Much has been written about the financial scandals that rocked the United States economy last year. After the huge losses, has anyone emerged with their shirts on their backs? Certainly the Enron employees invited to pose for Playboy didn’t.
It is hard to believe that MCI, now valued at $5,5-billion is all that is left of the MCIWorldCom behemoth, which was once worth $190-billion. It is well documented how this giant conglomerate of greed, financial engineering, blatant opportunism and investment bank folly came tumbling down. It is interesting to see who waded into the chaos of what was left and how they fared. There is even a South African connection.
After former CEO Bernie Ebbers resigned in April 2002, the market value of MCIWorldCom’s equity and bonds came tumbling down. Towards the end of 2002 you could buy its bonds for less than 15c on the dollar.
It was then that vulture investor MatlinPatterson started buying up the bonds through its MatlinPatterson Global Opportunities hedge fund, thought to be worth something north of $2-billion.
The initiators of MatlinPatterson were David Matlin and Mark Patterson, both in their early 40s. Matlin has been running vulture funds since 1994, first for Credit Suisse First Boston (CSFB) until 2001 and then for MatlinPatterson.
It was alleged his departure was prompted by the arrival of John Mack who was brought in to restructure CSFB. However, it is doubtful there was a serious falling out, as CSFB apparently still supplied more than $200-million of MatlinPatterson’s initial funds under management.
The South African connection lies with Patterson, who studied law and economics at Stellenbosch. He then earned his MBA at New York’s Stern School of Business and for 20 years gained commercial and investment-banking experience with firms like Bankers Trust and Salomon Brothers. He moved to CSFB and served as MD from 1994 to 2002.
MatlinPatterson’s approach sounds deceptively simple. It generally tries to take control of the bankruptcy process; once in control it rolls up its sleeves and restructures with, but mostly without, existing management.
It is hard to assess how successful MatlinPatterson has been. Matlin is generally thought to have racked up a 40% annual return with CSFB. However, the only returns I could dig up on MatlinPatterson’s Global Opportunity Fund was the 2,6% total return it achieved between 2001 and 2003.
This is not exactly fireworks, but it is also a short time over which to measure performance, especially for a newly formed fund. And we don’t know what has happened over the past 12 months.
Matlin once said only 30% of their investments paid out really well, and calculations show that the MCIWorldCom investment is one of them. Securities Exchange Commission filings show it invested about $300-million in MCIWorldCom, a stake now worth $700-million.
That equates to a compounded growth rate north of 50%. If that is not enough, MCI recently declared a dividend giving MatlinPatterson a dividend yield on their original investment of 23%.
Patterson says it is not as difficult as it looks to get a “dead” corporation breathing again. “One of the most common problems in struggling companies is management’s refusal to acknowledge the problem,” he says. “An honest assessment … is vital to solve the problem. Find out what the true value of the company is, then exercise your operating options: defer accounts payable as long as possible without violating contractual obligations. The restructuring of aggregate debt is a number-one priority, and the fiduciary obligations shift from the stockholders to the creditors.”
It looks like MatlinPatterson has got what it wanted from MCIWorldCom. It recently said it would consider selling after highly regarded Leucadia National indicated it is starting to invest in MCI and may buy 50% of MCI’s shares.
Who said bankruptcy is a bad thing? Bankruptcy can be very profitable!
Martin van Blerk runs the Botswana-based Baobab Global Fund. Baobab holds MCI stock