Ira Rennert's House of Debt

How leverage made millions for a tarnished financier--and investors lost out

Few financiers can boast as long and lucrative a career as Ira L. Rennert. During the 1990s, the 68-year-old Brooklyn native sold $1.5 billion in high-yielding junk bonds to create one of the nation's largest privately held industrial empires and built a personal fortune estimated at $500 million. Now he may be about to hit his biggest payday yet: Investment bankers are shopping his crown jewel, South Bend (Ind.)-based AM General Corp., to potential buyers. The company makes Humvees for the U.S. Army. The civilian version, the Hummer, costs $100,000 or more for celebrities such as Arnold Schwarzenegger and Andre Agassi. Rennert picked up the company for about $133 million in 1992, but it has a hot seller on its hands now--the rugged $55,000 H2 sport-utility vehicle. A sale could fetch him as much as $1 billion, bankers say.

Rennert sure could use the money: His empire is on the ropes. Two of his companies--a Kentucky coal company and a Utah magnesium producer--have filed for Chapter 11 bankruptcy protection in the past two years. Two others, a steelmaker and a lead producer, both reported big losses in their most recent filings. "Rennert has a track record of dramatically leveraging up companies with debt," says Thomas A. Watters, an analyst at Standard & Poor's. "They're really financially distressed." On top of that, Rennert and his holding company, Renco Group Inc., face fines of up to $1 billion if they lose a suit filed by the Environmental Protection Agency that charges the magnesium company with mishandling toxic waste near the Great Salt Lake in Utah. Renco is vigorously contesting the suit.

Already, the financial fallout from his companies has cost Rennert's investors hundreds of millions of dollars. The $1.5 billion in bonds his companies issued from 1992 to 1998 have now lost about $700 million, or almost half their value, according to a rough tally by BusinessWeek of his companies' 10 bond issues. For example, the steel outfit's bonds are trading for as little as 26 cents on the dollar, while the lead company bonds have fallen to around 20 cents. A Rennert spokesman disputes the figure, calling the calculation "overly simplistic and misleading," but didn't offer another one.

Some bondholders are gunning for Rennert. He became one of Corporate America's highest-paid chief executives in the '90s by taking a total of about $500 million in dividends and management fees from his companies, according to a 2001 report from Barclays Capital Inc. and Securities & Exchange Commission filings. Now the bondholders are trying to get some of that back: On Jan. 16, AIG Global Investment Corp., Carlyle High Yield Partners, and hedge fund Citadel Equity Fund asked a Manhattan bankruptcy court to appoint a trustee to decide whether the transfer of dividends, management fees, and other funds from Magnesium Corp. of America to Rennert was legal. "We believe the transfers made it impossible for the company to pay its reasonably anticipated debts and may have rendered it insolvent," according to their lawyer, Gerald K. Smith, of Phoenix-based Lewis & Roca LLP.

Despite the carnage, Rennert has done very well for himself. He owns a plush duplex apartment furnished with antiques and Impressionist paintings on Manhattan's Park Avenue near his Rockefeller Center headquarters. He has a palatial home in Israel and a Gulfstream 5 jet. And he's building a mansion, allegedly complete with bowling alleys and a huge garage, on 64.8 acres in tony Southampton, N.Y., for an estimated $100 million. Still incomplete after five years, the 100,000-square-foot complex angered neighbors and inspired James Brady's novel, The House that Ate the Hamptons.

This isn't the first time that Rennert's companies have run low on cash. BusinessWeek has learned that in 1962, when Rennert was a young securities broker running his own firm, I.L. Rennert & Co., in a Beaver Street office in Lower Manhattan, he was censured by the NASD for operating without enough capital. The NASD treats violations of federal rules requiring brokerages to be capitalized adequately as one of the most serious securities offenses because a lack of capital could leave clients in the lurch if a firm were to run out of money. Then, in 1963, the NASD caught Rennert with insufficient capital again, but it didn't give him another chance: It revoked his license on Nov. 29, 1964, according to securities regulators' documents, in effect banning him from the securities industry.

