🐮Manufacturers Fill Up the Early 2020 Docket🐮

Professionals Get an Early Break from Retail & Energy Distress. Asbestos!!

🏆Asbestos-Plagued Manufacturer Beats Retail to Achieve the First Large Bankruptcy of ‘20. Awesome.🏆

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Hear Ye. Hear Ye. ON Marine Services Company LLC gets the prize: it marks the first sizable chapter 11 bankruptcy case of 2020.* Its reward? A plan of liquidation.

Let’s be clear: by “sizable,” we are not referring to operations, employees, or some other more normal metric. Rather, we’re referring to approximately 6,000 asbestos-related personal injury claimants and, by extension, the massive contingent liabilities that comes with them. This company ain’t having much fun of late, we assure you. 😬

The debtor dates back to 1929 and has a legacy in manufacturing and selling products used exclusively in steelmaking. The products — called insulated “hot tops” — were single-use products into which molten steel was poured. While that might seem fairly innocuous to casual observers such as ourselves, “[b]y the mid-1940s, certain of the … “hot top” products contained asbestos as an intentionally included ingredient.” Whoopsy-daisy. This ceased to be the case after 1978.

The company previously filed for bankruptcy in 2004 which, we guess(?), means this is a Chapter 22. Like, maybe? (We really need a set statute of limitations for using that term). For whatever reason, the company did not address its asbestos-related liabilities in the prior bankruptcy and has subsequently enjoyed a jolly good time of defending cases for the past 14 years. Over 182,000 claims have been asserted against the company: we suppose someone deserves some sort of endurance award because, as noted above, only 6,000 remain on the books. Here is a snapshot of the debtor’s risk manager back in 2004:

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And here’s the debtor’s risk manager today:

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Clearly folks have had enough of this sh*t.

Interestingly, there’s a commentary here about the US tort system. While the 182,000 claims tout horrific injuries, e.g., mesothelioma, lung cancer, esophageal or colon cancer, the debtor highlights that 95% of the claims asserted against it have been dismissed without payment. Nevertheless, a decade+ of defending claims has depleted the debtor of critical insurance/reserves to fund defense and indemnity costs. “[T]he Debtor has reached the point at which its traditional method of dealing with Asbestos Claims is no longer economically feasible.” Said another way, this zombie is finally being put out of its misery.

The debtor filed for bankruptcy with an insurance settlement in hand. The proceeds from that settlement with fund the bankruptcy case and feed a liquidating trust that will be available to claimants as cases proceed.

*Pretty sure nobody would’ve predicted that Reed Smith LLP would be debtor’s counsel in the first large filing of 2020.

🏆Disruption-Plagued Dairy Manufacturer Beats Retail to Achieve the Second Large Bankruptcy of ‘20. Awesome.🏆

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Dallas-based Borden Dairy Company and 17 affiliated companies joined fellow dairy manufacturer, Dean Foods Company (which we’ve written about here, here, here and, lastly, here upon its chapter 11 filing) in bankruptcy court this week. Why? “Like other milk producers and distributors, Borden is facing a multi-year trend of shrinking margins and increasing competition. These negative trends have been exacerbated by declining margin over milk at retail even as the price of raw Class 1 milk has been increasing.” Boo Hoo. Or should we say: Boo Moo. SMH.

Anyway, what a storied history. Founded by Gail Borden in 1856 (PETITION Note: read the link if you want to feel awful about yourself and what you’ve accomplished in your life), the New York Condensed Milk Company started the first successful condensed milk processing plant in 1861. In the latter part of the 19th century, the company added processed and evaporated milk to its offerings and pioneered the use of glass milk bottles.

In 1919, the company changed its name to Borden Company in honor of Mr. Borden. This was a period of great uncertainty but that didn’t stop Mr. Borden’s descendants from expanding their dairy-fueled reign. They subsequently moved into ice cream, cheese and chemicals. Because that’s a combination we always want to see: ice cream, cheese and CHEMICALS. Over those years, Borden acquired over 200 companies. “Elsie the Cow” was born in 1936 and became a well known mascot.

By the 80s, Borden was the world’s largest dairy operator with sales exceeding $7.2b. Then gravity prevailed. By the early 90s, the company experienced financial distress borne out of two much expansion over the years and sold to KKR for $2b. KKR then dismembered Borden by selling off divisions and brands to various buyers. The culmination of these efforts was a comprehensive restructuring in 2017.

