Bonds of manufacturing and insurance companies still have room to run if Congress enacts legislation to limit asbestos-related lawsuits, according to several analysts and investors. Despite a strong June rally, the summer Congressional recess and high-profile opposition to the bill have caused investors to turn their attention elsewhere, says David Havens, insurance analyst at UBS Investment Research. Hank Greenberg, American International Group's chairman and ceo, was recently quoted at an insurance industry conference saying one version of the bill was "doomed to die."
But, Julie Rochman, a spokeswoman from the American Insurance Association, an industry trade group, says a different bill that would establish a $108 billion reserve fund and prevent further liability will absolutely pass this Congress, citing comments by leadership in both houses. Rochman is equally adamant that the bill will protect the insurance industry from further litigation. "We will not pay billions into a fund and still be subject to extortion by the trial bar and the tort system," she says.
Investors do not appear convinced by Rochman's comments. "From where I sit I'd assume it's just rhetoric," says Tom Marthaler, head of fixed-income atABN AMRO Asset Management. But Marthaler, like other investors, allows that last minute legislative surprises can never be discounted, and sees upside potential, at least in the short term, in bonds of high-yield manufacturers such as Owens Illinois and Georgia Pacific, as well as some auto parts makers if a bill were to pass.
On the high-grade side, issues such as the Dow Chemical 6% notes of '12 could easily see some 50 basis points of upside if investors are more certain about asbestos liability limits, says Dan Zaldivar, analyst at RBC Dain Rauscher. The Dow Chemical bonds were bid at 125 basis points over Treasuries last Wednesday. Issues from Union Carbide, a Dow subsidiary that has traded wider than Dow due to asbestos concerns, would likely see even bigger gains, he says.
Among insurers, CNA Financial, Liberty Mutual Insurance Group and Fairfax Financial Holdings would appear to benefit, according to Havens of UBS Investment Research. He has "sell" recommendations on CNA and Fairfax, which he says he would reevaluate if meaningful industry-friendly laws were to pass. He has no official view on Liberty, though he says he is cautious on the name, partly due to asbestos issues.