, an analyst with Lehman Brothers in New York.

Worry over O-I's situation isn't justified, Mr. Tiss said. O-I will pay out $150 million in asbestos claims this year, the highest amount yet, but it won't consume its $250 million in free cash flow, he said.

“Even in their worst year, they're still going to have free cash flow, easy,” Mr. Tiss said. “All that stuff is so overblown, it's ridiculous.”

Still, Mr. Bosshard said, “Owens Corning wasn't the first to go, and they may not be the last.”

Asbestos liabilities have prompted Standard & Poor's, Moody's Investors Service, and other firms to reconsider bond ratings for O-I and the others. A day after downgrading the senior unsecured debt rating for Philadelphia's Crown Cork and Seal Co., Inc., last week, Moody's announced it is considering a similar move for O-I and will talk with company officials.

O-I remains an excellent operator, but asbestos claims continue to increase and attorneys are becoming more aggressive, said Linda Montag, a senior vice president with Moody's. The rating agency will have to determine what kind of effect potentially higher asbestos claim payments could have on O-I's cash flow, she said.

“Now that Owens Corning has filed, there's one less deep pocket out there,” Ms. Montag said.

Armstrong's Mr. Steinreich said his company continues to negotiate with lenders for the one-year credit line. Although the firm has a more effective program for handling asbestos claims than OC, he said, it recently announced it would suspend quarterly dividends to pay short-term debt.

Analyst Timothy Jones of Ryan Beck Southeast Research Group in Boca Raton, Fla., said he would rather see Armstrong use that money to buy back stock, but it apparently is feeling pressure from banks.

Armstrong, O-I, and other former asbestos manufacturers are feeling pressure from Wall Street, too. Since OC's Oct. 5 bankruptcy filing, Armstrong's stock has plunged 78 per cent from $11.50 to $2.50 a share on the New York Stock Exchange, and O-I's fell 35 per cent from $9 to $5.88 a share on NYSE.

The collective market capitalization among five former asbestos building-materials manufacturers - OC, O-I, Armstrong, USG Corp. of Chicago, and W.R. Grace & Co. of Columbia, Md. - has dropped from $18 billion at their 1998 peaks to $1.9 billion.

“There's been a tremendous loss in market capitalization in the key businesses remaining,” said OC spokesman Gregg Bronk. “Clearly, it doesn't paint a very bright picture, especially with joint and several [legal doctrine] coming into play.”

Under the joint and several doctrine, asbestos manufacturers found by courts or juries to share the blame for exposure causing injuries can be forced to pay their own share of damages as well as those that were attributed to the firms in bankruptcy. Plus, because O-I sold its asbestos manufacturing operations to OC, lawyers may target O-I with new cases now that they can't go after the bankrupt firm, one expert said.

O-I's Mr. Hoff said such targeting is not likely to hold up in court. “I just don't think there's any legal standing for something like that,” he said.

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