As part of the restructuring, the debtors took on a $275mm credit facility. It consists of a $70mm revolving credit facility (PNC Bank NA), a $30mm Term Loan A (PNC) and a $175mm Term Loan B (held by KKR). The effective interest rate on the term loan facilities was 9.3% as of 12/31/19, which is on top of the 4.95% interest due under the revolving portion of the loan. So, yeeeeeeeeah, debt and the debtors’ interest expense nut is a big part of this bankruptcy filing.

The debtors are no longer the behemoth they once were. Nevertheless, they employ over 3000 people and makes tens of thousands of service calls to their customers (e.g., Walmart Inc. & Sam’s Club ($WMT), Kroger Inc. ($KR), 7-Eleven, CVS HealthCorp. ($CVS), Starbucks Inc. ($SBUX), etc.).

But their number suck. In 2018, the debtors had a total net income loss of $14.6mm on ~$1.2b of sales. In 2019, the loss widened to $42.4mm. Liquidity, therefore, is a big issue — and it’s compounded by (a) interest expense and amort payments on the term loan and (b) employee obligations under mandatory retirement plans and settlements related to pension funds. More on this below.

The macro reasons for the debtors’ problems sound like a Dean Foods’ encore:

  • The milk industry is highly competitive ✅;

  • Non-dairy products and beverages are stealing share (DISRUPTION!!) ✅;

  • Discount grocers have “intensified competition and reduced the margin over milk at retail” ✅; and

  • Walmart and other retailers who use milk as a loss leader are napalming margins ✅;

  • Commodity and freight costs are up ✅.

We hope the company isn’t dumb enough to pay Arnold & Porter Kaye Scholer for basically cribbing Davis Polk’s work here.

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The debtors don’t tip their hand as to what they hope to achieve in bankruptcy other than a “breathing spell” to get their sh*t in order. The Wall Street Journal noted:

Borden Chief Executive Tony Sarsam told The Wall Street Journal that he believes Acon, which took a major stake in the company in 2017, will be the primary owner of the business after the bankruptcy. He declined to say how much debt Borden would erase as part of its bankruptcy restructuring.

Acon, a DC-based private equity shop, is currently one of the debtors’ majority owners.

*****

They are also currently on PNC and KKR’s sh*t list. Both lenders objected to the debtors’ proposed use of cash collateral, stating that they were under the impression that an out-of-court deal was nearly done and that the bankruptcy filing was a sideswipe job of epic proportions. Acon led the pre-petition negotiations, the lenders note, and everyone was “close to finalizing [the deal].” KKR argued:

Inexplicably, however, with an almost fully-baked out-of-court restructuring solution in the form of the Out-of-Court Transaction seemingly in-hand, the Debtors instead chose to recklessly file these Chapter 11 Cases without (i) any prior notice to the Lenders, (ii) any discussion regarding use of cash collateral or other financing alternatives for these Chapter 11 Cases or (iii) any sense of what, exactly, the Debtors hope to accomplish through bankruptcy or how a calamitous and unprepared-for Chapter 11 filing will further those ends.

KKR adds:

As for the Debtors’ strategy for the Chapter 11 Cases as a whole, it seems to boil down to somehow using the bankruptcy process to negotiate a transaction that will be more advantageous to Acon than the Out-of-Court Transaction the parties were on the verge of consummating. Such a strategy is economically irrational and value-destructive. By filing these Chapter 11 Cases, the Debtors have chosen to incur substantial costs while also exposing the Debtors’ businesses to the inherent uncertainties of a bankruptcy process, which uncertainties are compounded by the Debtors’ failure to plan for the process or to articulate a clear path forward.

This might explain the lack of rationale for the filing in the first day filing papers.

The first day hearing — including a hearing on the cash collateral motion — was supposed to occur yesterday afternoon but got pushed to today. Stay tuned.

*****

One more thing: there’s another aspect to this that the likes of The Wall Street Journal didn’t pick up on. The debtors’ pensioners are about to get the royal screw.

The debtors note that, pre-filing, they made periodic payments pursuant to two settlement agreements they entered into in connection with their withdrawal from their (a) Central States, Southeast and Southwest Areas Pension Fund terminated in ‘14 (“Central States”) and (b) Retail, Wholesale and Department Store International Union pension fund terminated in ‘16 (“RWDSU”). In connection with the ‘17 restructuring, the debtors established a special purpose account funded with $30mm for these settlement payments — $185,225/month to Central States and $6,000/month to RWDSU. The account now has $26.6mm in it.

