Manville Plan Leaves Open Question of Firm’s Survival
Few American companies face as uncertain a future as Manville Corp., and few have had as deplorable a past.
After decades of manufacturing one of the most toxic products known to man and apparently repressing information about its health effects, Manville filed in 1982 for protection in bankruptcy court from the lawsuits of thousands of asbestos disease victims.
The result of that unprecedented maneuver is a reorganization plan designed to allow Manville to emerge from the bankruptcy court’s protection sometime in the next 12 to 18 months, assuming that appeals filed by opponents are overruled in federal court.
Even if it is finally endorsed by the courts, however, the plan raises broad questions about the limits of the bankruptcy law and about Manville’s ability to survive as a competitive business under the plan’s unique financial restrictions.
The key burden is the requirement that the company finance a multibillion-dollar trust for asbestos disease victims. The company will have to fund the trust at the outset with about $815 million in cash and insurance policy proceeds but must make substantial annual payments out of its cash flow for more than a quarter-century. These payments will constrict the company’s profits, which will depress its stock price and could affect its ability to obtain new capital.
Meanwhile, Manville will be grappling with the challenge of generating steady earnings out of core businesses that include fiberglass and forest products, extremely cyclical products. And because 50% or more of its shares will be held by trustees for the scores of thousands of asbestos victims, the company will be under extraordinary pressure to enhance the value of its stock, now hovering at about $1.50 a share.
Manville’s new management argues that the company’s balance sheet is not much worse than those of many other industrial companies in today’s high-debt environment and better than those of some of its competitors. Chief Executive W. Thomas Stephens points specifically at Owens-Corning, a leading fiberglass maker, which took on $2.2 billion of debt to fight off a takeover assault from Wickes Cos. last year.
“We probably have a much easier load to carry than they do,” he said in an interview last week from his family home in Arkansas. “There’s some doubt they’re going to make it.”
Wall Street professionals do not see things quite that way. Although agreeing that the post-bankruptcy Manville “will have a reasonably strong balance sheet,” Barbara T. Alexander, the building-goods analyst for Salomon Bros., noted: “The distinction is that Owens-Corning has the capability to pay off its debt, whereas Manville has no way to reduce its payments.”
All that can relieve Manville of its burden is the possibility, considered exceedingly slim, that the total number of asbestos disease victims comes in below the company’s own estimate of between 83,000 and 100,000. However, at least one study places the potential number of cancer victims alone at more than 200,000. Asbestos has been linked to two lethal forms of cancer as well as to asbestosis, an impairment of lung function.
Manville’s plight is a modern equivalent of reaping what one sows. Testimony and documents produced in scores of lawsuits suggest that company officials knew as early as the 1920s or ‘30s that its leading product, asbestos, was responsible for causing debilitating illnesses among employees and other workers. But the company sponsored no consistent medical studies, discouraged programs for fair compensation of the victims and took no steps to warn users of asbestos of the potential for injury.
Eventually, asbestos victims took to the courts. By August, 1982, Manville had settled or litigated 4,000 claims from victims and had an additional 17,000 pending. That month, the company, still solvent, filed its controversial bankruptcy petition. Its rationale for doing so is still in dispute; Manville says its potential liability in such cases would have eliminated its net worth and allowed its creditors to shut down the company.
May Be Overturned
Its opponents, however, contend that the filing was simply an attempt to escape responsibility for paying any further claims. If so, the maneuver failed, for the company’s reorganization plan makes it largely subject to the interests of asbestos disease victims.
The uniqueness of Manville’s bankruptcy filing, and consequently its reorganization plan, means it might yet be overturned in federal court.
In approving the plan Dec. 18, Bankruptcy Judge Burton Lifland acknowledged that Manville provoked “one of the most complicated and difficult bankruptcy reorganizations in history,” presenting “societal, legal and economic issues on a scale heretofore unknown to the bankruptcy courts.”
His goal, he said, was to find a way for Manville to compensate disease victims fairly while remaining solvent enough to continue financing the trust.
The result was a plan that unquestionably includes elements without precedent in bankruptcy. Chief among these is a crucial provision covering so-called future victims, or those who may yet develop asbestos disease, which has a decades-long latency period, from exposure that occurred years ago. Like those with existing claims, the future victims will be required to seek compensation from the health trust and will be forbidden to sue Manville for damages.
The bankruptcy law has no provision giving creditor rank to anyone without a claim existing at the time of filing. Lifland’s reasoning, however, is that the future victims’ claims are likely to be so numerous that failing to bind them to the trust-fund plan would doom the emergent Manville to failure.
‘Compromising the Law’
But that element has drawn protests from some plaintiffs’ lawyers and others who will file appeals.
