USG sets $4 billion asbestos settlement plan, will fully pay banks and bondholders

By Paul Deckelman

New York, Jan. 30 - USG Corp. unveiled plans Monday to settle all of its current and future asbestos injury claims, pay its bank lenders, bondholders and trade creditors in full, plus interest, and emerge from Chapter 11 early in the third quarter with what the company's chief financial officer called "an investment-grade profile," although CFO Richard H. Fleming said that it would likely be a while after that emergence before the Chicago-based building products company actually returns to high-grade status.

The company will file a plan of reorganization and disclosure statement incorporating the asbestos agreement with the U.S. Bankruptcy Court in Wilmington, Del. no later than Feb. 18, envisions stakeholder voting on the plan in April and May, with confirmation hearings slated for June 15-16 in Pittsburgh, and sees its plan becoming effective in early July - and no later than Aug. 1 - thus bringing to a close a bankruptcy case that's been dragging on for some five years.

USG sought protection from its creditors with a June 25, 2001 Chapter 11 filing (case number 01-02094), one of a number of companies pushed into bankruptcy in the past few years by a deluge of claims filed by people alleging that their exposure to asbestos contained in the company's products caused them medical problems. Other such companies in a similar situation include Toledo, Ohio-based insulation maker Owens Corning Inc., Lancaster, Pa.-based floorcovering maker Armstrong World Industries Inc., Southfield, Mich.-based automotive brake maker Federal-Mogul Corp. and Columbia, Md.-based chemical producer W.R. Grace & Co., to name just a few.

The company's chairman and chief executive officer, William C. Foote, called the asbestos agreement "a watershed for USG and the stakeholders in our case," further characterizing it as "a win for all constituencies." The agreement has been endorsed by the official committees representing asbestos personal injury claimants, USG's unsecured creditors and its equity holders, as well as the court-appointed representative for future asbestos personal injury claims.

Still to weigh in is the committee representing property damage claimants.

The asbestos claims accord forms the cornerstone of the company's anticipated plan of reorganization, which calls for USG's unsecured creditors, including its banks, bondholders and trade creditors, to be repaid in full, in cash, including contract interest.

Foote declined to elaborate on the interest formulas, telling an analyst on the conference call that followed announcement of the asbestos accord that such details would be contained in the disclosure statement. USG estimates that payments due to its unsecured creditors will total approximately $1.4 billion. In addition, the company expects to reinstate approximately $240 million of existing industrial revenue bond debt and would pay accrued interest on those bonds in cash. The company's existing shareholders would retain ownership of USG.

Trust to be funded in 3 stages

Under terms of the asbestos claims accord, USG will establish and fund a personal injury trust to pay asbestos personal injury claims - both existing claims, and any claims which will come up in the future. The agreement covers both claims against present subsidiaries, such as its U.S. Gypsum unit, as well as claims related to products made or sold by former subsidiaries, such as A.P. Green.

USG will fund its asbestos agreement in three stages under a complex formula that is linked to whether Congress passes and the president signs into law the Fairness in Asbestos Injury Resolution (FAIR) Act of 2005, which would set up a $140 billion industry- and insurance-financed national trust fund to handle all present and future asbestos injury claims. That bill has been kicking around the Senate for a year; while it was approved by the Senate Judiciary Committee last May, it has not come up for a vote yet, although the committee's chairman, Sen. Arlen Specter, said last week that the full Senate will take up the bill starting next Monday. President George Bush has expressed support for the bill, which would take asbestos claims out of the courts and redirect them to the claims fund. Supporters of the measure say that this will both allow faster payment of claims to ill people who need the money now, rather than having their claims tied up in the courts for years, while setting a top limit on what each affected company is on the hook for, allowing them to get on with their bankrupt reorganizations or out-of-court restructurings without having to fear the sudden appearance of billions of dollars of new liabilities. Critics say the bill is underfunded and may shortchange people who don't manifest medical conditions now but who may develop them down the road as a result of past asbestos exposure. Some contend the government may be left holding the bag should the national fund run out of money.

$3.05 billion note if FAIR act fails

Upon the reorganization plan's becoming effective, USG will immediately pay $900 million in cash into its trust fund, and a contingent note for another $3.05 billion.

The company will be obligated to make a payment of $1.9 billion on the note 30 days after the current 109th session of Congress adjourns for good around the end of the year, with the final $1.15 billion due six months after that adjournment. However, should the Senate and the House pass the FAIR Act, or something closely approximating it, and assuming the president signs it into law and it is not later declared unconstitutional, the $3.05 billion contingency note will be cancelled and USG's asbestos trust fund - along with similar funds set up by other asbestos-challenged companies under Section 524(g) of the federal Bankruptcy Code - would be folded into the new national trust fund. USG estimates that the $900 million initial cash payment it would make into its trust upon its reorganization plan's becoming effective is the maximum amount it would be obligated to kick in anyway were the FAIR trust fund to come into being.

USG plans to fund its asbestos settlement and the payments it will make to its bondholders, banks and other creditors from four sources. For openers, it has about $1.5 billion of cash, cash equivalents and marketable securities on hand, thanks to the company's strong performance during the time it has been in Chapter 11. Foote said that with that big cash pile, "we can essentially write a check for it [the entire $900 million initial cash payment due under the settlement]."

