Key time in OC bankruptcy

The Toledo-based building-products manufacturer entered Chapter 11 bankruptcy in 2000, burdened by liability for asbestos claims.

OWENS CORNING'S debt-reorganization plan faces the start of a key test next week when dissenting bank creditors present arguments that, if successful, could force the company into a major revision of its roadmap for emerging from bankruptcy.

U.S. District Judge Alfred Wolin, who is helping with the Toledo firm's 21/2–year-old asbestos bankruptcy case, will listen to arguments at a hearing starting April 8 in Newark, N.J.

It will mark the start of a critical new phase in OC's Chapter 11.

It is the official opening of the firm's reorganization plan confirmation process, lawyers said. The process is expected to go on for several months, after which the judge either will approve the plan or order the company back to the drawing board. With approval, and if Judge Wolin succeeds in forcing the feuding parties into a compromise, lengthy appeals would be averted and the Toledo company could quickly emerge from bankruptcy.

Toledo-based OC, which is known for its Pink Panther mascot, is a major manufacturer of insulation, vinyl siding, roofing shingles, faux brick, and fiber glass. It had 2002 sales of $4.9 billion, making it a Fortune 500 firm. The firm filed for Chapter 11 Oct. 5, 2000, to gain relief from hundreds of thousands of asbestos liability claims.

There is a wide chasm between asbestos claimants, who stand to gain the most under the debt-reorganization plan, and other creditors.

Stephen Case, a lawyer representing banks, bond holders, and others on OC's unsecured creditors committee, is critical of the $16 billion valuation of pending and expected asbestos claims.

“It is preposterous,” he said. He argues that the figure should be lower, but didn't say by how much. Most of the money is for people expected to get sick from exposure years ago to OC's asbestos insulation. The company stopped making the product in 1972. Most claims are from installers and others who spent years working around asbestos insulation.

Andrew Kress, a New York attorney who represents asbestos claimants, defended the $16 billion valuation.

“I don't think it's inflated,” he said. “It could be higher. The lion's share is in future claims.”

Said Mr. Case: “The main reason we oppose the plan is because it doesn't pay us enough.”

OC owes $1.5 billion to a consortium of international banks led by Credit Suisse First Boston. They argue they should get a larger percentage recovery on their claims because loans were backed by OC subsidiaries while other debt was not.

“... Owens Corning is not a financial shell game like Enron but one of America's most respected companies,” bank lawyers wrote in a pre-trial motion. “To permit Owens Corning to walk away from its negotiated ... commitments simple to facilitate a plan of reorganization would be shocking - and would set a dangerous and destabilizing precedent.”

Other creditors contend that OC and its subsidiaries should be considered as one entity and that the banks are entitled to no more than other creditors.

Still, in an effort to settle the matter, the two-month-old debt-repayment proposal - also known as a reorganization plan - includes a $400 million payment to the bank on top of their regular recovery. The proposal would give the banks 47 cents for each dollar they are owed, lawyers said.

Lawyers were unsure, however, how much other creditors would recover.

The debt repayment plan was filed jointly by the company and its asbestos claimants, without the support of other creditors. Under the proposal, OC's asbestos liability would be canceled and a trust fund would be set up to pay claims. The trust would get a majority of newly issued company stock and the right to pick seven of 12 members of a new corporate board of directors.

Lawyers say that Judge Wolin, who will hear the case in his courtroom in Newark rather than in Delaware where the bankruptcy was filed, has indicated he will pursue an unconventional approach to encourage settlement.

After allowing the banks to make their case, he is expected to issue no formal ruling but has indicated he will let all sides know how he intends to rule.

“We don't expect the judge to issue a separate order,” said Stephen Krull, OC legal chief.

It would be an effort to get the losing side to compromise and to avert appeals, which would prolong the bankruptcy. A formal ruling would come when Judge Wolin made a decision on the plan of reorganization, probably in early fall, lawyers said.

If the disagreement isn't settled by then, the losing side would be free to appeal the judge's decision.

“The judge's objective is to get a plan confirmed,” said Mr. Case, lawyer for unsecured creditors.

“The concern that some people have is that, if he put out an appealable order ... that will stop the train on getting a plan confirmed until the appeal is decided. He is trying to arrange things so that, if there are appeals, there will be a completed package and all the appeals will be heard at the same time.”

The judge has set aside 14 days to hear testimony on whether OC and its subsidiaries should be considered separately or as one entity.

“The court's process of approval will follow an unusual course,” conceded OC's chief counsel, Mr. Krull.

Said Louis Solimini, a Cincinnati bankruptcy lawyer who is not involved in the OC case, “It sounds like he is trying to do things on parallel tracks, rather than sequentially, to save time.”

Fear that creditors might vote down the proposal would preclude such an arrangement in a typical bankruptcy. Often that would mean competing plans could be filed, which would give the bankrupt company less direct say in how it should emerge from bankruptcy.

But that is not so in the OC case. Under the special rules of asbestos bankruptcies, a debt-reorganization plan needs only the support of asbestos claimants. The firm's asbestos claimants committee, which is a co-sponsor of the OC proposal, includes lawyers representing most such claimants. That would seem to assure OC of winning the support of the needed 75 percent of those claimants, lawyers said.

Mr. Krull, of OC, said the firm will revise its repayment plan as the judge makes his wishes known during the approval process.

If Judge Wolin approves the plan and disputes remain, creditors would be free to seek a court order delaying its implementation. They could then file an appeal with the Third Circuit Court of Appeals in Philadelphia. Such an appeal, lawyers say, could delay the Toledo firm's emergence from bankruptcy by six months or more.

Even so, OC officials and company lawyers say the firm could exit Chapter 11 by early next year. “I'm cautiously optimistic that Owens Corning will emerge from Chapter 11 in the first quarter of 2004,” said Norman Pernick, an OC lawyer in Delaware.

A number of secondary disputes could be delayed until then, Mr. Pernick said.

They include OC's demand that big stockholders return dividends paid during a period when OC may have been technically insolvent, efforts to recoup asbestos claims settlement money received by lawyers on behalf of clients in the months before Chapter 11, and attempts to win back some of the money OC paid for asbestos-liability-laden Fibreboard, Corp. in 1997.

Unaffected by developments in bankruptcy court are lawsuits filed by bond holders and shareholders in federal courts in Boston and Toledo, naming retired Chief Executive Glen Hiner and a number of other officers and directors - but not the company - as defendants. The lawsuits, whose primary target are OC's professional liability insurers, allege that officials deceived plaintiffs about the company's true financial health and other wrongdoing.

Bloomberg News Service contributed to this report.