A review has dramatically increased the asbestos liabilities of James
Hardie by $1.3 billion, but will it matter – has the company escaped
its reponsibilities?
It’s probably too early and too fanciful but the question has to be
put: how damaged will James Hardie be by the latest actuarial review of
the asbestos liabilities that shows a shortfall estimated at $1.3
billion? A gap Hardie thought it had isolated back in 2001 with its
move of domicile to The Netherlands.

And can James Hardie remain
solvent in the face of a dramatic ballooning in the possible cost of
asbestos claims, as outlined by the review, conducted by KPMG Actuarial
Services?

CEO Peter Macdonald certainly thinks so, telling the
special Commission of inquiry in Sydney on Monday that he was not aware
of any claims that could be made today against the Dutch-registered
company.

And if the company’s liabilities have risen, and do
rise as a result of any finding of the Special Commission of Inquiry
into the adequacy the $293 million put into the Medical Research and
Compensation Foundation to meet future asbestos claims. will it matter?

Can the extra money be recovered, or is the company beyond the reach of NSW law now that it is domiciled in Amsterdam?

Big
questions and certainly James Hardie gave no sign of wanting to put up
any additional money, saying that the KPMG report would be studied by
directors.

A spokesperson said Hardie’s legal position was
unchanged. That might be the case, but certainly the reputation of the
company and senior management, not to mention the board, chairman Alan
McGregor and CEO, Peter Macdonald, have taken a battering in the NSW
Commission of Inquiry conducted by David Jackson QC.

So what’s
the news. Well the KPMG Actuaries reviewed of the work consultants
Trowbridge Consulting did for Hardie from 1996 to 2003 KPMG estimated
future asbestos liabilities were $1.573 billion at June 2003, not the
$1.09 billion that Trowbridge had estimated liabilities would be at
that date in its report in 2001.

Furthermore, KPMG said based on
the information that would have been available at the time, it would
have estimated $694 million in future liabilities for James Hardie.
Back in 2001, while Trowbridge,a subsidiary of Deloittes, had estimated
just $323 million in liabilities.
The Company settled on a figure of
$293 million for the Foundation and it was established with that
capital base. The Inquiry was called after the Foundation became and
others became concerned the money would not be enough and there could
be a shortfall of some $800 million because of rising levels of claims
and associated costs.

KPMG’s estimate also included $432 million
in legal costs and an additional $356 million for “superimposed
inflation” not included by Trowbridge, which could give Hardie some
wriggle room. But experience in the US is that legal costs and
‘superimposed inflation’ drive overall asbestos settlement costs higher
much faster than anyone had expected in the past.

Superimposed
inflation is based on the way court judgements boost the amount in
awards above the rate of inflation in the community, especially where
there might be juries involved, or where some suggestion of punitive
damages is included, even if it is precluded by law. Hardie said the
figures produced by KPMG “highlight an unforeseeable upward trend in
claims numbers and average claimant costs in recent years”.

In
its review, KPMG said some “key respects” of the Trowbridge work, such
as its assumptions about the peak and duration of future claims, fell
“outside the bounds of what would be regarded as reasonable actuarial
advice”, which actuary talk for ‘got it wrong in spades’ folks.

For
example KPMG said Trowbridge had assumed that the peak number of
reported claims had already been reached by the year 2000, while it
(KPMG) did not expect the peak until “at least 2010”, which seems to be
one of the concerns of the Foundation, but not James Hardie.

Remember
that one of the points that not only reassured the NSW Supreme Court,
and rival asbestos producer, CSR, was the move by Hardie to issue
partly paid shares in the Australian rump of the company that would
match the Hardie market capitalisation in 2001 of $1.9 billion.

That
meant if the Australian company was unable to meet its debts, it could
call up all or part of the partly paid shares to meet those payments.

The Court was happy and the now CEO of CSR, Alex Brennan was assured by this move.

