Misery Loves Another Company

Federal-Mogul, burdened with asbestos claims, tests the limits of bankruptcy law.

Federal-Mogul Corp. had already recognized a $1.6 billion liability for asbestos-litigation costs when it filed for bankruptcy. But that expenditure got it no closer to ending these liabilities. The nature of asbestos claims is such that companies rarely solve their problem, no matter how much they pay out. But after a bankruptcy, says Todd R. Snyder, managing director of reorganization and restructuring for Rothschild Inc., the American arm of the global investment bank, it becomes easier to craft a lasting solution.

And Rothschild, which is working with auto-parts maker Federal-Mogul in its case, is all about helping clients in bankruptcy find a solution. Rothschild has made a practice of finding innovative, even aggressive, interpretations of bankruptcy law for its clients.

In 2000 it extended the bounds of asset sales typically completed under Section 363 of the bankruptcy code when it helped TWA complete the sale of 100 percent of its assets out of Chapter 11 protection. Rothschild also negotiated a $1.5 billion debtor-in-possession financing for United Airlines, a large portion of which, says Snyder, was predicated on such unconventional assets as the airline’s Bank One credit-card relationship and its frequent-flier program.

Rothschild is now helping break more new ground with Federal-Mogul. In January it announced a deal that may lead to settling not only Federal-Mogul’s present and future asbestos liabilities, but also those of Honeywell, whose Bendix friction-parts division — like Federal-Mogul’s own — has been plagued with lawsuits related to its use of asbestos, a material that causes serious respiratory diseases. (Honeywell took a $1.5 billion restructuring charge in its 2002 fourth quarter related to the settlements.)

In a move that could suggest how future asbestos cases may be resolved, Honeywell has agreed to transfer its Bendix unit to Federal-Mogul, along with the value of Honeywell’s $2 billion insurance policy. If the arrangement is approved by U.S. Bankruptcy Court in Delaware, the U.S. and U.K. liabilities of both companies, and the value of the insurance, will be placed in a special trust. The trust, authorized under the bankruptcy law’s Section 524(g), is designed to insulate companies from ongoing asbestos lawsuits while providing mechanisms for paying current and future claims.

The transfer of Bendix assets is contingent on court approval of the deal and on Federal-Mogul’s emergence from Chapter 11. With those two objectives achieved, as presently structured, Honeywell will give Federal-Mogul Honeywell’s foreign Bendix assets and transfer the capacity of its domestic Bendix assets, making Federal-Mogul one of the nation’s largest friction-parts makers. (Honeywell will also phase out the last vestiges of its asbestos use in Asia.)

Federal-Mogul CFO Mike Lynch sees nothing in that structure that should be a problem, although the specifics of the reorganization plan and the trust distribution plan haven’t been hammered out.

The Icahn Factor

The genesis of the deal, says Snyder, was an early agreement in the bankruptcy proceedings. Coming to terms were lawyers for asbestos complainants, who automatically became unsecured creditors when Federal-Mogul filed, and the company’s bondholders, who also became unsecured creditors.

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