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Energy services firm

McDermott International

(MDR) - Get McDermott International, Inc. Report

dodged more than a technical bullet this weekend when a court ruled it didn't have to return more than a half-billion dollars to a subsidiary facing huge asbestos liabilities, analysts said.

The ruling, by a federal court in New Orleans, suggests the company may be able to isolate the liability within its subsidiary, Babcock & Wilcox. Babcock, which used asbestos as an insulator in its industrial boilers, faces at least $1 billion in present and future claims, and filed for Chapter 11 protection in February 2000.

In an ongoing case, the court ruled Friday that McDermott did not have to return $622 million in assets to Babcock & Wilcox. The plaintiffs claimed that when B&W transferred the assets to its parent company in the summer of 1998, it was insolvent, making the transfer fraudulent. The court ruled otherwise.

"Since the start of Chapter 11, the asbestos claimants committee has tried to make this case about everything but Babcock & Wilcox," said John Donley, a lawyer with Kirkland & Ellis, McDermott's defense. "They've been trying to get at assets of McDermott Inc. and McDermott International. This lawsuit alleging fraudulent transfers was the linchpin of their strategy," he said.

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Hands Off

The ruling prevents the plaintiffs from getting access to that $622 million, but it also sets an important precedent, said Gary Russell, an analyst with Frost Securities. "Had the ruling gone the other way, it could have put further McDermott entities at risk of liability." In previous cases, companies with large asbestos claims often were unable to contain liabilities within one unit and have ended up bankrupt themselves.

Analysts and investors took note Monday. Salomon Smith Barney raised its rating on McDermott to outperform, while Merrill Lynch raised its rating to buy from neutral. The stock soared, closing up 15% to $14.20.

Still McDermott is not entirely out of the woods, said Russell. Plaintiffs could appeal the case, while the next big hurdle is the hotly contested dollar value of present and future claims against Babcock. McDermott and its lawyers say present and future claims are worth around $1 billion, while plaintiffs argue it's more like $2 billion to $4 billion. The total dollar value of claims at the time of bankruptcy was $1.3 billion.

Hanging On

According to McDermott's lawyers, Babcock has assets worth $650 million, plus insurance coverage of $1.13 billion. So whether McDermott can maintain majority control of the subsidiary or is forced to relinquish it to a settlement trust is dependent on the estimated value of present and future claims. The creation of a settlement trust -- one that is separate from both McDermott and Babcock -- was stipulated by Babcock's restructuring plan.

Before filing for bankruptcy, Babcock paid out $56,500 in settled claims, but any pending claims would not be paid until its reorganization is complete.

In other news, McDermott International reported a wider fourth-quarter loss, mostly due to one-time charges, and elected Francis Kalman as chief financial officer. Kalman replaces Bruce Longaker, who resigned effective Feb. 28.

The company posted a loss of $42.9 million in the fourth quarter, or 71 cents a share, compared with $25.5 million, or 42 cents a share, in the final quarter of 2000. Excluding one-time charges, fourth-quarter earnings totaled $16.1 million, or 26 cents a share.