Michael Milken’s Minions Profit From Debt

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recession. If there’s any doubt the 80’s are back, how about this: the return

of Michael Milken.

Or, at least, the legacy of Michael Milken. The convicted

junk-bond swindler is being watched like a hawk by the Securities and Exchange

Commission and confines most of his public activities to charitable events.

Lacking the luck of Marc Rich, the pardonless Mr. Milken has to stay away from

anything reeking of securities or debt, according to an S.E.C. decree he signed

in 1991.

But some of Mr. Milken’s minions are back in the picture-big

time, as Dick Cheney might say-doing the work they’d been trained to do at the

now-defunct Drexel Burham Lambert Inc. under his supervision. Just as Drexel

controlled the modern junk bond, so it controlled the modern junk-bond

work-out, in which distressed bonds were swapped for stocks, usually to placate

Mr. Milken’s famous bond-holding friends.

When the firm collapsed in 1991, some Drexelites had made

enough money to retire. Some left the business, but most dispersed across Wall

Street. The work-out specialists-the foot soldiers who greased the treads of

Mr. Milken’s junk-bond armored division and cleaned up his messes-moved to a

handful of firms, including Donaldson, Lufkin & Jenrette (which took over the reins of the junk-bond market), Smith

Barney, Jefferies & Co. and Alex. Brown.

Even in a booming

economy, there are always distressed companies, and so the ex-Drexelites kept

busy. But now junk bonds are trading at 1991 levels, default rates are rising

and the unheralded mechanics of Mr. Milken’s old money machine are back in

demand, plying the trade they learned under him and for him, and even competing

against one another for business.

Of the eight or so New York-based investment banks with

sizable work-out businesses, five of them are headed up by former Drexelites.

Bound by an odd kind of omertà and

grounded in a deep reverence for-if not fear of-Mr. Milken, they are out there

bringing companies back to life, and seeing some put out of their misery.

Barry Ridings is a large,

affable man with an orderly mop of gray hair and an uncommonly full mustache

who seems like the sort who would love PowerPoint presentations-which he does.

Mr. Ridings, 48, was at Drexel from 1986 until 1991, though never at the center

of power.

“Drexel was the New York

Yankees, and I was on the team,” Mr. Ridings said. “But I wasn’t the guy at

bat. I was the guy who came out in the seventh inning and raked the base path.”

Now, however, Mr. Ridings

runs the largest work-out advisory group of any of the Drexel alumnae, at

Lazard Frères & Co. In the last year, he has handled a $7.7 billion job for

the Korean conglomerate Daewoo Group and deals in the hundreds of millions for

Boston Chicken and underwear empire Fruit of the Loom.

Mr. Ridings, who arrives

at his Rockefeller Center office by 7 a.m. and stays until 8 p.m., said  he’s “always marketing.” He has a PowerPoint

presentation at the ready for companies seeking his help.

He presents the numbers: The market for junk bonds is valued

at about $646 billion in 1999 (compared with $173 billion in 1990), and the

market for low-credit-rating syndicated bank loans is at $320 billion, with an

estimated 7 percent default rate. “You’ve got an almost $1 trillion problem,”

Mr. Ridings concluded.

Even if that is an exaggeration, it means business is

booming. “BAD NEWS IS GOOD NEWS,” reads the first bullet point on Page 1 of Mr.

Ridings’ PowerPoint presentation. And so it is.

Page 18 shows the

industries in which new junk bonds were issued in 1999: any you can imagine.

Surprisingly, only 2 percent was in technology; 13 percent was in media and

cable, and fully 32 percent was in telecom-the next big work-out field, Mr.

Ridings believes.

Around Page 28 of the

presentation, the troubled company’s board of directors begins to see what a

work-out will mean, should they choose to pay Mr. Ridings’ group its $125,000

to $250,000 a month in fees, as well as its average 1 percent stake in the

restructured debt to avoid bankruptcy (not a guarantee).

A work-out could mean Mr.

Ridings’ group probes their company’s management-incompetent or fraudulent, too

fat or too lean. A work-out is an examination of the employees: size of staff,

contracts, salaries. It means a look at anything that could be affecting the

company’s ability to repay its debt. And fixing it will likely mean some

combination of swaps, rights offerings, interest moratoriums, debt buybacks and

bankruptcy filings, as well as cutting divisions, lowering pay and even cutting


The company’s managers might seek their own representation,

and that brings in lawyers. Lawyers swarm around troubled companies: The firm’s

board has lawyers, Mr. Ridings’ team employs lawyers and there are also

independent bankruptcy lawyers marketing their services.

Also circling are

“vulture investors”: firms who can smell an undervalued securities a mile away.

Battling them are the leveraged-buyout firms.

Lastly and most

importantly, there are the bond-holders themselves. Back in the Drexel days,

they were poorly organized and often subject to Mr. Milken’s will, Mr. Ridings

said. Now they form committees and hire their own lawyers and consultants. For

this reason, most work-outs now involve filing Chapter 11, which requires a

two-thirds majority of bond-holders. That’s a lower bar than the 80 to 90

percent of bond-holders Drexel alumni say they used to need to perform their

out-of-court work-outs back in the old days.

