Solutia Files Chapter 11 Bankruptcy

2003/12/22

Overburdened with the legacy liabilities of former parent Monsanto Company, Solutia Inc. and its 14 US subsidiaries have filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Southern District of New York. Solutia's European affiliates are not included in the bankruptcy filing. Solutia also launched a lawsuit against Pharmacia Corp., a unit of Pfizer Inc., seeking to transfer its $475 million in post-retirement liabilities to Pharmacia.

"We simply could not continue to sustain our operations burdened by Monsanto's legacy liabilities which, combined with the weakened state of the chemical manufacturing sector, current economic conditions and the continuing high energy and crude oil costs with unprecedented volatility, has prevented us from realizing Solutia's true value," says chairman, president and CEO John C. Hunter. "We believe that the Chapter 11 process will give us a forum to shed these burdensome liabilities."

Solutia was spun off from Monsanto in September 1997. As part of the spinoff agreement, Solutia assumed all environmental liabilities of Monsanto related to the chemical business, as well as a large amount of pension and post-retirement obligations. Monsanto then merged with Pharmacia in March 2000 and reemerged as an ag biotech and chemicals company through an initial public offering later that year. In turn, Monsanto indemnified Pharmacia with respect to any liabilities held by Solutia.

Solutia has been wrangling with Monsanto recently on asbestos liabilities. Earlier this month, Solutia refused to pay $3 million related to two asbestos cases it settled on behalf of Pharmacia (CMR, 12/8/03, page 3).

"Solutia's choice not to honor its obligations and pay the $3 million recently was the straw that broke the camel's back," said Monsanto chairman and CEO Hugh Grant on a conference call. "I believe [the bankruptcy filing by Solutia] is the best option for Monsanto. In electing not to pay the $3 million, there was no clarity in what would be next."

Solutia says it spends around $100 million per year to service liabilities it was required to accept when it was spun off from Monsanto in 1997. To offset these costs, the company cut operating costs by $100 million, worked with Monsanto and Pfizer to hammer out a $600 million settlement of polychlorinated biphenyl (PCB) liabilities in Ala-bama, and refinanced some debt.

"Concurrently, we have made every effort to come to an out-of-court resolution with Monsanto regarding these legacy liabilities," notes Mr. Hunter. "However, these negotiations have not been successful."

Solutia says that under Chapter 11, it has the right to reject executory contracts, which would include the spinoff agreement indemnifying the former Monsanto from the liabilities it put on Solutia. In the original spinoff agreement, Solutia took on environmental and post-retirement liabilities, but Monsanto (the old Monsanto, which then merged with Pharmacia) would be responsible for those liabilities in the event Solutia is unable to pay.

Solutia is also seeking to transfer $475 million in post-retirement liabilities to Pharmacia. "Those liabilities represent the retirees before the spinoff of Solutia, so we think they should all go back to Pharmacia," says a Solutia official.

Monsanto emphasizes that Solutia is required to honor its post-retirement and environmental obligations until a court rules otherwise. "Even in bankruptcy, Solutia remains responsible for its business and financial obligations," says Monsanto chief financial officer Terry Crews. "While we recognize our indemnity obligations to Pharmacia, we will not take on any obligations that are not our legal responsibility during this process unless there is resolution in the court.

Solutia's European subsidiary Solu-tia Europe SA/NV has reached an agreement with holders of two-thirds of its $200 million in 6.25 percent euro notes due 2005 to restructure the debt in order to avoid filing for bankruptcy. The maturity of the notes has been extended until 2008.

Monsanto says it is too early to estimate what liabilities, if any, it would assume because of Solutia's bankruptcy. "This will take months to play out," says Mr. Crews.

Merrill Lynch analyst Donald Carson says his worst case estimate of these liabilities for Monsanto is $1.25 billion, representing around $132 million in annual costs, or 34 cents per share.

"While negative news flow from this legal battle could weigh on the stock, obscuring the ongoing recovery in global ag markets and Monsanto's earnings momentum, we do not view the potential assumption of these liabilities as a significant risk, given the liabilities appear reasonably quantifiable, unlike the uncertainty of the prior PCB litigation liabilities, the analyst says.

Standard & Poor's placed Mon-santo's corporate credit rating of A on CreditWatch with negative implications, reflecting the potential increase in liabilities.

The Solutia bankruptcy overshadowed Monsanto's announcement that it has revised upward its first quarter 2004 earnings per share estimate by 10 cents from its original forecast for an underlying loss of 7 to 12 cents. Monsanto is seeing better than expected performance in its Brazilian business.

Shares of Solutia plunged $2.16 to 38 cents on the filing. The New York Stock Exchange moved to delist the company. Shares of Monsanto fell 86 cents to $26.65.