ABB has managed a remarkable turnaround since last year. Asbestos claims against one of its subsidiaries threatened to bring it down but decisive action means it now looks likely to make good on its plans to restore profitability, as Geraldine Lambe reports.
In October last year, the fate of power and automation company ABB seemed set. Most media pundits were predicting that it was on the brink of collapse, due to the asbestos claims made against its US subsidiary Combustion Engineering. In December, Moody’s lowered its senior unsecured debt rating to B1, a full 10 notches below the Aa3 rating ABB had enjoyed only one year earlier. But in the past few months, its spreads – along with several other high beta credits – have come in remarkably.
ABB has benefited from a stream of good news recently. It won court approval for its pre-packaged bankruptcy proposal, in which it agreed with claimants to settle and cap its asbestos-related liabilities at around $1.2bn.
The proposal was supported by 111,000 claimants. Once completed, in one fell swoop, it will rid the company of the uncertainty over how many new claimants may come forward and agree a single settlement for all claimants; it will also hopefully ensure the company’s immunity from any future claims.
Positive news
“That was hugely positive news for ABB,” says Georg Grodzki, global head of credit research at Royal Bank of Canada. “While the threat of claims was hanging over its head, the company’s ability to proceed with the sale of its oil and gas services unit or to tap the capital markets was severely curtailed. Investors would have had to be compensated for that uncertainty and that makes funding very expensive.”
The settlement, reached earlier than expected and at less expense than predicted, will enable ABB to draw a veil over its asbestos drama. It will place what many see as a manageable burden on the company’s cash flow over the next several years and allow it to concentrate fully on the ongoing restructuring and disposal tasks. “Now that they are making good progress towards settling litigation issues, the path appears to be cleared to implement further balance sheet initiatives,” says Mr Grodzki.
ABB’s recent stellar gains may have faced a setback last month, after a US Appeals Court ordered ABB to halt the asbestos settlement until it has reached a final decision on the appeal, but Mr Grodzki says it should not derail the bankruptcy package. “And the company says the delay will not prevent it from carrying out the much-awaited disposal of the oil and gas business.” Figures released in February illustrate that ABB’s management has delivered on its objectives and met its debt reduction – exceeding its EBIT (earnings before interest and tax) margin targets for 2002. The company has made enormous progress, not least in terms of credibility, since the middle of last year.
ABB’s bond performance was also helped by the power outage that caused such chaos in the US last month. Analysts predict significant investment in infrastructure and ABB remains one of the major providers of power generation and transmission equipment.
Once the settlement is finalised, it is strongly expected that the company will tap the markets, most likely with a major convertible bond, believes Mr Grodzki.
He says it will also free up the company to focus on a seamless implementation of its “step change” programme to restore sustainable profits. “It would mark an impressive turnaround for one of Europe’s most spectacular fallen angels and a company that was deemed to be on the brink of collapse as recently as October last year.”
