Asbestos transactions have been around over the past decade, but several trends are causing these transactions to become more commonplace. The typical asbestos transaction involves a company moving legacy asbestos liabilities, along with offsetting insurance assets and cash, to a subsidiary without claims on any of the company’s operating assets, prior to ‘selling’ the subsidiary to a third party. Bidders submit offers not to buy the subsidiary but instead with requirements of how much cash the seller must put into the entity. Because of the conflict of trying to retain as much cash as possible for the seller but not leaving the subsidiary insolvent, it is paramount for the seller to obtain a legitimate solvency opinion from an independent provider (and is usually a requirement of the buyer). The Duff & Phelps Opinions Practice of Kroll, LLC (“Duff & Phelps”) has been the market leader in providing asbestos related solvency opinions over the past decade. Over half of the asbestos-related solvency opinions provided by Duff & Phelps have occurred within the past two years.
Companies with asbestos-related liabilities have always been motivated to sell. The most commonly observed case is a publicly traded company that has to report its liability amount on its balance sheet every quarter and answer the same questions from analysts about how much of the liability has been paid off over the past three months. Furthermore, it is not good press to be trying to sell consumer products while being associated with a mesothelioma-causing liability. What has changed in recent years has been the buyer’s point of view.
The expected payout of asbestos liabilities is fairly well known at this point. “Occupational Exposure to Asbestos: Population at Risk and Projected Mortality 1980-2030” by Messrs. Nicholson, Perkel and Selikoff, was published in the American Journal of Industrial Medicine in 1982 and is known within the industry as the “Nicholson curve”. Exposure to asbestos in the United States largely occurred between 1940 and 1979, and the mesothelioma incidence rate peaked in 2002. Since incidence rates have been declining for two decades, many buyers view the Nicholson curve as conservative and see an opportunity to manage claims in a way that results in a lower liability amount than what the Nicholson curve would imply.
Second, is the sophistication of the buyers. There is a large list of financial buyers who do not have to report to public shareholders every quarter. Several of these financial buyers have developed a liability management platform that seeks out numerous legacy liability entities and uses scale to manage defense and administrative costs. The financial buyers hope to profit from the arbitrage of investing the entity’s cash while they wait for the defense and indemnity payments to be made. The cash is typically invested with a risk profile matching that of the insurance carriers who cover some of the liabilities, usually a BBB index. The duration of the investments is set to match that of when the claims are expected to be paid based on the Nicholson curve.
Lastly, rising interest rates have contributed to an increase in asbestos transactions. Simply put, financial buyers are able to realize a greater return on the investable cash than when interest rates were near zero.
Duff & Phelps expects the trend to continue with other legacy liabilities such as environmental liabilities and PFAS, among others. As settlements become more common and there is precedence in the market, transactions will follow.
Due to the nature of legacy liability transactions, it is crucial to receive a reputable solvency opinion. Duff & Phelps has provided over 1,207 solvency opinions over $7.7 trillion in deal value since 2005 and was ranked the number one U.S. global fairness opinion provider in 2023.
