The asbestos compensation body funded by James Hardie may need to draw on a taxpayer-backed loan arrangement to pay asbestos victims despite James Hardie showering its own investors with $US556 million in dividends in the past two years.
Under a legal agreement, James Hardie pays a set amount every year to the Asbestos Injuries Compensation Fund (AICF) to compensate victims suffering from asbestos-related diseases.
That amount can run to many millions of dollars and is set at 35 per cent of its operating cash flow.
The financial health of the fund is assessed annually by actuaries, KPMG, and in its latest report KPMG increased the "central estimate" for liabilities by 10.4 per cent to $1.9 billion.
That prompted a warning that Hardie's planned contributions alone may not be sufficient to cover the fund's costs for claims and it may need to tap a government-backed loan set up in 2010 when there were concerns that the global financial crisis could affect the fund's sustainability.
The NSW and federal governments agreed to provide the loan, of up to $320 million, for the AICF if contributions from James Hardie were insufficient to meet claims.
CIMB analyst Andrew Scott, in a research note, warned of a potential public backlash if the company drew on government funds given housing markets are now improving.
"Our forecasts now suggest that further drawdowns of the government loan by the AICF are likely to be required from financial year 2016 ... we believe a deficit may be sustained for some time," Mr Scott told clients.
On CIMB's numbers, the valuation of the asbestos liability has increased to $895 million, or $2.02 per share, and the AICF is forecast to be short $82 million in 2015-16.
"On our modelling ... [the AICF will have] insufficient funds to meet all expected commitments in FY16 and would see a further drawdown on loans from the NSW and federal governments," Mr Scott told clients.
"The fund may be unable to cover claims costs purely from James Hardie contributions for a number of years."
The fact that James Hardie paid $US556 million in dividends in the 2013 and 2014 financial years raised the ire of independent senator Nick Xenophon.
"The bottom line is if James Hardie can afford $500 million to give to shareholders it can find the money to give to dying victims of their product," Mr Xenophon said.
"If James Hardie doesn't come to the table they deserve the scorn of the Australian public. They have got through the GFC."
The situation comes as the company's top executive received a substantial pay increase last year. According to James Hardie's 2014 annual report, chief executive Louis Gries received $US11.7 million in total pay in 2014, up from $US7.9 million.
The AICF was formed in 2006 after an agreement between James Hardie and the NSW government.
The loan facility has been used twice and was quickly repaid, but the intention of the provision appears to have been ensuring James Hardie could get through the global financial crisis.
US housing starts, on a rolling 12-month basis, have risen from their GFC bottom of around 554,000 and they are running at 974,000 for the year to July.
James Hardie is spending $US200 million a year over the next three years expanding its plant capacity in the US, where the building materials supplier derives 80 per cent of its sales.
James Hardie spokesman Sean O'Sullivan said the company had just contributed $US113 million to the fund and he stressed that the AICF is an entirely separate entity. He said it is important that the integrity of the Final Funding Agreement is upheld.
"It delivers a level of certainty which is why investors are comfortable investing in James Hardie," Mr O'Sullivan said. "It balances the needs of all stakeholders including shareholders, claimants and future claimants."
According to the KPMG actuarial report, the number of claims in 2013-14 came in at 608, 12.6 per cent above expectations.
But CIMB says that the key driver of the liability increase was the 23 per cent jump in expensive mesothelioma claims to 370. In 2013-14 the average size of mesothelioma claims was almost three times that of the next largest disease category.
