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The eBearing News
February 3, 2003

Federal-Mogul Reaches Reorganization
Agreement With Creditors
copyright © 2003 eBearing Inc.

Federal-Mogul Corporation (USA) announced it has agreed in principle with its major creditors for a formal reorganization plan to be presented to the bankruptcy court. The plan would allow it to emerge from bankruptcy protection later this year but wipe out current shareholder equity.

The proposed plan was first brought forward by the creditors committee two weeks ago. Citing an impasse in negotiations with Federal-Mogul, they were ready to put this reorganization plan before the bankruptcy court without the company's participation. Part of their frustration stemmed from Federal-Mogul having missed several deadlines and extensions for the opportunity to file its own reorganization plan.

Federal-Mogul has been operating under Chapter 11 bankruptcy protection since October 1, 2001. The bankruptcy was driven by declining results from its auto parts operations, compounded by an avalanche of asbestos-related claims related to its acquisition of T&N plc. Federal-Mogul lost USD $810 million in the quarter preceding the bankruptcy filing.

Operating under bankruptcy protection is not designed to be a permanent state of affairs; within 120 days of filing Chapter 11, the company is supposed to present the court with a reorganization plan which allows it to continue operating and pay back creditors. If the company fails to file a plan within those 120 days, the creditors are then free to file their own plan.

According to creditors interviewed by eBearing, their frustration with Federal-Mogul has been mounting; the company has asked for and received three extensions to the exclusivity period filing deadline. Yet the creditors told eBearing F-M was not working on a reorganization plan but instead hoped to solve its problems by lobbying Congress to restrict asbestos-related claims.

• article: Federal-Mogul bankruptcy filing

• article: Federal-Mogul reorganization plan extensions

Under the agreed plan, the company's existing common stock shareholders would have their equity erased and the stock eliminated. Then, noteholders and asbestos claimants would convert all of their claims into new common stock in the reorganized company. 49.9% of the newly-created equity would go to noteholders and 50.1% would go into a trust organized to benefit the asbestos-related claimants.

In addition to 49.9% of the equity, the plan also involves at least one round of cash payments to creditors. The $1.6 billion of trade payables which the company had when it declared bankruptcy would be restructured into a combination of 6.5-year maturity Senior Secured Term Loans and 11-year maturity Junior Secured PIK Notes.

An attorney for the creditors' committee said last week, "It's a great plan because we're eliminating billions of dollars of debt from the balance sheet. It will enable the company to get out of Chapter 11 hopefully by the end of the summer, certainly this year, and it will fix the capital structure of the company so it can go forward without any asbestos overhang."

In a related move, Federal-Mogul signed a letter of intent with Honeywell to acquire its troubled Bendix friction materials business. Honeywell and Bendix face a similar flood of asbestos-related claims related to Bendix brake products. By rolling Bendix under Federal-Mogul and then reorganizing under the proposed plan, all of the Bendix asbestos-related claims would be contained and limited by Federal-Mogul. Honeywell is so intent to divest Bendix that no cash will change hands in exchange for F-M assuming all asbestos-related claims.

F-M Chairman and CEO Frank Macher said, "We are very pleased to announce that we reached this important agreement and expect that we will emerge from Chapter 11 later this year with a much stronger balance sheet and with a full resolution of the company's asbestos liability issues. This agreement, combined with our recently announced letter of intent to acquire Honeywell's Bendix friction materials business, should position the company to be an even stronger and more competitive global supplier to the automotive industry. The plan will eliminate over $2.5 billion of interest-bearing indebtedness, remove the taint of asbestos liabilities from the company, and give customers, suppliers and other stakeholders the confidence they need in the long-term health and success of Federal-Mogul."

Separately, the bankruptcy court is also scheduled to hear F-M's request to be allowed to break its long-term lease for the facilities on Northwest Highway. The company hopes to move its offices to nearby Travelers Tower II, saving almost $4 million a year.

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- by Bruce A. Carr
from individual research,
tips and commercial sources.
Bruce Carr edited this content.
Copyrighted material; unauthorized reproduction prohibited.

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