But
without any announcement, James Hardie cancelled these partly paid
shares in 2003, without disclosing that it had done so to the NSW
Supreme Court, the ASX, the Foundation, CSR or any other interested
party.

Chairman Alan McGregor told the Commission last month
that it was decided that advice should not be sought on whether
disclosure should be made.

A spokesman for CSR said last week
that the first they knew of the cancellation when it was revealed at
the Commission. Meanwhile the Commission heard Monday that James Hardie
organised its affairs last year so that it would not have to provide
more funds to the trust it set up in February 2001 to handle asbestos
compensation even if the trust established a legal claim, chief
executive Peter Macdonald agreed under cross-examination yesterday.

He
defended the “commercial morality” of last year’s decision to dismantle
an October 2001 arrangement to ensure that creditors in Australia would
not be disadvantaged by Hardie’s shift to the Netherlands by pointing
to legal advice that a law suit from the Medical Research and
Compensation Foundation would be “unfounded”.

“I am not aware of any claims today that could be made against James Hardie Industries NV,” Mr Macdonald said.

And
there it is, the whole reason for the bolt to Amsterdam, and a hint of
defiance from the company in the event of an adverse decision being
made against it in Australia.

Investors in the company will no
doubt take heart from comments like that, but they will have to ask
themselves if Hardie does go down this route, how much damage will be
done to their investment.

So can James Hardie withstand a
requirement to increase the amount of money, either through legal means
or moral persuasion? Well, it will depend on the amount of course, but
if the Foundation’s $A800 million shortfall is a guide, then it will be
hard, but doable. Hardie had total assets of almost $A1.3 billion at
the end of March and net earnings of around $A160 million.

It’s
got low debt, and good cashflows from its businesses in the US. But the
company should have migrated to the US where a journey into Chapter 11
bankruptcy would have helped stabilise the problem and establish a
buffer against future claims by allowing for a negotiated settlement
that involved creditors, just like other American asbestos producers
have done.

Crikey doesn’t know what the situation is with a
Dutch registered company with assets here and in the US and other parts
of the world, where there is some sort of judgement or request in
Australia to make a huge payment to an Australian foundation to try and
settle these claims. The tax position would be complex and the ability
of the company to continue as a going concern would be of primary
concern to directors.

But having done one shuffle out of
Australia back in 2001, to limit or escape the asbestos claims, as is
claimed by some in the inquiry, a second gambit aimed at limiting any
liability would be a tough ask.

So the question has to be asked
of James Hardie directors, is the company resilient enough to continue
as a going concern if there is a substantial liability found to exist
for future asbestos claims.

The KPMG report increases pressure
on the directors and the company. That 2001 departure and establishment
of the foundation is increasingly looking like a gambit that was too
sharp by half.

It could cost shareholders, employees and
possible claimants dearly and leave the final bill to be picked up by
Governments in Australia.

=============================

The James Hardie asbestos issue is certainly hotting up again and here
is some of our recent sealed section material on the issue which was
emailed to Crikey subscribers.

Disgraceful James Hardie dumped

June 8 sealed section

James Hardie shares plunged 98c to a low of $5.22 this morning after
the bombshell KPMG report revealing that total asbestos liabilities are
now a whopping $1.57 billion, more than five times the $293 million
placed in the asbestos fund when it was established in February 2001.
The stock recovered to finish 72c lower for the day at $5.50 but this
was still a $330 million reduction in market capitalisation in one day.

James Hardie shares hit a record high of $7.80 last November and
were trading at $6.90 before the NSW inquiry commenced a few weeks
back. Therefore, whilst the All Ords pushes to record highs, James
Hardie’s market value has fallen by $640 million since the beginning of
May.

The market is clearly expressing the view that James Hardie will be
forced to write out another huge cheque to fully fund all asbestos
liabilities. However, we don’t buy this final KPMG figure as that
includes a whopping $432 million in legal fees.

The Federal and NSW Government really should get together with James
Hardie and sort this out. The solution should not involve another gravy
train for lawyers.

