The move by Wayne, New Jersey-based G-1 Holdings, formerly known as GAF Corporation, to file for bankruptcy last week because of asbestos claims has sparked fears among bondholders of its subsidiary, Building Materials Corp. of America, that the assets and liabilities of both the entities may be combined. Building Materials has no asbestos liability and is not involved in the bankruptcy proceedings, but if consolidated it could be made liable and may be unable to payback bondholders. "I have been reassured by lawyers that this cannot happen unless both companies file for bankruptcy, but I've heard it from other investors, so the theory is definitely out there," says Shawn Curley, analyst at Imperial Capital Management in Los Angeles.
However, the company is pouring cold water on the notion. "The two companies are completely separate," says a G-1 official. "They have separate cash accounts and their offices are not connected in any way." He adds that G-1 has said this publicly before: "We've made it clear to investors that these two separate companies have never been treated as one. Imagine if every time a company went bankrupt and all their subsidiaries went bankrupt too. That is ridiculous."
The low double-B rated Building Materials, a manufacturer of roofing products, has $540 million in debt, including the 7.75% senior notes of '05 and the 8% senior notes of '08, which were recently collateralized in late December. Bondholders approved the collateralization "because, although they had to take second priority to the bank loan when they had been pari passu before, at least they got some collateral," says Curley.
