J&J owes at least $2 billion to people who say they’re sick from baby powder containing asbestos.
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Only two companies in the world can pay their bills reliably enough to get excellent credit ratings from both S&P and Moody’s. But one of them, Johnson & Johnson, filed for bankruptcy to deal with customers who claimed that the company’s products gave them cancer.
The consumer goods giant went bankrupt on Thursday as it owed at least $2 billion to people who said they were sick from asbestos-tainted J&J baby powder.
J&J is far from the usual user of Chapter 11 protection. It has about $25 billion in cash and a $10 billion line of credit—easy enough to set up the proposed victims’ trust fund.
Still, J&J isn’t the first solvent company to face allegations that it’s taking this asbestos-related path. At least three others — Georgia Pacific, Trane Technologies, and Saint-Gobain — are all trying the same strategy.
In a move known in legal circles as the “Texas Two-Step”, bankruptcy judges allowed companies facing major litigation claims to shuffle their corporate organizational charts and set up special units to house their asbestos obligations using a business-friendly Texas law.
One company first moves its corporate charter to Texas, then splits in two: one part retains its healthy assets and businesses, while the other owns asbestos claims.
The latter then files for bankruptcy and puts all current and future asbestos lawsuits on hold until the company comes up with a plan to pay them off. J&J did this in federal bankruptcy court in North Carolina, where two judges ruled the proceedings were legitimate, over objections from victims’ lawyers. . The company itself is not in bankruptcy. Moody’s Investors Service says the company’s credit rating will not suffer from the filing. J&J did not immediately return emails seeking comment. Microsoft is the only other company with the highest credit ratings from both S&P and Moody’s.