WR Grace to approach investment grade within 18 months - Moody's

04 February 2014 18:07  [Source: ICIS news]

WR Grace to approach investment grade within 18 months - MoodyHOUSTON (ICIS)--WR Grace should approach investment-grade credit ratings in the next 12-18 months now that it has emerged from Chapter 11 bankruptcy protection, Moody's Investors Services said on Tuesday.

Looking ahead, the company will likely reduce debt while maintaining high margins and liquidity, Moody's said. By the end of the year, WR Grace should have an adjusted cash balance of $475m.

The company will likely apply some of its cash to reduce leverage, Moody's said. By December, Grace should reach a ratio of 2.9 regarding debt to earnings before interest, tax, depreciation and amortisation (EBITDA). That compares with a debt/EBITDA ratio of 3.5 reached at the end of December 2013, Moody's said.

While WR Grace should benefit from lower leverage, it will face other hurdles in the upcoming months.

The company will contend with a heavy reliance on its catalyst business, weak growth in the European chemicals market and shareholder demands to return cash, Moody's said.

Those shareholder demands arose with Grace's exit from bankruptcy, since the company could not pay dividends or buy back stock while it was operating under Chapter 11, Moody's said.

Already, Grace's board has approved a share repurchase programme worth up to $500m. It should be completed in the next 12-24 months.

Meanwhile, the company will have to fund its asbestos-related obligations through 2033 and possibly longer, Moody's said. However, this should be manageable given the amount of cash that Grace should generate in the next two decades.

WR Grace filed for bankruptcy protection under Chapter 11 in 2001 after being overwhelmed by asbestos lawsuits.

The roots of those lawsuits go back to 1963, when Grace began operating a vermiculite mine in Libby, Montana. The vermiculite was used to make the company's line of fireproofing products.

These included Grace's Zonolite home and building insulation as well as its Monokote commercial and industrial insulation.

The vermiculite, though, was contaminated with tremolite, an especially harmful form of asbestos, Moody's said.

WR Grace would continue to operate the mine until 1990. Meanwhile, a wave of asbestos-related litigation built up, which would ultimately overwhelm the company and lead to its bankruptcy filing in 2001.

At the time of the filing, WR Grace faced 65,656 asbestos-related lawsuits involving 17 property damage claims and more than 129,000 personal injury claims.

By 2002, the US Environmental Protection Agency (EPA) designated the Libby mine and the surrounding area as a Superfund site.

In 2008, Grace paid a $250m civil settlement to fund the clean-up of Libby. At the time, it was the largest ever asbestos clean-up bill in the US.

Currently, the EPA estimates that up to 50m homes in the US and Canada have Zonolite insulation. The EPA said the insulation should not be a threat as long as it is left undisturbed.

The deadline to file Zonolite property damage claims has already passed.

These asbestos claims will now be handled by two trusts.

One will handle personal injury claims, and these have been capped, Moody's said. The other trust will handle property damage claims, the analysis firm said. These include those related to US and Canadian Zonolite attic insulation.

While property damage claims are not capped, Moody's expects that these will be small, reaching a maximum of $50m over the next 20-30 years.

Resolving the asbestos liabilities removes a significant burden on the company, Moody's said. These loomed large during the company's nearly 13-year bankruptcy.

During that time, the uncertainty of these liabilities hindered the company from establishing sole-source contracts with customers, Moody's said. It hampered the company's ability to retain and attract employees. The uncertain size of the liabilities also kept the company from obtaining the best terms and prices from suppliers.

In itself, bankruptcy protection proved to be another hurdle, Moody's said. While it was under Chapter 11, Grace could not make acquisitions without first getting permission from creditors and the bankruptcy court.

WR Grace's bankruptcy stands out because of its length − among the longest in the history of the US.

However, Grace's bankruptcy is also unusual in the agreement it reached regarding claims that were filed before its filing, Moody's said.

Those claims included those held by unsecured creditors as well as those belonging to equity security holders.

WR Grace's unsecured creditors will achieve an ultimate recovery of 100%, Moody's said. Meanwhile, shareholders saw the value of their stock rise from $1.52 at the time of Grace's 2001 bankruptcy to more than $90 today.

Such a payback is not the typical fate of unsecured creditors and shareholders. They usually realise a much lower rate of recovery. In some cases, they receive nothing.

By: Al Greenwood
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