The price of W.R. Grace's bank debt dropped about five points to 45 as the company last week dragged lendersalong with their unsecured paper -- into bankruptcy. The move carries a particular sting for holders of the bank debt, as Grace had reportedly been talking to banks about a secured deal that would have put lenders in a much better position in the event of bankruptcy. "It hurts for them," one dealer said of the bank group. "It means the difference between a 75 to 80% recovery versus a 55-65% recovery. If the deal was secured, the group has some superiority in claims. Now they're up against everyone from payroll to the stationary store to the telephone company."
Market players said $10-15 million of Grace bank debt traded. Traders said the market was expecting to see a secured bank deal coming from Grace, but the company's board of directors opted to file for bankruptcy in the face of asbestos liability claims. "The banks were shocked. It was bad," one dealer noted.
One dealer said W.R. Grace faces the double-whammy of having asbestos tied to its name and having an unsecured deal. "The company is good; the asbestos is the issue. Asbestos scares these guys, and the thing's unsecured, which makes it incredibly difficult to trade," he said. "When you don't get post-petition interest, you don't get interest in bankruptcy. You don't get the coupon."
Calls to the company were directed to its Web site. A press release on the filing states that in 2000 the litigation environment changed with an unexpected 81% increase in claims. Chief Executive Officer Paul Norris attributed the sharp rise due to "a surge in unmeritorious claims." The company's liabilities largely stem from commercially purchased asbestos added to some of its fire protection products, which it stopped doing in 1973. J.P. Morgan Chase and Bank of America are the lead arrangers, according to Capital DATA Loanware. Spokeswomen at both banks did not return calls for comment.