The eBearing News
October 2, 2001
Federal-Mogul Files Chapter 11 Bankruptcy
copyright © 2001 eBearing Inc.
In a long-anticipated move, Federal-Mogul Corporation (Southfield, Michigan) has
filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code and a similar filing in the United Kingdom. The filings cover only F-M
operating subsidiaries in the U.S. and U.K.. The company has over 100 operations in
23 other countries which are not involved.
The decision was made by the board of directors meeting on Sunday, and filed on Monday,
October 1, 2001 in Wilmington, Delaware. October 1 is the first day of the
company's fiscal fourth quarter.
Federal-Mogul said it does not expect any facility closures or job losses
as a result of the bankruptcy filing. CEO Frank Macher said, "Moving forward,
Federal-Mogul will continue to serve its existing customers, fulfill current
contracts and secure new business. I have been in close contact with many
of our major customers and suppliers, who have indicated that they will support
Federal-Mogul during the restructuring process."
In its announcement, Federal-Mogul cited the reason for the bankruptcy
filing as related only to ensuring the company's survival in the face
of a never-ending avalanche of asbestos claims and litigation. The asbestos
claims were, "threatening our company's viability," said Mr. Macher.
Mr. Macher said, "After vigorously working for a legislative solution
and operating nine months with our new litigation approach for managing
asbestos claims, we have determined that the process is the only way
we can effectively structure payments for claimants without financially
crippling the operations of Federal-Mogul." He went on, "Today's action
provides a means for effectively separating our company's acquired
asbestos liabilities from our true operating potential, thus paving
the way for Federal-Mogul to emerge from the reorganization process
as a stronger, more competitive enterprise. We remain committed in
our efforts to bring about a legislative solution for managing
Mr. Macher said the company has secured $675 million in debtor-in-possession
financing commitments from a group of banks led by J.P. Morgan Chase & Co.
Added to an existing $345 million credit line, the company will have
$1.02 billion of bankruptcy financing. The company will ask for release
of $400 million immediately. In its filing, F-M listed assets of
$10.15 billion and liabilities of $8.96 billion.
[ click here to go to Federal-Mogul's official bankruptcy update site ]
Federal-Mogul faces asbestos claims from seven different directions,
but primarily arising from its acquisition of T&N plc.
In early 1998, Federal-Mogul acquired of British
autoparts maker T&N plc (Manchester, England; formerly Turner & Newell, a
building materials manufacturer). From its due diligence, F-M knew that T&N
faced mounting asbestos litigation related to its then-closed building
materials operations and existing brake components operations.
Federal-Mogul estimated the total T&N asbestos litigation exposure would
amount to approximately USD $89 million. However, the exposure is now
over twenty times that amount and growing.
Several T&N divisions are responsible for generating claims. Gasket Holdings,
Inc. manufactured the Flexitallic Gasket, very commonly used in industrial
and piping systems. Flexitallic, according to F-M, is named in the largest
number of U.S. asbestos personal injury cases against the company. Former T&N
division Ferodo America, commonly known for its brake pads and shoes, also
once used asbestos in its products and is the target of "thousands" of claims.
The 1998 acquisition of Cooper Industries included Moog Automotive, a division
of which once manufactured friction products containing asbestos. There are
"thousands" of claims against Federal-Mogul via this Moog acquisition. In
addition, the Cooper acquisition also included Abex brake, which is also
the object of claims.
Federal-Mogul also acquired gasket manufacturer Fel-Pro in 1998. Fel-Pro
gaskets once contained asbestos and, once again, F-M faces "thousands" of
claims related to exposure to old Fel-Pro gaskets.
Federal-Mogul's old Vellumoid division, closed since 1981, also manufactured
gaskets containing asbestos and is subject to claims.
In asbestos claims, Federal-Mogul paid out $89 million in 1998, $178 million
in 1999, $351 million in 2000 and will probably pay $350 million in 2001.
It still faces more than 365,000 unprocessed asbestos-related
claims in the United States.
More than 30 companies snarled in asbestos litigation have filed for
Chapter 11 bankruptcy since 1982, according to Federal-Mogul. Ten
companies involved in asbestos-related litigation have filed Chapter
11 since January 1, 2000. In addition, a Rand study estimates now that only
about half the asbestos claims that are going to be filed have been filed.
Asbestos-related claims are only one of the many problems Federal-Mogul
faces, however. Even without the asbestos situations, the company's core
business units have been faltering.
After a long string of acquisitions in the late 1990's, F-M top management
was widely criticized for failing to integrate the businesses and capitalize
on the potential synergies. In the ultra-competitive automotive OEM and
aftermarket business arenas, competitors quickly learned to capitalize on
Richard Snell, CEO and architect of the acquisition strategy, was forced
out in late 2000. In January 2001, a new management team headed by Mr.
Macher, took over and the
company, beginning a strategy of cost containment and building on
the best of its business units. Underperforming and nonstrategic
business units have been jettisoned and focus turned to core expertise.
About Chapter 11 Bankruptcy
A case filed under chapter 11 of the U.S. Bankruptcy Code is often referred
to as a "reorganization" bankruptcy; a voluntary action where the debtor
remains in control of the business is termed a "debtor in possession." Under the
provisions of chapter 11, the organization continues to operate normally,
and a reorganization plan must be filed at a later date. Operations under
bankruptcy can go on for many years.
Under voluntary Chapter 11, there is no trustee appointed; the company
develops a reorganization plan designed to ensure the survival of the business
as a going concern and to pay creditors.
When the bankruptcy petition is filed, an automatic stay goes into effect.
This stay freezes all judgments, collection activities, foreclosures, and
property repossessions against the company. Any outstanding debt owed by
Federal-Mogul when the bankruptcy filing was made are put on hold and will
not be paid until the bankruptcy ends. Ongoing business expenses, starting with
the date of the bankruptcy filing, will be paid as usual.
Federal-Mogul has 120 days, until February 1, 2002, to file its reorganization
plan. If it does not file a plan with the court by that date, the creditors
are able to file a plan.
Creditors, generally representing the seven largest unsecured claimants (claims
which have no actual lien against property) will make up the Creditors' Committee.
The Creditors' Committee will probably play an important role in how Federal-Mogul
does business under Chapter 11.
Federal-Mogul Creditors - the domino effect
Because a bankruptcy action can drag on for years, many of Federal-Mogul's
vendors will also suffer greatly. While F-M is involved in many
depressed and low-margin auto parts businesses, the company's vendors for
those parts have been squeezed even tighter by the current economic climate.
With no prospect of being paid for pre-Chapter 11 bills any time soon,
there is legitimate concern that some smaller vendors may themselves be
forced into bankruptcy.
Another key provision of the chapter 11 code will also impact vendors.
That provision can require vendors who received payments from F-M in the
past 90 days (since July 1, 2001) to return those funds back to the company
for more equal disbursement to all creditors ("disgorgement"). This may also
force some cash-strapped vendors into bankruptcy.
The impact of the bankruptcy filing on Federal-Mogul's vendors is not yet
completely known, but eBearing has interviewed a number of the company's
suppliers. Most, it seems, had already either cut off the company entirely
or put it on very short credit terms.
In Federal-Mogul's case, the bankruptcy petition may very likely improve the
payment schedule for current suppliers as cash flow is freed up from