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W.R. Grace exits bankruptcy protection after 13 years
February 10, 2014 | —Robert Westervelt
W.R. Grace emerged from bankruptcy protection last week, ending nearly 13 years of operation under Chapter 11 protection to resolve nearly 130,000 asbestos personal injury and property damage claims.
The company’s joint plan of reorganization, which became effective 3 February, establishes two independent trusts to compensate asbestos claims. The trusts will be funded with more than $4 billion from a variety of sources, including cash; warrants to purchase Grace common stock; deferred payment obligations; insurance proceeds; and payments from former affiliates, such as Sealed Air. Grace had paid out more than $560 million through December 2000 to settle claims prior to bankruptcy.
Grace executives said there would be no significant shift in strategy. “We will be the exact same company working toward the exact same goals,” says Grace chairman and CEO Fred Festa. The company’s focus remains on “growing through product innovation, geographic expansion and bolt-on acquisitions in our core businesses; and [continuing] to improve profitability through value pricing, product mix improvement and ongoing improvement in productivity,” Festa says.
Grace filed for Chapter 11 bankruptcy protection on 2 April 2001. Most of Grace’s asbestos liabilities stem from commercially purchased chrysotile asbestos that was added to some of its fire protection products. A smaller set of claims stemmed from the company’s operations at Libby, MT, where it operated a vermiculite mine until 1990.
Grace first filed a joint reorganization in September 2008 after reaching settlement with asbestos claimants and equity holders. The court confirmed the plan in January 2011 and it took another three years to settle or address final appeals.
Grace made 25 acquisitions with the support of creditors and the bankruptcy court while operating under bankruptcy protection.
Grace revenues were $1.6 billion in 2000, the last full year of operation before bankruptcy, and were $3.5 billion in 2013. The company posted adjusted Ebitda margins of 22% in 2013, among the highest for US specialty makers.
Investment ratings firm Moody’s (New York) said 4 February that Grace should exhibit near-investment-grade credit quality over the next 12–18 months, but it could take some time before investor caution dissipates. “We expect Grace to reduce leverage and maintain strong margins and liquidity,” says Anthony Hill, senior analyst with Moody’s. Challenges facing Grace include “shareholder demands to return cash, a heavy reliance on the company’s catalyst segment, and weak growth in the European chemicals market,” Hill says. The company must also address some “investor cautiousness after emerging from a prolonged period under bankruptcy protection.”
Grace has raised secured financing to address asbestos liabilities, but awhile may pass before Grace can raise unsecured debt that carries more favorable terms, Hill adds. “Until Grace has been operating without bankruptcy court protection for two years and management has demonstrated its commitment to a stronger balance sheet, it may be difficult for investors to justify a debt investment at the same unsecured level as these asbestos-related obligations,” Hill says. “As a result, it may be some time before the investing community accepts any unsecured debt offering by Grace.”
Separately, Grace announced last week that its board has authorized a share repurchase program of up to $500 million, or roughly 6.8% of outstanding shares based current market capitalization. Grace was barred from paying dividends and undertaking any shareholder repurchases while under bankruptcy protection. “Our strong balance sheet and cash flow provide the financial flexibility both to invest in growth and return capital to shareholders,” Festa says.