“They’ve ended up compromising the law,” said George Rosenberg, a Los Angeles-based plaintiffs’ lawyer who last week appealed Lifland’s approval to federal court in New York. “If people are worried about the future claimants, they have to go to Congress (to change the law).”
Rosenberg says he intends to appeal the reorganization on several other grounds, including the disallowance of punitive damages, the breadth of the injunction barring lawsuits against Manville and the contention that Manville has underestimated the potential cost of future settlements, meaning that the trust fund may be inadequate.
Even many plaintiffs’ lawyers who helped negotiate the final plan with Manville say that they support it as much out of a sense of resignation as enthusiasm. The reorganization, they say, was the only alternative to liquidating the company to pay claims--an option that would probably yield much less money.
“This is the best possible solution to a multifaceted problem,” says Ronald L. Motley, a Charleston, S.C., lawyer who served with Rosenberg and 19 other lawyers on a court-appointed committee representing asbestos health victims throughout the 4 1/2-year bankruptcy process. “It’s a far better solution than any other we heard.”
Once it emerges from bankruptcy, Manville faces a unique financial burden. Under the reorganization plan, the company, upon its emergence, must make the payment of about $815 million in cash and insurance policy proceeds into the health trust fund. Starting four years from that point the company must pay 20% of its profits, but no less than $75 million annually, to the trust. This so-called profit sharing arrangement continues indefinitely, until all victims are compensated, but will take place for at least 27 years.
Trustees Hold Votes
Finally, the plan turns over to the trustees 50% of Manville stock and the right to an additional 30% if needed. The stock can be sold to pay victims’ claims but, more importantly, it gives the trustees voting control over the company.
These payments, combined with others the company must make to settle other creditors’ claims, make Manville a heavily mortgaged industrial concern. In its first eight years out of bankruptcy, the payments will average nearly $109 million a year, peaking in the fourth year at about $170 million.
That is the equivalent of carrying a long-term debt of more than $700 million at 10% interest a year, and it must be paid regardless of any other capital borrowings Manville is forced to make. In comparison, at the time of its bankruptcy filing, Manville had less than $350 million in long-term debt.
For all that, Manville’s Stephens argues that the company’s cash flow will still allow it to invest about $150 million a year in its continuing operations.
“There’s capital available to grow the corporation,” he says.
That corporation will be heavily involved in mature, generally high-profit-margin, but cyclical businesses.
Having disposed of all of its asbestos business, Manville’s most important product now is fiberglass, accounting for more than 40% of its $1.9 billion in 1986 sales. The company is a low-cost producer of the product, Salomon’s Alexander said.
“It’s a cyclical business, but relatively high margin,” she added. “The United States has the technological lead in fiberglass, so there won’t be many import problems.”
Next is forest products, accounting for 24% of sales. Among the jewels in this segment is Olinkraft, a packaging board company Manville acquired in 1979 (as a dividend, the acquisition included Stephens, who was an Olinkraft executive).
Manville’s other promising businesses include the manufacture of diatomite, a mineral familiar to owners of swimming pools as a filtration material and of which the company claims it is the world’s largest supplier, and perlite, an insulating material. Manville is also developing a Montana platinum mine, the only one outside South Africa and the Soviet Union, in partnership with Chevron and a Canadian company. Once it begins operating, according to estimates by the Value Line Investment Survey, the mine could produce $5 million a year in profit.
“They’re in some very attractive core businesses, but they’re unquestionably cyclical,” Alexander said. Although the product lines do not all follow the same cycle--that is, they should not be expected to all slump at once--in a long recession of a severity similar to the 1980-82 slump, “they would not be able to make the payments” to the trust, Alexander said.
Uncertain Relationship
In that case, Stephens said, Manville would dip into its credit lines to cover the payments.
One other uncertainty about Manville’s future is its relationship with its new owners, the victims of asbestos disease and cancer. Trustees for the victims gain voting rights over their stock in the fourth year after Manville’s reorganization, and some on Wall Street have questioned whether the unusual arrangement might create an adversary situation between the trustees and management. Stephens noted that if there is any residual ill will between the plaintiffs’ lawyers and Manville, it should dissipate quickly, for Manville’s top management, business orientation and attitude toward victims have all changed since the 1982 filing.
“If there’s any animosity, it would be a failure on management’s part,” he said.
Whether Manville’s stock will have any allure for investors is an open question. Today’s shareholders will end up with as little as 2% of the emergent company. Since the health victims’ trust gets at least 50% and other creditors another small share, about 40% to 45% of Manville’s stock will be available for public trading. It is likely to remain a stock only for the hardiest plungers for years or decades, or until it is known whether the trust will need to exercise its right to another 30%.
“From a management point of view,” Stephens said, “having the stock owned by a trust is not scary. The trustees will have to be interested in long-term growth, not like Wall Street. The arbitrageurs (speculators in short-term stock prices) aren’t that forgiving.”
