Saturday, April 28, 2001

'Vulture investors' try to cash in on others' misfortune

Debt makes Chiquita, others targets

By Cliff Peale
The Cincinnati Enquirer

        The vultures have their eyes on Chiquita Brands International Inc.

        These investors, named for their practice of swooping in on a financially troubled company and picking off the best parts, have their eye on the banana giant.

        Cincinnati-based Chiquita is a perfect case for the “vulture investors.” While unable to make payments on $862 million in debt, it still carries value that intrigues investors who want to make a quick profit with one of the world's most recognizable brand names.

        “Vulture funds look for asset-rich companies,” said Michael Schroeder, chief investment officer of Wasmer, Schroeder & Co., which has owned bonds issued by Chiquita. “Some companies don't have any, but at least Chiquita has assets. But what the value is, I don't know.”

        Chiquita is trying to persuade the holders of its debt — who bought bonds issued by the company — to accept common stock because it cannot make those payments.

    Companies routinely issue debt in the form of bonds to raise money for operations or other corporate purposes.
    The worse the company's financial situation is, the higher the interest rate on those bonds will be. That increases the company's costs, but also increases the rate of return for investors.
    With a slowing economy and more companies laying off workers, the supply of “high-yield” bonds has surged during the past year, according to Wall Street analysts.
    And with companies undergoing restructuring in need of cash, the bonds can sell on the open market for significantly less than full value. That's because of fears that the companies will not be able to pay their bond obligations, increasing both the risk and the potential return for the investor.
    Funds and individuals that specialize in buying those bonds — sometimes called “vulture investors” — look for a quick return on their investment. They try to force the company to either sell off its assets that still have value or to turn its operations around.
        But the negotiations now include not only long-term bondholders, but also traditional vulture funds that deal in “distressed debt” like Chiquita's.

        The stakes could not be higher, including control of Chiquita by Reds owner Carl Lindner and the fate of about 370 workers at corporate headquarters in Cincinnati and about 30,000 worldwide.

        It's the latest step in a decadelong financial struggle by Chiquita. The company's stock price has fallen to historic lows, and the bonds that it sold are trading on the open market for only about half their original market value.

        That is one of the inviting signs to vulture investors, who can buy the bonds to get a seat at the Chiquita negotiating table, then bargain to try to control part or all of the company.

        These investors generally operate quietly, buying debt or stock without fanfare and negotiating privately with management.

        Chiquita might scare off some traders of distressed debt because of the Lindner family's large stake — the family controls more than one-third of Chiquita's common stock — and the soft prices for bananas worldwide.

        But after a settlement of an eight-year trade battle between the United States and the European Union announced this month, the price of Chiquita's bonds increased to about 55 cents on the dollar, up about 10 cents during the last two months.

        The deal with Europe should mean more European sales for Chiquita and increase the value of the company in the eyes of vulture funds and other investors.

Slow economy creates trend

        Chiquita is hardly alone as the target of vulture investors, a trend born in the slowing U.S. economy.

        As revenue slows, companies are less able to pay off millions of dollars in bonds they have sold to raise operating cash.

        Other companies in similar situations include Polaroid Corp., which announced Feb. 22 that it would eliminate 950 jobs, or 11 percent of its global work force.

        Moody's Investors Service cut its ratings last month on $900 million of Polaroid's debt, and bonds issued by Polaroid were trading at less than 40 percent of their original value.

        Locally, vulture investors are buying bonds issued by International Knife & Saw Inc. in Northern Kentucky, hoping to reap quick returns.

        The privately held company lost $15.5 million last year, and its $90 million in debt issued in 1996 is trading now for only about 10 cents on the dollar.

        “The bondholders who are interested in the bonds at these levels are looking for (higher) equity-type returns,” said Bill Schult, chief financial officer. “I get no interest from the types of investors who originally bought these securities. I get a lot more inquiries from (vulture) investors.”

        Those bonds — simply notes that a company sells to borrow money — are traded in the open market. As companies default, that debt becomes “distressed,” meaning that it trades at lower than its original sale value.

        Bondholders often are the first creditors in line to be paid off if a company defaults. They can be paid off if the company sells assets or if management — sometimes new executives are installed by the creditors — can turn around the company's fortunes.

        It's a risky strategy. If the company's assets cannot cover its bank loans and other creditors, the bondholders could be left with nothing. But because they bought the bonds at a discount, the potential rewards are huge if the strategy works.

        With a bulging supply of distressed debt, vulture funds are seeing a heyday now that they have not enjoyed since the early 1990s, said Marty Fridson, chief high-yield strategist at Merrill Lynch in New York.

        “The vulture funds went through a long period without a lot to invest in, so there's some pent-up demand,” Mr. Fridson said.

        As the economy has slowed during the past year, the supply of distressed debt has skyrocketed. At the end of January, it totaled about $150 billion, more than one-quarter of the total bonds issued, Mr. Fridson said.

        That percentage is double the level of a year ago, he said.

        Some companies find themselves in financial difficulty, but have enough cash so that they are not the target of vulture investors.

        For example, NS Group Inc., operator of Newport Steel, last month decided to lay off almost 300 workers at its Wilder plant because of unprofitable steel-making operations. But its $80 million in available cash makes it able to pay its debt and keeps it somewhat immune to vulture investors, president Rene Robichaud said.

        “The vultures are going around to companies who have more debt than cash,” Mr. Robichaud said.

A vulture's dream

        Chiquita officials and Mr. Lindner's office declined to comment on the company's bonds. But people familiar with the talks acknowledged that major funds that specialize in buying distressed debt were involved.

        A restructuring would put bondholders in control of Chiquita's future, analysts said, because it would dilute the value of the stock — including Mr. Lindner's.

        If the company reaches a deal with bondholders, Chiquita probably will seek approval from a federal bankruptcy court, without going through the time-consuming process of writing a reorganization plan while under bankruptcy protection.

        But the bondholders' secured position — their $862 million is a higher priority than all of Chiquita's common shareholders — gives them an immediate seat at the table.

        “I think it's one that the bigger players could be taking a position there,” the analyst Mr. Schroeder said.

        Mr. Fridson of Merrill Lynch acknowledged that Chiquita's established brand name and thousands of acres of farms in Latin America could provide the value that vulture investors crave.

        “A company with a brand name like Chiquita at least looks analyzable,” he said. “I guess the only uncertainty is the (European) quota situation. You have to buy this paper with some patience.”

Lindner still a factor

        Of course, the question surrounding Chiquita is whether the 82-year-old Mr. Lindner is buying bonds to try to retain control of Chiquita.

        Along with his family and holding company, American Financial Group Inc., he controls more than one-third of Chiquita's common stock, which stands to be significantly diluted in any restructuring.

        Officials in Mr. Lindner's office had no comment on whether he was buying the company's bonds.

        While holders of a company's bonds generally are not made public, a group of Panamanian investors that owns almost 10 percent of Chiquita's common stock has asked directly if American Financial is buying Chiquita's bonds.

        It has gotten no response from the company.

        Mr. Lindner and American Financial used a similar method to gain control of the old Penn Central railroad in the 1970s, accumulating debt gradually and eventually taking control.


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