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
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
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
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.