Toxic shock for Owens Corning

Home Channel News, Oct 23, 2000 by Brae Canlen

Mounting asbestos-related claims force building products giant into Chapter 11 to reorganize

TOLEDO, OHIO -- When Owens Coming and 17 of its subsidiaries filed for Chapter 11 protection earlier this month, the obvious culprit was asbestos, an insulation material that has wreaked havoc on the humans who breathed it, the companies that made it, and the courtrooms that have attempted to measure its toll.

But the true toxicity of asbestos may yet be witnessed in the next several months, when Owens Corning -- a $5 billion manufacturer that dominates several building materials markets -- tries to dodge the white fibers that threaten its corporate health.

Analysts who follow OC hold differing opinions about the company's future. But most observers agree that the asbestos issue will continue to dog OC regardless of its reorganization plan.

Indeed, less than a week after filing Chapter 11, OC found itself trying to plug leaks in the dike. Dow Jones News Service reported on Oct. 11 that the company had sought a court order to prevent a group of lenders, led by Credit Suisse First Boston, from exercising their rights and declaring defaults under a $1.8 billion credit agreement OC entered into in 1997. The lawsuit also sought to prevent the banks from accelerating the payments under any separate banking agreements, or freezing, impairing or otherwise moving against the funds of OC's nonbankrupt subsidiaries.

"[Bankruptcy] has a stigma," asserted Timothy Jones, an analyst with Ryan, Beck Southeast Research Group in Livingston, N.J. "Obviously, they've got to patch things up with their suppliers and calm down their customers. But it's in everyone's best interest that [Owens Corning] continue. It's not like there's a thousand suppliers in the building industry."

Claims and profits

Best known among consumers for rolls of Pink Panther insulation, Owens Corning also supplies the building and remodeling industry with roofing materials, vinyl siding, cultured stone and asphalt. Its annual revenues notwithstanding, company's earnings have been led by asbestos-related injury ins dating back to the early 1980s. In 1997, Owens Corning d to satisfy its present and future product liability obligations by developing its National Settlement Program, which incorporated 176,000 cases involving more than 50 law firms. Under the NSP, Owens Corning agreed to pay $2.4 billion over five years.

But the negotiated settlement didn't protect the manufacturer from what its officials now say have been "a flurry of recent new filings from plaintiffs not participating in the NSP."

At the time it filed for Chapter 11, claims filed against the company had ballooned to 460,000. The company had paid or had committed to pay out $5.2 billion to claimants. The company took a $1 billion charge against second-quarter earnings to cover the cost of 62,000 new claims that had been added to NSP. Its projected payout during the fourth quarter of this year alone is expected to be around $250 million.

As asbestos-related woes plagued the company, OC has started warning investors that its earnings were being impacted negatively by rising raw materials costs and lowering demand for building products. OC is carrying $2.7 billion in long-term debt, and its shareholder equity, as of Oct. 12, was negative $1.28 billion.

Wall Street has reacted predictably. An avalanche of negative reactions from analysts and debt rating agencies submerged the stock, which closed at $2 per share on the day the company announced its Chapter 11 filing, which compared to just under $44 per share in May 1999. (A few days later, its stock fell to $1.03 per share, though it bounced back slightly.) In August, Standard & Poor's joined two other credit rating agencies in downgrading the company's debt. OC's profitability "will probably be at meaningfully lower levels over the next couple of years," Standard & Poor's said.

Donaldson, Lufkin & Jenrette projected that the already low demand for roofing, siding and insulation would only worsen as the economy slows, resulting in two years of decline in worldwide sales and operating income for OC. "We believe that the outstanding issue for Owens Corning was, and will continue to be, asbestos ... which [is] increasing in terms of the number of anticipated settlements and costs per claim," an Aug. 1 report stated.

A call for legislative relief

Under Chapter 11 protection, OC can stop malting asbestos claim payments. It will also cease payment on interest or unsecured debt securities. But the company promised to to meet "all future obligations to employees, suppliers and vendors" through cash reserves -- estimates range between $300 million and $400 million -- and a $500 million line of credit from Bank of America.

"We have a very, very strong company financially," said OC's chief operating officer Dom Cecere in an August interview with NHCN. "We've managed costs and we're structured quite well. Our profits are very good."

Glen Hiner, OC's chairman, told the Wall Street Journal that he expected OC to emerge from Chapter 11 in three years. NHCN was unable to contact OC officials for further comment.