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Published: 10/2/2005

Struggling toward exit: Asbestos-related bankruptcies continue to dog OC, other firms

BY GARY T. PAKULSKI
BLADE BUSINESS WRITER

Owens Corning's hopes of quickly emerging from Chapter 11 protection are long gone.

But as the bankruptcy case passes the five-year mark this week, the firm has plenty of company.

Of the pack of U.S. businesses that filed for Chapter 11 at the turn of the last century to escape a blizzard of asbestos liability, most continue to struggle to emerge.

In comments last week, lawyers for the Toledo building products manufacturer pointed to what they regard as hopeful signs that an impasse between opposing creditors may be nearing an end. That hurdle has prevented a speedy bankruptcy exit.

"Talks are on a faster rather than a slower track," lawyer Norman Pernick said during the firm's monthly hearing in U.S. Bankruptcy Court in Wilmington, Del.

"Talks are toward a broad conclusion of the case. They have been ongoing and are pretty substantive."

While offering encouragement, Judge Judith Fitzgerald said she wants the Fortune 500 firm to submit a revised plan of reorganization by Dec. 31. The current plan was derailed Aug. 15 by the Third Circuit Court of Appeals in Philadelphia, which overturned a key provision affecting how much banks will recover from the $1.6 billion they lent the company before bankruptcy.

Stephen Krull, OC's in-house legal chief, struck an equally optimistic note in a separate interview.

Although the Appeals Court ruling that was decided in favor of the banks creates more work for OC's legal team, it was the second resolution this year of a major issue dividing the main adversaries in the case, Mr. Krull said.

Earlier, U.S. District Judge John Fullam pegged the firm's asbestos liability at $7 billion, choosing a figure midway between estimates of the banks and the asbestos claimants with whom the banks have been at odds.

"Those were complex issues," Mr. Krull said of the twin decisions. "They have now been resolved."

The Third Circuit rejected a request by OC's creditor groups to reconsider its decision, although the parties have the option of appealing the matter to the U.S. Supreme Court.

Mr. Krull emphasized: "We're not willing to sacrifice how we emerge for when we emerge. The focus is on our company emerging strong."

In addition to OC's asbestos debt, its Fibreboard subsidiary owes $1.3 billion, which is expected to be paid by a trust fund financed with asbestos insurance proceeds. Other debts include $1.7 billion owed to bondholders and vendors.

Negotiations in the case are being led by top East Coast tort and business lawyers who are no strangers to legal scrums.

Heading talks for agent Credit Suisse First Boston and other banks is Martin Bienenstock, of the New York firm Weil, Gotshal & Manges LP. Mr. Bienenstock, 52, led his firm's representation of Enron Corp.

Leading negotiations for asbestos claimants is Elihu Inselbuch, 67, a lawyer with New York's Caplin & Drysdale, who bills at a rate of $795 an hour.

"I cannot comment on confidential discus-

Leading negotiations for asbestos claimants is Elihu Inselbuch, 67, a lawyer with New York's Caplin & Drysdale, who bills at a rate of $795 an hour. "I cannot comment on confidential discussions," Mr. Inselbuch said.

Mr. Bienenstock did not respond to a request for comment.

While talks continue on the East Coast, a strong housing market has helped metro Toledo's third-largest corporation nail down healthy profits from the sale of insulation, roofing shingles, faux stone, vinyl siding, fiberglass, and other products.

Profits, at $67 million in the second quarter, were twice those of a year earlier. Sales rose 14 percent to $1.4 billion. In 2004, the company took in a record $5.7 billion.

Chief Executive Dave Brown said morale at the firm is good, despite the hit taken by the company's stock and the resulting damage to employee 401(k) retirement savings accounts, which often contained significant amounts of OC stock. The company has nearly 20,000 employees worldwide.

The Pink Panther firm's strong results and safety improvements -accidents worldwide have been cut by 65 percent in three years - show that employees' "hearts and minds are really in the game," Mr. Brown added.

Rivals suggest that firms in Chapter 11 are sometimes at a competitive advantage because bankruptcy frees them from huge interest payments and allows them to renegotiate more favorable terms on contracts with landlords and others.

"If there are advantages, we have found none," Mr. Brown said, noting that the only positive outcome will be an end to the firm's asbestos liability issues.

