The ghost of asbestos litigation came back to haunt ABB – and its bond spreads – at the end of last year as the US Appeal Court rejected its $1.2 billion asbestos settlement plan. This came as a surprise to many in the market as two lower courts had ruled in ABB’s favour.
“Given the fact that the Bankruptcy and District Courts have approved the Combustion Engineering plan of reorganisation, we are naturally surprised and disappointed at today’s decision,” says Jürgen Dormann, ABB chairman and CEO. But he remains confident that the firm can resolve its asbestos liability within a plan of reorganisation compatible with the court in a timely manner and at no significant additional cost.
ABB spreads were hit hard. The firm’s CDS widened more than 130bp when the news broke on December 2. Five-year CDS rocketed from 85/90 to a high trade of 220, before settling back to 155/165 the following day. By December 14 spreads partially recovered when five-year CDS were trading at 125.
Analysts agree that the re-emergence of asbestos litigation risk is a setback for the firm and raises fresh question marks over the ultimate financial exposure ABB is facing from asbestos litigation. Some believe that the ultimate exposure could be higher given the Court’s detailed objections and may even rise to double the initial settlement.
More importantly, ABB’s Chapter 11 plan of reorganisation of its US subsidiary, Combustion Engineering will be reviewed by the District Court. In January 2003, ABB offered a $1.2 billion trust fund for claims against Combustion Engineering.
This has affected its current re-financing proposals as proposals for an exchange offer for the euro 2008 and sterling 2009 bonds into a new 2012 offering was cancelled because of the court action. This is the last piece in its financial restructuring as ABB completed a $2.5 billion rights issue and launched a new three-year $1 billion bank facility last year
For some analysts, the postponement of the exchange offer is of no concern. “ABB is not desperate to complete its bond restructuring and is comfortable with its existing profile,” says a high-yield analyst at a London-based investment bank.