Moody's Cuts Congoleum Ratings
New York, NY, Dec. 19--Moody's Investors Service downgraded the ratings of Congoleum Corporation because of mounting asbestos claims, the apparent exhaustion of its primary insurance coverage, and a temporary delay in the attachment of its excess layer of insurance coverage. The outlook continues to be negative. Ratings affected are as follows: Senior implied rating, lowered to Caa2, from B2 Senior unsecured issuer rating lowered to Ca, from B2 $100 million of 8.625% senior unsecured notes due 8/01/2008 lowered to Ca, from B2
The ratings reflect Congoleum's flat sales and declining earnings over the past five years and the poor revenue and earnings outlook going forward, negative free cash flow over the past four years despite a reasonably strong economic backdrop for the first half of this period, high debt leverage, low returns, and weakness in one of its most important end use markets -- manufactured housing.
In addition, in August 2002 the company received notice that its primary insurance coverage for asbestos claims was exhausted, although its excess insurance carriers are asserting that $13 million of primary coverage still remains owed by the primary carriers. Until this issue is resolved, the company may incur unreimbursed litigation and settlement costs. Once the company moves into its excess insurance coverage layers, it will probably have to co-pay between 25% - 33% of the costs because of the insolvency of certain of its excess carriers. The ratings acknowledge Congoleum's strong industry position, its 114 year history, established brand name, and nationwide multiple distribution network support.
Nearly all asbestos-related claims brought against Congoleum to date allege that various diseases were caused by exposure to asbestos-backed vinyl flooring, which the company discontinued in 1983, and/or to asbestos-backed resilient tile, which the company stopped producing in 1974. As of September 30, 2002, the company was one of many defendants in approximately 13,075 cases involving approximately 39,626 individuals. This compares to about 6,563 claims for 23,129 individuals as of December 31, 2001. The total indemnity costs incurred to settle claims through the first nine months of 2002 were $2.1 million, compared to $1.1 million for all of 2001. While insurance covered 100% of the costs in 2001, it covered only $1.3 million (of the $2.1 million) indemnity costs and related defense costs for the nine months ending September 30, 2002.
In addition, during its third quarter ended September 30, 2002, Congoleum paid an additional $1.1 million in defense and indemnity costs to settle claims, for which it expects only partial reimbursement by its excess carriers. During this same quarter, the company also agreed to settle two claims for $1.6 million plus an assignment of insurance proceeds, with the $1.6 million paid out during the fourth quarter that began October 1. Congoleum does not expect any insurance reimbursement for this $1.6 million payout. The company has estimated that its range of probable and estimable undiscounted losses for asbestos-related claims through the year 2049 is $53.3 million to $195.6 million before considering the effects of insurance recoveries.
Assuming that these estimates are accurate and that the remaining excess insurance carriers remain solvent throughout this time period, Congoleum may have to pay $13 million to $65 million out of its own pocket over this same 50-year period. It is unlikely that the company would be able to afford payments at the higher end of the range of estimates, and even the lower range of estimates would be a burden. The company is currently conducting a new detailed analysis of its asbestos liabilities and related insurance coverage, which may cause it to increase the range of its probable and estimable undiscounted losses for asbestos-related claims. The wide notching of the rating on the senior unsecured notes vs. that of the senior implied rating is a reflection of the limited recovery possibilities of the senior notes in a distress situation.