The scandal is now really starting to damage reputations. How could
Trowbridge Consulting possibly say there was only $293 million in
liabilities when KPMG now says $1.57 billion is the final figure?

Think about it for a moment. A major blue-chip Australian company
has poisoned thousands of customers and employees, causing death and
disease on a large scale. Rather than being accountable for their
actions and paying compensation where the Australian courts decide it
is due, these blue-chip directors decided instead to cynically create a
structure whereby they can subsequently shed corporate responsibility.

So who were the James Hardie directors at the time all of this was done?

What does the Centre for Independent Studies think of this?
Afterall, their current chairman, Alan McGregor, was chairman of James
Hardie at the time this was done.

And how ironic that AMP and Mayne chairman Peter Willcox was another
James Hardie director who signed off on the strategy. AMP no doubt
offered life insurance to a lot of people poisoned by James Hardie and
many of them would have been treated in the Mayne private hospitals
before they were flogged off last year.

Willcox invited Meredith Hellicar onto the AMP board last year and
she is another veteran James Hardie director who approved the shedding
of asbestos liabilities strategy. Former Brambles finance director
Michael Brown is another of the NEDs who now needs to be held
accountable.

Whilst the evidence so far suggests it was very much a management
driven policy, you have to wonder if those corporate cowboys at
Brierley Investments didn’t have some input into the strategy.
Afterall, Brierley dumped its shareholding on May 21, 2001, not long
after the now notorious Medical Research and Compensation Foundation
was established. The silly fools still got well below the current share
price because no-one realised what a success James Hardie would make of
its US building products business over the past few years.

It has been so successful that the company is more than big enough to fully fund all asbestos claims.

Finally,
this situation provides another example of how useless those luddites
at the ASX are. Hardie changed its code from HAH to JHX in October
2001, so it is impossible to go back and look at all those ASX
announcements leading up to the establishment of the foundation in
February 2001.

Companies with the same code can be searched back
till the beginning of 1998 so any company with something to hide should
simply change their code. In Hardie’s case, they changed the code
without even changing its company name.

Check out the ASX announcement of the 168 page actuarial review here – James Hardy new actuarial review

Peter Macdonald under the pump

June 4 sealed section

The Special Commission of inquiry into the setting up of a
foundation by James Hardie to house its asbestos-related liabilities is
on its last legs with Hardie CEO Peter Macdonald giving evidence this
week.

And at times he was a feisty chap, engaging in some spirited verbal
jousts with counsel for the Foundation, Michael Slattery QC. That led
the Commissioner, David Jackson QC to remark that he would be ‘very
surprised’ if Hardie Counsel, Tony Meagher SC was representing the
company for free.

“One of the reasons why you pay him a significant amount is so that
when the time comes to argue the case, he will do it for you,” Mr
Jackson told Macdonald, who was in the witnesses box.

“It really doesn’t help your case for you to take his role and I
would be obliged if you would answer the questions that are put to you.”

Jackson further advised Macdonald that he should not feel obligated
to “counter-punch”, and he shouldn’t weaken and be tempted “to answer a
different question from the one that’s put to you”.

Now that’s a pretty straight piece of advice. From newspaper reports
it was a series of fairly robust exchanges between Slattery and
Macdonald.

The Hardie boss also told the Commission that the then deputy
managing director of CSR, Alec Brennan had expressed concern that his
company might be left “holding the baby for asbestos costs” after
Hardie revealed plans to set up the trust and move its domicile to
Amsterdam.

Mr Macdonald said he had told Mr Brennan, who is now CEO of CSR,
that there were no grounds for concern. He said he told Brennan that
the financial position of the former Australian parent company would be
‘preserved’ by an issue of partly paid shares.

The inquiry has been told that the partly paids entitled the
Australian rump of Hardie, left behind in the shift of domicile, to
make a call on the new Dutch company in the event of the Australian
company being unable to meet its debts. The value of the call was
linked to the market capitalisation of Hardie at the time of the shift
of $1.9 billion.

