NEARLY THREE-QUARTERS of a million asbestos claims have been filed in US state and federal courts. About 100,000 were filed in 2003 alone, though as many as half of all new claimants have yet to suffer significant illness as a result of exposure to asbestos.
Lobbying group Asbestos Alliance says claims and costs have bankrupted more than 70 US companies. The total costs of settlements could reach $265 billion.
One case, which is winding its way through the English High Court in London and the US Bankruptcy Court in Delaware, shows what happens when the labyrinthine complexities of asbestos litigation combine with clashes of bankruptcy law and procedure. Precedents are being set for corporates, bondholders, banks, pension schemes, and insolvency professionals that find themselves tangled up in future cross-border insolvencies. And, according to one adviser, the case is burning around $10 million a month in fees.
In Delaware, New York Stock Exchange-listed Federal-Mogul Corporation and 22 US subsidiaries are subject to Chapter 11 bankruptcy proceedings. In the UK, 134 companies are in administration. Many are members of the Turner & Newall (T&N) Group, which Federal-Mogul bought in 1998. One of T&N's businesses was making and installing building materials that contained asbestos.
"This is probably the most complicated cross-border insolvency ever," says Robin Parsons, a London partner at Sidley Austin Brown & Wood, lawyers to Federal-Mogul. "It is absolutely extraordinary and the issues being raised are of huge importance."
A silent epidemic
The word asbestos comes from the Greek for "inextinguishable". Ancient chroniclers recorded that weavers who made asbestos cloth developed breathing problems.
A couple of millennia later, and companies that mined asbestos, or manufactured, sold or used asbestos products, must wish that they were as observant. In the 1960s, asbestosis, which scars the lung tissue, and mesothelioma, a fatal cancer, started triggering compensation claims from sufferers. As the number of asbestosis claims levels off, mesothelioma claims will rise in number. The "silent epidemic" that already kills 1,800 people in the UK annually will peak in 10 years.
T&N's is the first large UK asbestos bankruptcy and may be the largest ever UK non-insurance insolvency. It highlights the problem of underfunded pension schemes, a recent big worry for UK companies. It is groundbreaking in the way the UK administrators have let T&N's management carry on the day-to-day running of their business. It has established one of the first detailed protocols to synchronize the different US and UK insolvency procedures. And it could become the first restructuring where UK businesses are saved using the asbestos claim provisions of Chapter 11 of the US Bankruptcy Code.
Federal-Mogul is not a bad business. Nearly 45,000 employees make and distribute engine and vehicle parts worldwide. In 2003, net sales from continuing operations were around $5.5 billion.
Its difficulties are a direct result of asbestos litigation, mostly brought by US residents against both Federal-Mogul and T&N and their subsidiaries. In 1998, Federal-Mogul Group made asbestos payments worth $89 million; in 1999, $178 million; and in 2000, $351 million. Between 90% and 100% of all these payments were related to T&N liabilities.
By October 2001, the asbestos burden was unbearable:114,443 personal injury claims were pending against T&N. Federal-Mogul Corporation and T&N filed for Chapter 11 relief. The English companies applied for administration orders in the High Court and Kroll Buchler Phillips was appointed UK administrator. Federal-Mogul was the sixth major publicly traded company in 20 months to file for Chapter 11 protection because of asbestos litigation.
The big problem is future US claims. Nobody knows how many there will be, so the value of liabilities is hard to work out. In February last year, one actuary estimated the present cost of over 1.16 million future claims to T&N as $5.728 billion. However, elsewhere in the same memorandum, the same actuary states that the figure could be $10.497 billion.
Uncertain valuations
This higher potential exposure arises partly because T&N is no longer part of the Center for Claims Resolution, which has coordinated asbestos litigation on behalf of defendants and often achieved lower settlements. It is also because, if Federal-Mogul and T&N's Chapter 11 reorganization plan is eventually implemented, individual asbestos claimants can expect larger awards, since the quality of the claims allowed to proceed would be higher.
Others reckon these figures are too high. In the UK, the T&N pension scheme has around 37,000 beneficiaries. By the end of March last year, it had an estimated deficit of £97 million. In any winding up of T&N, it would have the largest single claim. An actuary commissioned by the pension fund trustees puts the cost of future US liabilities at between $2.1 billion and $5.5 billion.
In most transatlantic workouts, a Chapter 11 restructuring, once agreed by different parties and given US court approval, is implemented in the UK via schemes of arrangements and company voluntary administrations (CVAs).
Federal-Mogul isn't like most transatlantic workouts.
Early on, the administrators and the US and English companies in Chapter 11 took the unusual step of entering into a cross-border insolvency protocol. Adopted in January 2002, it will "promote the orderly and efficient administration of the Insolvency Proceedings to... reduce the costs" for the benefit of all debtors and creditors.
"Communication between courts is difficult," says Susan Hazledine, a litigation partner at Allen & Overy, the law firm advising the T&N pension trustees. "You can't effectively have two judges sitting together and producing a judgement. One issue is how on earth would you appeal it?"
The administrators, meanwhile, agreed to let the directors of the UK companies continue to exercise their powers, subject to the administrators' veto. "That's a novelty," says one lawyer. "The administrator has let the management run the UK business while it tries to do a deal with the asbestos creditors." T&N's is in effect the first debtor-in-possession administration.