Distressed investing has been called many things – predatory, fee-obsessed – but “easy” isn't usually on the list. And yet, the head of a large state pension appears to have made precisely this assumption on the way to losing hundreds of millions of retiree dollars.
General partners having a hard time justifying their fees to pension boards can take heart in the recent, unfortunate experience of the Retirement Systems of Alabama, which tried to save money on fees through a do-it-yourself approach to special situations. In 2002, the pension, managed by chief executive officer David Bronner, bought a 36.2 percent stake in bankrupt US Airways for $240 million, as well as providing $600 million in secured and debtor-in-possession financing to the airline. Two years later, US Airways is again bankrupt, and Bronner's private equity adventurism looks flighty.
The sad fact for the airline, for its employees, and for the public employees of Alabama is that US Airways was almost sold to one of the best airline turnaround teams in the business – Texas Pacific Group. The Texas private equity firm led with a stalking-horse bid that involved a $200 million equity investment in the airline and essentially the same financing. In the eleventh hour, Bronner's pension entered the fray, a move that was initially rebuffed by the airline, but later embraced.
Bronner apparently won the hearts of the company's executives and bondholders with the extra $40 million, kind words on organised labour and tough talk on the fees. Texas Pacific was to collect a $3.5 million fee for arranging the DIP financing; it would see a $3.75 million transaction fee if the deal were completed and $7 million break-up fee if it wasn't. Alabama promised no fees.
You get what you pay for – Texas Pacific head David Bonderman has worked with management to help two struggling airlines return to profitability, first Continental Airlines and then America West. Bronner's relevant experience is as an investor in airline bonds.
Bronner, in fact, seems to have thought he could tap Bonderman's superiority at airline turnarounds by stealing Texas Pacific's homework. In a speech last year at a debt-investor conference, US Airways president and CEO David Siegel noted Texas Pacific's original bid, and said: “The involvement of TPG – the premier private equity firm in aviation – brought us expert advice and instant credibility in the marketplace.”
In an interview with Pensions & Investments magazine immediately following the US Airways deal, Bronner himself put it differently: “There's nothing better than having an LBO firm do all the groundwork in one of these transactions.”
Bronner's press remarks at the time read like those of an amateur alchemist who has stumbled across a fabled formula. On distressed investing, he told CNN: “You're getting the equity after the bankruptcy and most of [the company's] problems go away.”
To Pensions & Investments Bronner said: “We could earn an estimated return of $1 billion over five to seven years on the investment. It's only going to cost us a little over $200 million.”
On CNBC, the cable TV business network, an anchorman asked Bronner: “You know, private equity shops spend a lot of time identifying management talent that they can bring in once they gain a controlling stake. Do you feel confident you can bring in the management that can turn this airline around?”
Bronner replied: “Well, I don't think you have to turn it around. I think [CEO Siegel] has done a tremendous job … if you just follow the path that he is on right now to take him out of bankruptcy, you have a great management team right there.”
Bronner, during his decades-long stewardship of the Alabama pension, has led the system on previous do-ityourself private investments, including in a chain of newspapers, a chain of television stations, and a golf course. He doesn't have a high opinion of private equity firms, largely because of the fees they charge. He told Pensions & Investments: “I'm making the decisions and saving the fees, rather than investing through private equity funds, because then they're making the decisions and choosing investments we might not want.”
Bronner's plan for adding value was to advertise US Airways throughout the television stations and newspapers that the Alabama pension owns. In any case, the airline industry was going to turn around “once we get through with Iraq,” Bronner told the magazine.
Would Texas Pacific, or another fee-charging outfit, have been able to avert a Chapter 22 with US Airways? Perhaps not. But at least the people of Alabama could have been told that their money was lost at the hands of “the premier private equity firm in aviation.”