It has also emerged during the inquiry that these partly-paid shares
were cancelled by Hardie without any announcement in March 2003,
without telling the ASX or the NSW Supreme Court which approved the
shift in domicile, including the partly paid shares.

A spokesman for CSR said outside the inquiry that the first they
knew of the cancellation of the partly paid shares, which were used to
reassure Mr Brennan in 2001, was when it revealed in the Commission
last month.

Now there’s a tantalising sign of some future discussions between
CSR and Hardie about disclosure, information flow and the like.

Crikey wonders if Peter Macdonald will be counter-punching as
robustly in any discussion with Alec Brennan after the inquiry has
finished as he did in the Commission this week.

There’s a feeling that CSR is ‘not happy Peter’ about Hardie’s actions.

Stephen Loosley – the battler’s friend

June 1 sealed section

There is something about figures from the NSW Labor Right that is
different from the rest of Australia. The pragmatism and self-interest
seems to know no bounds. Before we even launched Crikey, a prominent
NSW Right figure wanted to invest $50,000 for 5 per cent. This was the
peak of the Dot Com boom afterall.

And so it seems with former Senator and NSW ALP general secretary
Stephen Loosley who collected almost $50,000 for his Big Four
accounting firm PwC for advice on one of the most cynical corporate
restructurings we can recall.

The James Hardie asbestos dodge stinks to high heaven and it amazing
to think that Labor bruvvas such as Loosley and those charmers from
Hawker-Britton were so happy to take the Hardie coin to shaft unions
and future claimants poisoned by the James Hardie asbestos.

Loosley has a penchant for charging big fees to help huge and
usually controversial companies. He sits on the NRL board as one of
News Ltd’s representatives and has also done plenty of trouble-shooting
for Frank Lowy’s “whatever it takes” Westfield shopping centre empire.

James Hardie and News Ltd spin

May 14 sealed section

Marcus Priest had a very interesting feature in The Weekend Fin
about the James Hardie spin strategy surrounding its departure from
Australia and those pesky asbestos liabilities.

The crisis for the company comes at a very interesting time for its
departing spin doctor Greg Baxter, who resigned in March and is due to
take over as News Ltd’s main Australian spindoctor in June.

Crikey broke the story of Baxter’s hiring by News and we understand
that he agreed to stay on until the end of May to help James Hardie
through its controversial NSW commission of inquiry.

The Fairfax press have certainly run with the Hardies story harder
than News Ltd so it would be interesting to know how Baxter is dealing
with News Ltd journalists when he’ll soon become a senior executive
inside the company. It certainly didn’t hold The Australian’s Margin
Call columnist Michael West back when he wrote this recent column getting stuck into Baxter and his current employer.

News Ltd only started sending a reporter to cover the inquiry last
week. From what Crikey has read, James Hardie has behaved disgracefully
and should be forced to stump up another $500 million to ensure there
is enough cash to pay to their hundreds of dead and dying asbestos
victims from over the years.

The James Hardie departure to Holland

May 14 sealed section

When James Hardie Industries shareholders voted to move the company
to the Netherlands back in late 2001, a major concern was tax.
Australian tax. So it comes as something of a surprise that one of the
reasons advanced three years later for a capital return was a new Dutch
tax. What? What’s going on here?

CEO Peter Macdonald said in a statement that Dutch authorities had
recently ruled that a 10% withholding tax was to be paid on future
capital reductions. Hardie was planning a return of up to $200 million
paid for from the proceeds of the sale of its gypsum business.

Moving to Holland was going to solve James Hardie’s tax woes. It
hasn’t. And those asbestos nasties in Australia keep creating bad news.
Someone has mucked things up, as Jimmy Hardy explains on the site here:
http://www.crikey.com.au/business/2004/05/14-0006.html

Peter Fray

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