Monday, Apr 23, 2018
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Wall St. drags Dana into asbestos doldrums

Dana Corp.'s asbestos-related liabilities will cost about $5 million before taxes this year - a minuscule expense for the $13.2 billion company - but Wall Street has drawn the auto supplier into the same dreary picture as fellow Toledo companies Owens Corning and Owens-Illinois, Inc.

As Dana's stock price and bond evaluations falter, the company has been named as yet another casualty of asbestos liabilities like those behind OC's bankruptcy-protection filing in October. Some Dana investors have expressed concern about the size of the auto-parts maker's asbestos liabilities, a situation investment firm Merrill Lynch & Co. called “overblown” yesterday.

A report in yesterday's Wall Street Journal said that stocks and bonds of a growing number of Old Economy companies with even remote connections to asbestos are tumbling amid heightened worries that asbestos litigation is becoming costlier for companies that are its targets.

Along with O-I, which also has experienced a stock-price drop this year, Dana maintains its asbestos risks remain under control. Few asbestos claimants ultimately identify Dana products, such as clutch facings and gasket material, and its insurance carriers shoulder most costs, said Greg Smietanski, Dana's director of investor relations.

“It's upsetting,” Mr. Smietanski said of the asbestos-related attention. “But, at the same time, our comfort level remains the same.”

Yesterday, however, stock of all three Toledo-based Fortune 500 companies performed well on Wall Street yesterday. Dana gained 7 percent; O-I was up 22 percent, and Owens Corning - beaten down to under $1 a share - was up 25 percent.

Dana's stock price hit a new 52-week low last Thursday but closed yesterday at $14.94 a share on the New York Stock Exchange, up $1. Despite yesterday's rise, though, Dana's stock remains far below its 52-week high of $33.25 a share.

The Wall Street Journal report yesterday quoted Rick Rieder, head of corporate-bond trading at Lehman Brothers Holdings Inc., as saying asbestos is “... having the most devastating impact on certain companies as I've seen in a number of years. Asbestos is an issue that touches a number of companies directly, and others in a broad way, and investors aren't touching any security believed to have significant exposure.”

Currency exchange rates, a slowdown in both heavy-truck and light-vehicle markets, and soft sales of replacement parts have had much more to do with Dana's stock decline than have asbestos concerns, said Efraim Levy, an equity analyst with S&P Equity Group in New York.

“Dana has been hit with everything you can be hit with,” he said.

Next year, Dana again expects to have expenses of about $5 million before taxes for asbestos-related issues. Dana had 70,000 outstanding claims as of Sept. 30, and 33,000 were covered by settlement agreements.

“Dana's asbestos-related exposure has never been material,” Mr. Smietanski said. “The company knows of no reason why it will be material in the future.”

Moody's Investors Service last month downgraded Dana's long-term debt rating from Baa1 to Baa2, a move that maintained its investment-grade status. Standard & Poor's Ratings Services, meanwhile, revised Dana's debt outlook from stable to negative in October while keeping its investment-grade ratings for corporate credit, senior unsecured debt, and commercial paper.

Although Moody's and S&P both talked about the industry woes facing Dana in their reports - and its debt-to-equity ratio of about 52 percent - neither mentioned asbestos. Dana's asbestos liabilities haven't played into its debt ratings, said Lisa Jenkins, a fixed-income analyst with S&P Ratings Services in New York.

“We don't view it as a major rating concern at this time,” she said. “It's more operational issues.”

Owens Corning created unease on Wall Street and turmoil for other former asbestos producers when it filed for Chapter 11 bankruptcy protection Oct. 5. The firm was the largest of more than two dozen that have used federal bankruptcy laws to gain relief from tens of thousands of asbestos liability claims since 1980.

After the filing, stockholders rushed to sell shares of other companies that produced asbestos, including downtown Toledo neighbor, Owens Illinois, Inc. Both firms were once involved in the production of an asbestos-containing insulation known as Kaylo.

Banks have tightened lending to the former asbestos producers. Another company, Armstrong World Industries, Inc., filed for Chapter 11 protection Dec. 6.

O-I, whose stock briefly dropped below $3 a share but yesterday rose $1 to $5.50, says its asbestos problem is not as bad as Owens Corning's because it stopped producing the asbestos insulation in 1958, long before OC. Still, O-I has been dropped from the prestigious Standard & Poor's 500 stock index of leading U.S. companies.

Investors have become worried that plaintiffs' lawyers will increasingly sue companies that never actually made asbestos, but either used asbestos in their workplaces or transported asbestos-related products.

Meanwhile, investors are scrambling to determine the most vulnerable companies and are dumping their stocks and bonds. Some large investors say they have been combing through documents of companies ranging from auto suppliers to oil companies, looking for the word “asbestos,” a potential red flag that gives reason enough to avoid a company's stock or bonds.

But Warren Buffett is buying up shares of USG, a Chicago company with potential asbestos exposure.

So, too, are insiders at some similar companies. Bulls point to recent activity by Mr. Buffett, known for his savvy, often contrarian, bets as a sign that the sector is a bargain.

Still, some on Wall Street caution investors not to make a big bet soon on companies stained with the asbestos brush.

Estimates of potential liabilities have in the past been too low. Unless investors have patience to wait for the outcome of all lawsuits, it may take a while before the pessimism lifts.

The Wall Street Journal contributed to this report.

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