U.S. Gypsum Files Chapter 11

Monday June 25, 4:45 am Eastern Time

http://dailynews.yahoo.com/h/nm/20010625/bs/manufacturing_usg_dc_6.html

USG Files for Bankruptcy, Blames Lawsuits

NEW YORK (Reuters) - Building materials manufacturer USG Corp. (NYSE:USG - news) on Monday became the latest victim of asbestos litigation costs.

USG said it filed for Chapter 11 bankruptcy protection to contain spiraling costs from asbestos lawsuits -- 22,000 new claims have been filed against it since the beginning of this year. These costs are expected to top $275 million in 2001.

Chicago-based USG, the eighth company in the last 18 months to file bankruptcy to resolve asbestos claims, said its major domestic subsidiaries, including U.S. Gypsum Co., USG Interiors Inc. and L&W Supply Corp., also filed Chapter 11 petitions.

Other companies could easily follow USG into bankruptcy as they fall prey to a vicious circle, analysts said. With fewer companies left that can be sued, the number of lawsuits increases as the number of companies that can be sued decreases, forcing them to seek bankruptcy protection.

"Lawsuits continue to be filed at a high rate with no slowdown in sight,'' said Chairman and Chief Executive William Foote in a statement.

"We have said repeatedly that U.S. Gypsum can afford to pay for its own liability,'' Foote said. "But it cannot pay for the liability of other companies or pay everyone who was exposed to asbestos-containing products -- yet that is exactly what is happening because of the high volume of new cases and the other asbestos-related bankruptcies.''

Foote said the recent bankruptcies of other asbestos-troubled companies -- including chemicals company W.R. Grace & Co. (NYSE:GRA - news), building materials firm Owens Corning NYSE:OWC - news) and a major unit of floor and ceiling maker Armstrong Holdings Inc. (NYSE:ACK - news) -- have "dramatically increased'' U.S. Gypsum's asbestos costs.

Shares of USG fell as much as 12 percent in early trade, falling below a 52-week low of $3.65, but pared losses to close down 15 cents, or 3.9 percent, to $3.73 on the New York Stock Exchange (news - web sites). The stock is nearly 90 percent off the year high of $33.56.

Asbestos is a fireproof insulator that can cause lung cancer and other serious diseases when its fibers are inhaled. Widely used in the late 19th century, it became a health concern in the 1950s. Asbestos-related litigation has led 27 companies since 1982 into bankruptcy, USG said.

'SPIRALED OUT OF CONTROL'

The lawyers representing the people who file asbestos claims often try to include as many companies as possible, USG said. USG and other companies also complain most of the claims filed are by people who are not sick.

The companies that haven't filed for Chapter 11, such as auto parts maker Federal-Mogul Corp. (NYSE:FMO - news), packaging products supplier Crown, Cork & Seal Co. Inc. (NYSE:CCK - news), and plastic container maker Owens-Illinois Inc. (NYSE:OI - news), are left with a disproportionate burden, analysts said.

"The financially most healthy ends up paying the tab for others,'' USG spokesman Robert Williams told Reuters. Williams said the only way for USG to control the costs was to file for Chapter 11, which will consolidate its many lawsuits across the country into one: the U.S. Bankruptcy Court in Delaware.

"Any tangential, historical experience with asbestos could make companies susceptible to these lawsuits,'' said John Kasprzack, an analyst with Richmond, Virginia-based BB&T Capital Markets. "It is remarkable how fast in the last year and a half this has spiraled out of control.''

Williams said the vast majority of claims are settled out of court, but in recent years lawyers' demands have escalated, prompting the company to fight the suits. Kasprzack said the only feasible solution may be legislation, but he laughed when asked when he thought that may transpire.

"Not any time soon,'' he said. "There is no impetus on Capitol Hill to pass (asbestos legislation).''

The company has said it has been lobbying Congress to enact laws that would minimize potential damages from asbestos lawsuits, but that may become an even tougher task with the recent shift to a Democratic majority in the U.S. Senate.

"USG's filing kind of shows it is unlikely Congress is going to reach a solution in the near term,'' said Trip Rodgers, an analyst who tracks USG for UBS Warburg. "Particularly with the change in control in the Senate -- that put a nail in the coffin for the company,'' he said.

USG RESTRUCTURING PLAN

USG, maker of top-selling Sheetrock wall boards and other building materials, also said it has received financing of up to $350 million from J.P. Morgan Chase to increase its liquidity and fund operations during the restructuring process.

During the restructuring, USG said its operations will continue uninterrupted. Foote said he did not know how long it would take to emerge from Chapter 11.

Matthew Moyer, an analyst with A.G. Edwards & Sons Inc., who said he was not surprised by the filing, said he expects it to take "several years.''

Martin Whitman, who manages the $2.4 billion Third Avenue Value mutual fund, which on April 30 held about $65 million of USG bonds, said he was more optimistic about the future of USG than of rival companies that have faced similar troubles.

"It's much, much better financed than Armstrong and Owens Corning. It's a very well-financed and well-run company. They will have a bad year this year, but they should come back well,'' he said.

Since 1994, U.S. Gypsum has been named in more than 250,000 asbestos-related personal injury claims, and has paid more than $450 million before insurance recoveries to manage and resolve asbestos-related litigation.

USG said it received 52,000 asbestos-related claims in 2000. Its asbestos personal injury costs have risen to more than $160 million in 2000 from $30 million in 1997, and it expects that figure to rise to more than $275 million this year, before insurance, which it said is nearing depletion.

*** POSTED JUNE 28, 2001 ***