Submitted by George Putnam, III as part of our contributors program.
Grace’s Chapter 11 Reorganization Plan Effective: GRA Added To Post-Bankruptcy Stock Index
After nearly 13 long years operating under Chapter 11 protection, chemical & construction icon W.R. Grace & Co. has finally emerged from bankruptcy. The information provided below details Grace’s history, Chapter 11 reorganization and post-bankruptcy stock prospects. GRA is the most recent addition to The Turnaround Letter’s Post-Bankruptcy Stock IndexTM, which reflects the post-bankruptcy investing climate by tracking the 20 largest post-bankruptcy stocks within the four-year span immediately after their emergence. Other recent additions to the Index include American Airlines (AAL) and Eastman Kodak (KODK).
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Today’s Grace is a premier specialty chemicals and materials provider. The Company dates back to 1854 when William Russell launched operations in Peru. Twenty years later, Grace relocated to The Big Apple and was formally chartered and incorporated in 1872 and 1899, respectively. Grace launched its NYSE listing in 1953, and the Company first entered the specialty chemicals industry the following year with its acquisition of Dewey & Almy Chemical Company and Davison Chemical Company. These purchases specifically established the Company’s catalysts, packaging, silicas and construction product lines.
Chapter 11 Filing
This bankruptcy was the result of an increase in the number of personal injury and property damage claims asserted against the Company as a result of exposure to asbestos contained in certain previously-manufactured products. In 2000, asbestos-related claims against the Company rose 81%, with an even higher rate of increase during the first three months of 2001-seriously threatening Grace’s core business operations.
The Company ultimately concluded that the only way to define and resolve its asbestos liabilities, while preserving the value and viability of core business operations, was a reorganization under Chapter 11 of the Bankruptcy Code. As of its April 2001 petition date, W.R. Grace was a defendant in approximately 70,000 asbestos-related lawsuits related to property damage and personal injury claimants. Grace’s April 2001 Chapter 11 filing included 62 of the Company’s domestic entities but none of its foreign subsidiaries.
After nearly ten contentious years operating under Chapter 11 protection, the U.S. Bankruptcy Court entered an order confirming the First Amended Joint Plan of Reorganization, as Modified and filed by Grace, the official committee of asbestos personal injury claimants, the asbestos personal injury future claimants’ representative and the official committee of equity security holders. In her opinion, Judge Judith Fitzgerald resolved all outstanding objections to the Joint Plan in favor of Grace and its co-proponents.
As a result of the asbestos-related nature of the proceeding, Grace also needed U.S. District Court approval of its Plan. In January 2012, the District Court issued an order denying all objections and confirming the Plan in its entirety. The District Court reaffirmed its January 2012 confirmation order on June 11, 2012 following a motion for reconsideration. The District Court order states, “Having now reviewed several thousand pages of party briefing and having had the benefit of two oral arguments, the Court finds that the parties’ Objections are denied, and . . . the Joint Plan is confirmed in its entirety.”
During 2013, five separate appeals were argued before the Third Circuit Court of Appeals. The Court denied four appeals in the third quarter of 2013; and, in the fourth quarter, the Company settled a fifth appeal relating to the amount of interest payable on its pre-petition bank debt and recorded a $129 million charge.
The Plan finally became effective on February 3, 2014 after Grace’s $2.6 billion bankruptcy lumbered on for nearly 13 years-more than double the average stint of the majority of asbestos-related Chapter 11 filings, as detailed below:
Interior finishings’ retailer Armstrong World Industries, Inc. ($4.2 billion in assets) from December 2000 through October 2006.
Energy Services’ provider Babcock & Wilcox Company (a subsidiary of McDermott International, Inc.) from February 2000 through February 2006.
Machinery and auto parts’ manufacturer Eagle-Picher Industries, Inc. ($479 million in assets) from January 1991 through November 1996.
Automotive parts’ manufacturer Federal-Mogul Corporation ($10.1 billion in assets) from October 2001 through December 2007
Composite materials’ provider Keene Corp. (with $132 million in assets) from December 1993 through July 1996.
Building products’ manufacturer Manville Corp. ($2.8 billion in assets) from August 1982 through November 1988.
Mineral products’ supplier Owens Corning ($6.5 billion in assets) from October 2000 through September 2006.
Materials’ manufacturer Raytech Corp. ($73 million in assets) from March 1989 through July 2006.
Steel tubing/products’ manufacturer UNR Industries, Inc. (with $219 million in assets) from July 1982 through September 1989.
Building products’ manufacturer USG Corporation ($3.2 billion in assets) from June 2001 through June 2006.
Key Terms of Reorganization Plan
Grace’s confirmed and effective Plan establishes two asbestos trusts, under Section 524(g) of the U.S. Bankruptcy Code, to compensate personal injury claimants and property owners. Funds for the trusts will come from a variety of sources including cash, warrants to purchase the Company’s common stock, deferred payment obligations, insurance proceeds and payments from successor companies.
