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Asbestos Lawyers Strong-Arm Armstrong
Richard Lehmann, Forbes/Lehmann Income Securities Investor , 11.29.02, 7:00 AM ET

NEW YORK - Armstrong World Industries, a subsidiary of Armstrong Holdings, was one of the first of two dozen companies that decided that bankruptcy court was the place to resolve its unquantifiable and unending asbestos litigation liability. On Nov. 4, it filed a settlement plan that throws into question whether this strategy benefited anyone other than the asbestos lawyers and the company's management. The proposed plan would wipe out the shareholders of the company and give about two-thirds of the debt and equity to a trust, which would settle all asbestos claims. If this is a model for all future settlements, the future looks dim indeed for shareholders and debt holders of hundreds of companies with unresolved claims. It also throws into question the strategy of trying to use the bankruptcy court to address this problem rather than keeping the pressure on Congress to resolve the matter, a remedy more likely now that the balance of power there has shifted.

The Armstrong (otc: ACKHQ - news - people ) settlement seems to put an extraordinarily high value on the asbestos claims given the large equity and debt carve-outs for the claims settlement trust. Prior to bankruptcy, the company showed only a $690 million liability for such claims. We could not find a definitive value for the asbestos claims in the plan documents, but the carve-out implies a valuation of some $4.8 billion was used for settlement purposes. The preexisting unsecured creditors of Armstrong, which includes $1.4 billion of debt holders, are to receive 34.4% of the new common stock and 35.5% of $1.05 billion in cash and new debt as well as a few other contingency crumbs. Depending on how the new stock performs in the market, this represents a recovery for bondholders of between 36 cents and 62 cents on the dollar.

Given the magnitude of the asbestos claims and settlement in this first case and given the sizeable claims still pending, the Armstrong settlement represents nothing so much as the first installment in a massive wealth and corporate ownership redistribution program. Should investors now fear lawyers confiscating whole companies from shareholders? The asbestos problem threatens the entire list of Dow Jones Index companies and the Armstrong settlement sets an ominous precedent that Congress must address if our economic system is not to suffer serious damage.

While the Armstrong management may be promoting this settlement, it is a sellout of their responsibility to shareholders and creditors. What's fair about equating a current shareholder and bondholder claim derived from money lent, with an unquantifiable litigation claim for a near perpetual time period for future medical, legal and hypothetical expenses. This is especially true since other companies will be contributing to the funding process in proportions yet to be determined because most asbestos claims are against multiple defendants. A pay-as-you-go approach that addresses demands as they arise seems more fitting than a total confiscation of the company. Such an approach would also leave room for some relief should Congress finally act. Tobacco companies, who were way more culpable in the dangers of their product, cut a deal which left shareholders and bondholders in place. Armstrong management's failure to cut a similar deal is both questionable and suspect.

The next steps in Armstrong's plan are the filing of a disclosure statement within the next 60 days and then a hearing to set the plan-voting timetable. The best we can say for this plan is that we hope the unsecured creditors vote it down.

Companies in bankruptcy facing similar exposure:

Owens Corning (nyse: OWC - news - people )

G-I Holdings

W.R. Grace (nyse: GRA - news - people )

U.S. Gypsyum (nyse: USG - news - people )

Federal-Mogul (otc: FDMLQ - news - people )

Kaiser Aluminum (otc: KLUCQ - news - people )

Armstrong Holdings (otc: ACKHQ - news - people )

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