$1.8 billion rights offering

USG will also raise some $1.8 billion via an equity rights offering, which will allow current shareholders to buy one new share of USG stock for each share they currently own at a price of $40 per share - about half the $79.85 price at which the company's New York Stock Exchange-traded shares closed on Friday. USG said that assuming all shareholders participate in the rights offering, there will be no equity dilution and the current pro-rata ownership of the company will not change. However, legendary investor Warren Buffett's Berkshire Hathaway Inc. - currently a USG stockholder - has agreed to "backstop" the rights offering, or purchase any of the new shares that are not bought by other shareholders under the offering. Shareholders can also freely sell or trade their rights during the offering period, which is expected to be at least 20 days beginning at or around the time the reorganization plan is confirmed.

Debt to refund contingent note

In the event that the FAIR Act is not approved, or is approved but its later declared unconstitutional, and USG is required to make the additional payments for the contingency note funding its asbestos plan, USG intends to raise about $1 billion in new debt. CFO Fleming told the conference call that this would likely include "some combination of term debt, public [i.e. bond] debt and a bank revolver."

The company also stands to receive tax refunds for its cash contribution to its 524(g) trust fund; should the FAIR Act not take effect and USG be required to pay the whole $3.95 billion trust fund cost itself, the refunds could total up to $1.1 billion, which would be used to help defray the trust fund's payment obligations. Should FAIR go into effect and USG not be required to make any additional payments beyond the $900 million, the tax refund on that initial cash payment would be $300 million.

According to figures provided by the company as part of its presentation, USG's liquidity position would be considerably stronger should the FAIR Act pass and go into law; should that occur, it would have about $3.6 billion in total funds - the $1.5 billion of on-hand cash, the $1.8 billion of rights offering proceeds and the $300 million tax refund on the $900 million, but would only have to lay out $2.3 billion of it - the $900 million initial fund payment and the $1.4 billion of obligations to the creditors. The other $1.3 billion would stay with the company.

However, should FAIR not pass, although there would be more total cash available - $5.4 billion, including the $1 billion debt offering proceeds and the larger tax refund of $1.1 billion rather than $300 million - that would be more than offset by the need to pay the $3.05 billion contingency note in two installments, bringing total outlays to $5.35 billion, with just $50 million left over. Not surprisingly, USG supports the FAIR Act as "good public policy that provides a national solution, and plans to advocate for its passage."

Aiming for investment grade

Fleming said that the post-bankruptcy USG - its bondholders, bank debt and trade creditors now paid off and its asbestos liabilities now re-routed to the newly established 524(g) trust fund (and, company officials hope, after that to the FAIR Act fund once it goes into effect and absorbs their own fund) - would have "an "investment grade profile," although he acknowledged that it would take some time for the company's ratings to be raised back to those levels, which USG held before it was forced into bankruptcy in 2001.

"When we initially emerge from the bankruptcy, upon the effective date [of the plan], and have not yet borrowed the money to make the back-end payments [on the trust fund], we literally will be an all-equity capital structure," he said, "and thus, we felt significant debt capacity to make the contingency payments [by borrowing the $1 billion] if necessary."

Assuming the contingency payments are to be made and the $1 billion of new debt borrowed, "after the tax refund is received, our debt level will be about $1.2 billion, assuming the contingent back-end payments are made." He said that was the level of debt USG maintained before its bankruptcy.

In its fourth-quarter and full-year 2005 results, released concurrently with the asbestos claims announcement, USG said that its consolidated results included a pretax charge of $3.1 billion ($1.9 billion, or $43.39 per share, after tax) in the fourth quarter, related to a corresponding increase in the company's reserve for the estimated cost of resolving its asbestos-related liabilities, including the asbestos personal injury claims, which will be paid out under the trust fund plan, asbestos property damage claims, and other asbestos related claims and legal expenses. Using conservative accounting principles, the reserve increase assumes that the FAIR act will not go into effect and USG will have to make the contingency payments.

Asbestos property damage claims - relating to things like the cost of removing asbestos from buildings - are not included in the announced agreement. USG said it will hold talks with certain representatives of asbestos property damage claimants about resolving their claims as part of the bankruptcy. It further said that property damage claimants whose claims remain unresolved will have the right to pursue those claims in the courts after confirmation of the plan of reorganization.

Foote noted that along with its announcement about the asbestos claims settlement and its plans for emerging from bankruptcy, USG also posted record fourth-quarter and 2005 full year sales and earnings, ex-special items like the asbestos-related charges.

Strong earnings help fund agreement

On that basis, the 2005 fourth-quarter net earnings were $165 million ($3.70 per share), up from $85 million ($1.97 per share) a year earlier. Full year 2005 net earnings excluding the charges, were a record $510 million ($11.70 per share), well up from $312 million ($7.26 per share). Including the asbestos-related charges, USG posted net losses of $1.8 billion ($39.94 per share) for the fourth quarter and $1.4 billion ($32.92 per share) for the full year.

"This tremendous performance over the past several years has made [the asbestos claims settlement] announcement possible," Foote said. "These two announcements are tied together, for without the first [the earnings results], we wouldn't have the second."

He said that the company's strong results - which he attributed to the "stellar" efforts of the company's 14,000 employees - provided it with sufficient cash to fund a large part of the agreement. "Today, we are benefiting from the excellent performance we have achieved in the marketplace over the past several years," he said.

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