Upon the Plan’s effective date, the personal injury trust was funded with the following: A) $557.75 million in cash from Grace; B) a warrant to acquire 10 million shares of Grace’s common stock at an exercise price of $17.00 per share, expiring one year after effective date; C) rights to all proceeds under all of Grace’s insurance policies that are available for payment of personal injury claims; D) $42.13 million in cash from a subsidiary of Fresenius AG, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Fresenius and E) $856.82 million in cash and 18 million shares of Sealed Air Corporation’s common stock paid by Cryovac, Inc., a wholly-owned subsidiary of Sealed Air, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Cryovac and Sealed Air.
The Company is obligated to make $110 million in deferred payments to the personal injury trust for five years beginning in 2019 and $100 million annually for ten years beginning in 2024, which obligation is secured by Grace’s obligation to issue 77,372,257 shares of the Company’s common stock to the asbestos trusts in the event of default.
All property damage claims have been channeled to the property damage trust for resolution, and the property damage trust contains two accounts: the property damage account and the Zonolite attic insulation property damage account. Following the effective date, unresolved and future non- Zonolite attic insulation property damage claims are to be litigated pursuant to procedures to be approved by the U.S. Bankruptcy Court and, to the extent such property damage claims are determined to be allowed claims, are to be paid in cash by the property damage trust.
On the effective date, the Zonolite attic insulation property damage account of the property damage trust was funded with approximately $34.36 million in cash from Cryovac and Fresenius. Grace is obligated to make a payment of $30 million in cash to the Zonolite attic insulation property damage account on the third anniversary of the effective date and to make up to ten contingent deferred payments of $8 million annually to the Zonolite attic insulation property damage account during the 20-year period beginning on the fifth anniversary of the effective date (with each such payment due only if the assets of the Zonolite attic insulation property damage account fall below $10 million during the preceding year).
The property damage trust is to resolve U.S. Zonolite attic insulation property damage claims that qualify for payment by paying 55% of the claimed amount, but in no event is the property damage trust to pay more per claim than 55% of $7,500 (as adjusted for inflation each year after the fifth anniversary of the effective date).
Concurrent with effectiveness of this Plan, the Company entered into a credit agreement with Goldman Sachs Bank USA, as administrative agent that provides for the following: a $250 million revolving facility due 2019, a $150 million multicurrency revolving facility due 2019, a $700 million term loan due 2021, a EURO 150 million term loan due 2021 and a $250 million delayed draw term loan facility due 2021.
Grace emerges from Chapter 11 protection as a publicly-traded entity (NYSE: GRA). As of December 31, 2013, the Company estimated its consolidated assets to be $5,398.4 million; consolidated liabilities to be $4,827.2 million and stockholders’ equity of $571.2 million. The Turnaround Letter has long-maintained that post-bankruptcy stocks represent an interesting investing sector because they operate in such an inefficient niche and often move independent of the overall market. Although some companies take advantage of the Chapter 11 process to reshape businesses and balance sheets-to ultimately emerge as stronger, more competitive entities-investors are often biased against post-bankruptcy situations. As a result, these companies can be undervalued and, in select situations, represent an appealing turnaround investing opportunity.
New Generation Research’s Post-Bankruptcy Stock IndexTM monitors the market capitalization of the 20-largest post-bankruptcy stocks, and GRA will now be added to the Index-joining other recent additions AMR and Eastman Kodak. Since its inception on January 1, 2012, the Index has significantly outperformed, gaining 92.6% versus 42.7% for the S&P 500 Index. In terms of recent performance, post-bankruptcy stocks have very slightly underperformed the S&P, 19.2% to 19.5%, over the past twelve months. The Index’s post-bankruptcy stocks underperformed over the first part of last year but caught up later in the year, outperforming the S&P over the last three- and six-month periods (see attached graphic).
As of February 3, 2014, 77,063,385 shares of Grace’s common stock were issued and outstanding; and an aggregate of 87,372,257 shares of the Company’s common stock are reserved for future issuance in respect of claims and interests filed and allowed under the Plan. Grace has been quick to address post-bankruptcy investor sentiment. Just two days after emergence, its board authorized a $500 million share repurchase program to be completed over the next 12 to 24 months. Fred Festa, chair and C.E.O., comments, “This program demonstrates our commitment to increasing long-term shareholder value. Our strong balance sheet and cash flow provide the financial flexibility both to invest in growth and return capital to shareholders.”
Although Grace’s long-term post-bankruptcy financial health and investing appeal remain to be seen, I do like current prospects for this sector, as a whole–which is why I recently highlighted ten stock picks within the chemical industry. Many chemical companies appear to be well-positioned to profit from the continuing economic rebound in the United States and other parts of the world. Increased industrial activity will boost demand for numerous chemical products. Moreover, low natural gas prices in the U.S. are a boon to domestic chemical producers since they use gas as both an energy source and a raw material. For example, Dow Chemical (DOW) looks even more attractive now in light of the news that activist hedge fund manager Dan Loeb has taken a big position in the stock. Learn more about my favorite value stock opportunities within the chemical sector.