The debtors are laying claim to this money; they note that it is unencumbered by their lenders nor the pensioners.

The hits just keep on coming for pensioners. Between a deluge of coal bankruptcies, Jack Cooper, Dean Foods and now this, someone get them a cookie and a big a$$ glass of milk. They may need it to soften the blow to come.


🏆Asbestos-Plagued Manufacturer Beats Retail to Achieve the Third Large Bankruptcy of ‘20. Awesome.🏆

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Ohio-based Paddock Enterprises LLC (aka Owens-Illinois Inc.) is the latest victim of asbestos-related liabilities to find itself in bankruptcy court. And by “latest” we mean the first in, like, a few days. As noted above, just last week another manufacturer, ON Marine Services Company LLC, filed for bankruptcy after having had enough of dealing with decades-worth of claims within the tort system. ON filed for bankruptcy to address 6,000 claims emanating out of the 70s; Paddock filed for bankruptcy because its alternative to the tort system — “administrative claims agreements” — became increasingly untenable and it must still address 900 claims stemming from the 40s and 50s. That’s right, the 40s and 50s!! The purpose of filing for bankruptcy is to establish a 524(g) trust to deal with current and future asbestos claimants.

This case seems rather straight-forward and so we’ll spare you the long summary. In a nutshell, if a company at one time manufactured product with asbestos, it is generally f*cked. But there is an interesting commentary herein about these types of lawsuits and why bankruptcy is warranted. In the context of discussing its reserve coverage of asbestos-related tort expenditures ($722mm!), the company notes:

The Debtor believes that, although the established reserves are appropriate under ASC 450, its ultimate asbestos-related tort expenditures cannot be known with certainty because, among other reasons, the litigation environment in the tort system has deteriorated generally for mass tort defendants and Administrative Claims Agreements are becoming less reliable.

It gets better (PETITION Note: this is a long but worth-it passage):

What is certain is the incredible disparity between what the Debtor has historically paid, and is now being asked to pay, for Asbestos Claims, given the extent of its historical asbestos related operations. As of September 30, 2019, the Debtor had disposed of over 400,000 Asbestos Claims, and had incurred gross expense of approximately $5 billion for asbestos-related costs. In contrast, its total Kaylo sales for the 10-year period in which it sold the product were approximately $40 million. Asbestos-related cash payments for 2018, 2017, and 2016 alone were $105 million, $110 million, and $125 million, respectively. Although these cash payments show a modest decline, the overall volume and claimed value of Asbestos Claims asserted against the Debtor has not declined in proportion to the facts that (i) over 60 years have passed since the Debtor exited the Kaylo business, (ii) the average age of the vast majority of its claimants is now over 83 years old, (iii) these demographics produce increasingly limited opportunities to demonstrate legitimate occupational Kaylo exposures, and (iv) other recoveries are available from trusts established by other asbestos defendants. Rather, increasing settlement values have been demanded of the Debtor. And because the Debtor has settled or otherwise exhausted all insurance that might cover Asbestos Claims, it must satisfy all asbestos-related expenses out of Company cash flows.

Oh man. You’ve gotta love the plaintiff’s Bar. Those numbers are staggering. $40mm in 1940-1950 dollars would be equal to approximately $565mm in 2018 dollars. As compared to $5b in liability. And more to come. SHEEEESH. (PETITION Note: none of the foregoing is intended to disrespect any of the victims of the debtor’s product. Yes, we feel obligated to say that.)

There’s also a structural issue: the debtor entity subject to these extensive liabilities was incorporated in December 2019 as a direct wholly-owned subsidiary of O-I Glass Inc. ($OI), a $2b market cap glass container manufacturer. This is the classic “good company,” “bad company” structural separation (and the stock market appeared to approve):

We suspect there’ll be at least some fireworks in bankruptcy court over this structure as creditors — almost exclusively the plaintiffs’ law firms — try to broaden the pool of potential proceeds from which they can recover monies for their clients.


💥Tweet of the Week💥

Sorry, but this is bullsh*t ⬇️. Though “…you previously unsubscribed from Barney’s emails…Saks, as the buyer of Barneys New York’s data in bankruptcy, will spam you — unironically given the inclusion of the Privacy Policy(!) — with a marketing email that you never opted into. There ought to be some sort of exclusion in chapter 11 363 sales where just because someone’s email address sits SOMEWHERE in the rolls of a bankrupted company that that doesn’t mean that you’ve opted into ANY correspondence whatsoever from a successor.


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