Today, nearly 40 years since he was ousted from the industry, Rennert denies he was punished by the NASD at all. Through a spokesman, he says he shut his firm voluntarily and the NASD revoked his license as a routine administrative matter because he was no longer in business. "Due to market conditions, the firm found itself in violation of the net-capital rule," says spokesman Jon Goldberg. Rennert "raised capital and put it into the firm to bring it into compliance. Again the firm fell below the net-capital requirements, and he voluntarily shut the firm down." But former NASD lawyer Bill T. Singer, a partner at New York-based law firm Gusrae, Kaplan & Bruno PLLC, points out that "you don't revoke your license, you surrender it; there is no voluntary revocation." NASD rules specify that anyone whose license is revoked is not allowed to associate with any NASD firm "in any capacity."

In any case, Rennert never looked back. His license had been taken away, but that didn't prevent him from handling investors' money. Instead of selling stock, he eventually entered the freewheeling world of private equity, which isn't regulated by the NASD or the Securities & Exchange Commission. That allowed him to sell millions in bonds to investors and use the borrowed money to build a portfolio of private industrial outfits in which his holding company, Renco, owned nearly all the shares. All the while, it was difficult for investors to learn that his securities license had been revoked decades ago. Only the bare outlines of what happened survive in NASD and state records.

Rennert's tale is instructive at a time when a growing legion of discredited star analysts and bankers, who symbolize the excesses of the '90s, are being banned from the industry or are under investigation. As Rennert's career shows, people who are penalized by the securities industry can easily--and legally--slip into other financial services and continue to take funds from investors.

After his license was yanked, Rennert refashioned himself as a consultant for the next 11 years, according to his brief entry in the 2001 Who's Who in America. But it's not clear what type of consulting he did. In 1975, he emerged as a financier, arranging small leveraged buyouts and amassing an eclectic collection of unwanted companies that made everything from pet cages to butcher blocks.

In the late 1980s, Rennert became one of Wall Street's favored buyers of companies that no one else wanted. His first big deal was in 1988, when Renco bought a Warren (Ohio) steel company from its parent, LTV Steel Co., which was in bankruptcy, for $140 million. He renamed it WCI Steel Inc. and turned it around with the help of $250 million in junk bonds.

Soon, investment bankers were falling over themselves to issue bonds for Rennert. With blue-chip mutual funds and hedge funds such as Putnam Investment Management LLC and John Hancock Funds LLC lining up to buy his bonds, Rennert didn't need to put much of his own money into his deals, according to SEC filings. In 1992, he put down just $10 million when he bought AM General for an estimated $133 million. Now, with the military buildup in the Mideast boosting demand for Humvees and with the H2 selling well, he is listening to bankers who say it's a good time to sell. J.P. Morgan Chase & Co. is pitching AM General to private investment funds, including the Carlyle Group and Chicago-based Madison Dearborn Partners. General Motors Corp. has an option to buy 40% at the market price.

A windfall couldn't have been better timed. As commodity prices started sliding in the late '90s, Rennert's companies began choking on his borrowing binge. In November, 2000, Lodestar Holdings Inc., his coal company, missed an $8.6 million payment on its bonds. Four months later, bondholders forced it into bankruptcy. His Magnesium Corp. followed a few months after that. Now, WCI Steel says it expects to report a pretax loss of $37.6 million on sales of $502 million in the fiscal year ended Oct. 31, 2002, according to an SEC filing. Says S&P's Watters: "We have a very low credit rating [on the company], indicating a high probability that WCI Steel will default on its bond-interest payments."

Environmental regulators and residents near some of his companies' factories also are hounding Rennert. Over a dozen lawsuits charge him or his companies with polluting lakes in Utah and land in Missouri. The EPA ranks the group of companies controlled by Renco as the nation's 10th-largest polluter.

All of the financial troubles will make it harder for Rennert to issue bonds again. "If an entity controlled by Rennert returned to the high-yield market, it would be at best viewed with a high degree of suspicion," says Daniel W. Dienst, managing director of the corporate and leveraged finance group at CIBC World Markets. But don't count on this ending Rennert's long career. A long-forgotten NASD action decades ago sure didn't.

By Emily Thornton, with Susann Rutledge in New York, and David Welch in Detroit

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