Conversely, the absence of strong stock - which, under current plans, will be worthless at the end of the bankruptcy case - prevents OC from using shares to raise cash for acquisitions and other uses, he added.

OC is far from where executives had hoped at the time of the filing for filed for Chapter 11 on Oct. 5, 2000. The management team led by CEO Glen Hiner portrayed bankruptcy as an opportunity to end the firm's long asbestos liability problem and to be "Clear and free by 2003."

Mr. Krull was then an aide to OC's chief counsel, Maura Abeln Smith, but wasn't a senior officer. "Company leadership thought it was important to set an aggressive objective," he said.

Had OC met its target of exiting bankruptcy in three years, it would have been one of the few former producers of asbestos-containing products to do so.

The first major asbestos bankruptcy, filed by Johns Manville Corp. in 1982, lasted six years.

Halliburton Corp., a major supplier to the U.S. military in Iraq, emerged from an asbestos bankruptcy involving a subsidiary this year after less then two years. The case was resolved quickly because the firm came to terms with creditors before filing. As part of the settlement, the company agreed to pay $5.1 billion to settle hundreds of thousands of claims.

More typical, however, are the cases of Babcock & Wilcox and Pittsburgh Corning Inc.

Babcock, which filed seven months before Owens Corning, continues to struggle to develop a plan of reorganization that is acceptable to creditors.

Pittsburgh Corning, a glass-block manufacturer owned partly by Pittsburgh's PPG Industries Inc., filed two months after Babcock and six months before the Toledo company.

The Pennsylvania firm's reorganization plan received needed support from creditors in voting last year, but has yet to be approved by a bankruptcy judge because of objections by other creditors.

As part of the proposed settlement, PPG will make significant contributions to an independent trust fund that will pay asbestos claims against Pittsburgh Corning. Those contributions include nearly $1 billion in cash and 1.4 million shares of PPG stock.

Such trust funds are set up in all asbestos bankruptcies under special laws governing the cases. Under those laws, the trust funds receive slightly over half of the reorganized company's stock.

OC was forced to file as a result of its production of asbestos-containing pipe insulation from the 1950s to 1972.

An examination of major cases involving four other firms that filed about the same time as OC found that all are struggling to develop repayment plans and exit strategies.

Ceiling-panel maker Armstrong World Industries Inc., which also filed in 2000, is appealing a federal judge's rejection of its plan of reorganization in February. The judge was responding to objections from unsecured creditors, who along with other major creditor groups had initially supported the plan by the Lancaster, Pa., firm. The parties are awaiting a hearing on the matter.

Federal-Mogul Corp., of Southfield, Mich., is awaiting a ruling from a judge on the size of its asbestos liability, although creditors approved a reorganization plan last year.

Chemical maker W.R. Grace & Co. and wallboard manufacturer USG Corp., both of which filed in 2001, have yet to win the crucial support of asbestos claimants for reorganization plans or to have court hearings to assess the size of current and future asbestos claims.

OC's current plan is supported by asbestos claimants and some bondholders but is opposed by banks.

Lawyer James McMonagle, appointed by the court to represent interests of shipyard workers and others who become ill from prior exposure to OC's asbestos insulation, agreed that the twin court decisions this year were a significant step. "In any case where a court makes an important decision, the parties look back and evaluate their positions," he said. "That's what's going on here."

Management's inability early on to accurately assess the length of the case stemmed from an unfamiliarity with the bankruptcy process and a failure to recognize the complexity of the case and unique circumstances at OC, he said.

Nathalie Martin, a bankruptcy lawyer and resident scholar at the American Bankruptcy Institute, worked on the 1990 asbestps case of Celotex, which was in Chapter 11 for six years.

Although non-asbestos cases typically take about two years, asbestos bankruptcies are almost always much longer.

One reason: a typical filer knows when it enters Chapter 11 how much it owes and to whom. But because of the latency of asbestos diseases, asbestos filers are sometimes in the dark on that question, said Ms. Martin, a law professor at the University of New Mexico. "All of the big, huge cases take a while," she said.

OC lawyers will be back in court next month when Judge Fitzgerald will consider a company request to extend the period during which they have the exclusive right to file a plan of reorganization without facing competing proposals submitted by creditors.

Contact Gary Pakulski at: gpakulski@theblade.com or 419-724-6082.



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