Wilbur Ross: 'No Chapter 11 Here'

The investor extraordinaire speaks out on the Cerberus deal and how it will affect automakers, private equity, and the auto market overall

Like the private equity firm Cerberus that just won the bidding for DaimlerChrylser's (DCX) Chrysler, distressed investing guru Wilbur Ross has had one eye firmly trained on Detroit lately. The man who made his reputation with such down-and-out industries as steel and textiles, has recently been focused on building a sizable auto parts business. In April, he added the Collins & Aikman (CKCRQ) unit, which sells carpet and acoustics for cars, to a series of other acquisitions in the segment, including C&A's European and South American operations, a stake in Lear Corp.'s (LEA) interiors business, and Japan's Mitsubishi Belting Kaseihin. The result is that his International Automotive Components Group North America sells close to $5 billion in auto components each year.

As both a supplier to the big automakers and a negotiator with their unions, Ross has more than a passing interest in the biggest buyout to come down the pike. On May 14, in a phone interview from his New York offices, Ross shared his thoughts on what Cerberus' deal with Chrysler means for automakers and for private equity, as well as his take on the market in general.

Now 69, Ross sold his seven-year-old private equity firm, WL Ross & Co., to British investment firm Amvescap for $375 million last July. But he has neither bowed out nor slowed down since, and still runs the firm. Here are edited excerpts from his conversation with BusinessWeek Senior Writer Nanette Byrnes.

Is this Chrysler deal a turning point?When we first started going into auto parts a couple of years ago, there was a fair amount of controversy in Detroit whether it would be a good thing to have private equity in the auto industry. Now it's becoming more and more clear that private equity is in every sector, and that question has answered itself. More than any other recent transaction this shows private equity has no boundaries of size, geography, or industry. Private equity has raised hundreds of billions, and the leverage is for all practical purposes unlimited. Chrysler is complicated because it's a consumer marketing situation and a huge industrial restructuring on a scale you wouldn't have expected private equity to take on even a couple of years ago.

Does it say something new about labor's attitude?The leaders of the big industrial unions, including [UAW President] Ron Gettelfinger, have a very clear understanding of their industry, a very clear view of how it's going to go in the future. They're more experienced negotiators even than private equity because a union leader's most fundamental job is negotiation. They aren't going to yield one penny that isn't absolutely required. But at the end of the day they are realists. Having a gold-plated contract with a company going down the drain isn't the right answer. What you need is a contract with a healthy company. I've been consistently impressed with how well the union people understand the industry in which they operate. Nobody should expect they'll pull one over on the unions.

Do you expect big changes quickly at the carmaker?Chrysler goes from an unwanted stepchild to owners who want it enough to put $7 billion into it. One thing was clear: Daimler wasn't going to keep putting money in there. Announcing Mr. LaSorda would remain the CEO, that's also a little unusual. As often as not the new group takes a big meat ax to management.

That suggests to me they pretty well buy into LaSorda's turnaround plan, which is essentially a two-year turnaround. He believes and has announced publicly that in 2009 they could make $2 billion. If they do, that's already a pretty good return on Cerberus' investment. It could be they've concluded this is a very achievable plan.

What do you think they had over the others in the hunt for the deal?One advantage they had over other bidders is that they already own 51% of [General Motors financing business] GMAC (GMA). Now they're taking on Chrysler Financial. If they put those two together, I would consider there would be quite a lot of synergies. And they'll be an extremely important lender in the whole American system.

Are more job cuts inevitable?I don't' think anything is inevitable. What private equity brings to the party is a new set of eyes, a dispassionate view. Because they're not a publicly reporting company, they're not tied to quarterly this, that, and the other thing. They can afford to take write-offs and measures that might be hurtful if they were publicly traded. Daimler is taking 19.9%. As I understand the accounting rules, if they had over 20% or more, they would have to book its part of the result. So there will be no public report of the employee buyouts or write-offs, whatever they do to clean it up.

Will that include putting the company in bankruptcy to get rid of the retiree costs?There won't be a Chapter 11 here. Nobody would put in $7 billion of equity and then put it in Chapter 11. That would be silly. There are some issues that need to get reconciled that in other situations get taken care of in an 11. Last year the union refused to give health-care concessions to Chrysler that they gave to Ford (F) and GM (GM). Presumably Cerberus, I would assume at least gets to parity with their agreements. Health care alone [for retirees and current workers] is a couple thousand dollars per car. All three of the big American companies have their contracts up for discussion in August. I would assume this would be a topic of conversation.

This is not a leveraged buyout in the normal sense. Cerberus is not borrowing any of the $7 billion. If anything, this is a de-leveraging, not pro-leveraging event.

What does this deal say about the market overall?Both debt and equity have been coming into the market very aggressively. They just released the statistics for the month of April in terms of junk bond issuance: $11 billion of new junk bonds issued. That isn't so remarkable, that's the way it's been running, though it's 27% more year-to-date than 2006. The big news is that 60% of bonds issued in April were rated CCC. That's below BB+, BB, B+, B. It's been 10 years or so since such a high percentage of debt has been of such low rank. That's really moving down the quality spectrum. And 73% of it was for LBOs vs. 56% in 2006 year-to-date. What this says to me is we're building up toward another period of big defaults. More than 20% of all the CCC debt historically has defaulted within three years.

So are you sitting and waiting for those opportunities?There will be more opportunity. But we have found lots of it in this environment. One thing with a default is it usually takes two or three years to get through the bankruptcy and back up and running.

Where are you looking then?There are some we are looking at but we haven't consummated. I don't want to come up with a shopping list for publication. Last year we made a big play in reinsurance, that's getting closer to where one would exit. Premiums seem to have peaked out. We've bought the largest rail car company in Europe and transportation is an interesting area. Not airlines. But, other than that, there are lots of other interesting opportunities in transportation.

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