Credit analyst: Sealed Air asbestos settlement should boost trading levels

By Ronda Fears

Nashville, Dec. 2 - Sealed Air Corp.'s resolution of asbestos claims should boost levels for its debt and stabilize its credit quality somewhat, said Carol Levenson, director of research at Gimme Credit. The analyst said the debt is cheap right now, in light of the event.

"Friday's announcement by Sealed Air (Baa3/BBB) that it had reached an agreement in principle to settle all its asbestos-related and fraudulent transfer claims must be viewed as terrific news for the company's bondholders," Levenson said in a report Monday.

"The 56% jump in Sealed Air's stock, despite settlement costs of more than $700 million, implies the stock market was expecting a much more severe outcome.

"If the preliminary agreement receives all the necessary approvals and a definitive agreement is reached under identical terms, Sealed Air could become the first company facing material legal claims to put its asbestos woes behind it without even dipping below investment grade, much less being forced to file for bankruptcy."

The complex transaction by which Sealed Air acquired the Cryovac food packaging business from W.R. Grace in 1998 was challenged by Grace's asbestos creditors as a fraudulent transfer and Sealed Air could have been held liable for Grace's asbestos claims or forced to return the value of the Cryovac assets to Grace's creditors.

"As this business produces roughly 60% of Sealed Air's operating income, this was a serious threat to Sealed Air's credit quality," Levenson said.

To compound Sealed Air's problems, the court ruled in July that the method to be used in determining whether the Cryovac transaction rendered Grace insolvent would take into account not only Grace's liabilities at the time of the transaction but also its post-1998 asbestos claims, which had skyrocketed.

This ruling sent Sealed Air's stock down by roughly the same amount it rose on Friday and prompted S&P to review it for a downgrade.

"If this settlement holds up and Sealed Air truly has put its asbestos issues behind it, we believe the initial damage to the company's liquidity and debt protection measures caused by the settlement will be more than offset by the resolution of its legal uncertainty," Levenson said.

Sealed Air won't have to fork over the cash until Grace's reorganization becomes effective, although it will accrue interest on the cash portion until that time.

While Sealed Air has sufficient capacity under its bank facilities to fund the cash payment, the company is currently renegotiating its primary facility, which expires in March.

Gimme Credit estimates the cash payment would increase Sealed Air's pro forma debt/EBITDA ratio to 4x from 3x, with EBITDA coverage falling to 4.5x from 6x.

The company cut back its capital spending program severely this year, she noted, and in the first nine months generated $125 million in free cash flow.

"Given the business risk of the packaging industry, we would view the company as a weak BBB absent the asbestos taint, but its bonds should now trade more in line with its credit quality," Levenson said.

Sealed Air's $3.6 billion 4% convertible preferred due 2018, which was issued at 50 in April 1998 at the time of the acquisition from W.R. Grace, on Monday closed down 1.15 points to 41.05. The stock ended down $1.45 to $36.75.

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