Aaron Elstien has an interesting piece on Wilbur Ross in Crain’s NY.
Reprinted with permission:
‘King of Bankruptcy’ moves into toxic mortgages. Hope that proves wiser than his auto-biz bets
By Aaron Elstein
Wilbur Ross, who famously pocketed hundreds of millions turning around bankrupt steel mills, is moving to dramatically different turf. Last week, the “King of Bankruptcy” unveiled plans to invest up to $1 billion in distressed mortgages.It’s worth a shot. After all, little else of what Wall Street’s top vulture has feasted on since his steel coup has turned out very well. The auto-parts company Mr. Ross created nearly four years ago has seen its revenue sink and its prospects darkened by Chrysler’s bankruptcy filing last week. His coal-mining outfit has suffered three consecutive years of losses and now faces a cash crunch. He acquired a stake in a bond insurer last spring, and has seen its stock price fall 60% since.
“I have a heck of a lot of respect for the guy,” says Nicholas Colas, chief market strategist at brokerage firm BNY ConvergEx. “But there’s no doubt he’s got a bunch of businesses in really tough shape now.”
It’s a humbling moment for Mr. Ross, a turnaround specialist for more than 30 years. He sealed his Midas-like reputation when he invested $325 million in bankrupt steelmaker LTV in 2002 and created International Steel Group. Thanks to booming demand—and Bush administration tariffs on imported steel—he took the company public a year later and then sold it the following year for $4.5 billion, reportedly reaping a quarter-billion dollars for himself.
He further boosted his fortune, recently estimated by Forbes at $1.8 billion, when he sold his boutique investment firm WL Ross & Co. in 2006—a market top, in hindsight—for $375 million.
Life since the steel deal, however, illustrates the danger in the game the 71-year-old Mr. Ross plays: the risk of buying into troubled businesses too early. Mr. Ross, who declined to comment for this article, is hardly the only bottom-feeder to run into difficulties. Highly regarded investment firms Warburg Pincus and Davis Advisors, for example, suffered last year from ill-timed bets in MBIA and Merrill Lynch, respectively.
“Everybody I’m aware of took big losses in “08,” says Robert Miller, chief executive of restructuring advisory firm Miller Mathis & Co.
Game gets harder
Yet Mr. Ross may also be struggling because the game he’s played best—buying bankrupt companies at rock-bottom prices—is getting harder. Fewer businesses are restructuring under bankruptcy-court protection, but instead are heading straight to liquidation, a result of the dismal economy and reluctance on the part of cash-strapped banks to lend. Mr. Ross must look farther afield than before for distressed investments.
Perhaps that explains the industrialist’s move into distressed mortgages. It also helps that his latest move—if the government lets him make it—looks like a can’t-lose proposition. Under the terms of the Obama administration’s public-private investment program, which Mr. Ross is seeking to join, the government, alongside private money managers, will buy toxic assets from banks and minimize investors’ losses.
A windfall would be most welcome as Mr. Ross grapples with the enormous challenges faced by International Automotive Components Group, a car-parts maker he cobbled together beginning in 2005 by acquiring pieces of bankrupt manufacturer Collins & Aikman and other concerns. Oops: IAC’s revenue sank $800 million last year, to $4.5 billion, and the company is looking at an even bleaker 2009, with U.S. auto production free-falling 50% in the first quarter.
Chrysler contracts torn up?
Now comes Chrysler’s bankruptcy. IAC, which makes instrument panels and flooring for the Town & Country minivan, could see its contracts with the automaker torn up in court. An IAC spokesman says it’s premature to assess how Chrysler’s bankruptcy could affect the supplier, adding that the federal government’s $5 billion Auto Supplier Support Program should ensure that IAC gets paid what it’s owed. He declined to say whether IAC is profitable.
Mr. Ross’ International Coal Group (ICO) is also struggling. It was created when he acquired a mining outfit out of bankruptcy for $290 million in 2004 and was taken public a year later in a $231 million offering. The West Virginia-based company has posted losses for three consecutive years, for a total $180 million worth of red ink.
Its stock, which debuted at $11 a share, now fetches about $2.50 amid declining demand for the coal used to make steel in cars and growing questions from credit raters over the company’s ability to maintain sufficient cash.
Mr. Ross’ buy-low instincts betrayed him last spring, as well, when he invested $250 million in bond insurer Assured Guaranty (AGO). Unlike in his previous deals, Assured Guaranty wasn’t in bankruptcy proceedings, and Mr. Ross paid $23.47 a share—market price at the time—for his 13% stake. The insurance stock has since declined to about $10 a share. Last September, the company said Mr. Ross would increase his stake to 18%, but he hasn’t done so yet because, a spokeswoman says, Assured Guaranty is in the process of acquiring a rival.
Rolling snake eyes so many times has taken a toll on Mr. Ross’ investors, which include major pension funds like the California Public Employees’ Retirement System. His $4 billion WLR Recovery Fund IV, which closed to new investors in January 2008, posted a decline of 17% through last Sept. 30, according to CalPERS data.
In contrast, his funds raised in 1997 and 2002 generated returns of 35% and 82%, respectively. If CalPERS fears Mr. Ross is losing his touch, it isn’t saying so—at least, not publicly.
“Performance tends to be negative for younger funds since it takes a few years for them to ramp up,” a CalPERS spokesman says. “We of course communicate with them privately if we have concerns.”
While his auto plays are in trouble, I think Wilbur is going to hit a home run with his mortgage buys. The thing about these valueplays is that they take time to run their course. With these we’ll have to take a look back a few years from now in order to make an accurate assessment. My money is on Wilbur (figuratively, not literally)
Disclosure (“none” means no position):