And the sheer size of

debt these days necessarily makes things litigious. “You cannot make $1 billion

in debt go away outside of court,” Mr. Ridings said.

Add to all of that the

accountants, the government, other bankers and the press, and there’s a good

reason that work-out specialists like Mr. Ridings put in those 12-hour days.

Because of the

complicated scope of their work, many of the top work-out specialists have law

degrees and experience in an assortment of investment-banking departments.

“It requires a wider skill

set,” said Joseph Radecki, who was at Drexel from 1983 to 1991 (“to turn out

the lights,” as he likes to put it) and who now runs the group at CIBC World


“Restructurings are like

M.&A. assignments,” said Richard Nevins, who was at Drexel from 1985 to

1991 and now runs the group at Jefferies & Company Inc. “You have to get

into the guts of the business, and you have to work with whatever you got.”

These days, there’s

enough business to go around for the entire ex-Drexel crew. “There was some

very sloppy underwriting done in the late 90’s,” said Mr. Nevins, another

large, affable man with a mustache. “As the high-yield market gets strong,

people start to stretch; people start papering over mistakes.”

Are things as good as Mr.

Ridings suggest? “Yes, we’re all running around congratulating ourselves on how

terrible life is,” Mr. Nevins said, only half-joking. 

Like Mr. Ridings, Mr.

Nevins’ work-outs at Jefferies have run the gamut. He recently handled a $1

billion deal for satellite company ICO Global Communications, which Mr. Nevins

said was the largest bankruptcy of 2000, and a $1 billion deal for AmeriServe,

a food distribution company.

Mr. Radecki, meanwhile,

has followed a Drexel game plan of the 80’s, taking advantage of the sharp

decline in oil prices that occurred in the late 90’s.

“Nineteen ninety-eight to

2000 saw a lot of distressed debt in oil and gas companies,” he said. “When oil

dropped to $11 a barrel, most of those companies lost their liquidity. We saw a

lot of small bankruptcies.” Mr. Radecki’s group at CIBC recently restructured

$300 million in debt for the National Energy Group.

But shifts in industries

and the economy are not the only things auguring bankruptcy these days. Because

of changes in regulations, Mr. Ridings said, almost every major nursing-home

company in the country is bankrupt, and the health-care industry is generally

in a shambles. His group recently helped restructure one of the largest, Sun

Healthcare Group Inc., in a $2 billion deal.

At principal investor

Joseph, Littlejohn & Levy, meanwhile, Paul Levy, a onetime co-head of

Drexel’s work-out group who appears in Connie Bruck’s The Predators’ Ball , has just acquired, with a partner, the

health-care company AdvancePCS, for about $1 billion. They have also acquired New

World Pasta, maker of the Ronzoni brand, for $140 million.

But of course, as long as

there is debt, there will be work-outs.

“Capital markets are

stupid,” said Mr. Ridings. “We make a living because of the herd mentality on

Wall Street. Because of the excesses of the capital markets. Because they do

things they shouldn’t do.”

Predators No More

At Drexel, the people in

the work-out group were not the ones pulling up to the Predators’ Ball at the

Beverly Hilton in white limos. They weren’t the ones drinking champagne with

Diana Ross in Don Engel’s notorious Bungalow 8. They were behind the scenes,

plugging leaks, “paying debt (by) issuing more debt,” as Mr. Nevins put it.

“We put the grease on the

wheels,” said David Ying, Mr. Levy’s partner at J.L.L. and once a co-head of

the Drexel group as well.

The most common form of

grease was the exchange offer-an out-of-court settlement that involved swapping

distressed bonds for stock. Drexel started the practice as a service to their

clients and bond-holders. It later became a profitable business unto itself,

drawing, like M.&A., large fees for advisory work and percentages. Exchange

offers were far quicker than bankruptcy proceedings (Drexel managed to snatch

business from and deeply annoy the legal community, among its many enemies) and

more lucrative. They were also ephemeral. 

“We didn’t fix the

companies,” Mr. Ridings said. “We just put Band-Aids on them. All the parties,

particularly the creditors, didn’t want to deal with the problem.”

Mr. Ridings said that

Drexel often “put too much debt” on companies, particularly when it was funding

leveraged buyouts. “We didn’t have a margin of safety. So as soon as they had a

hiccup, they ran into problems.”

Richard Nevins and Joseph

Radecki agreed. Debt was often issued “knowing there would be problems,” Mr.

Radecki said. Drexel’s restructuring department was often just “kicking [the

problem] down the road,” said Mr. Nevins. Issuers were “paying debt by issuing

more debt.”

Paul Levy conceded that, by urging such solutions as

exchange offers, Drexel did not always properly mend its clients. “It is a fair

generalization that a company is more completely fixed in a bankruptcy than out

of a bankruptcy.” But he added that bankruptcies are “long, slow and tedious,”

and that Drexel’s exchange offers happened quickly enough to keep a company’s

business from languishing as it went through bankruptcy proceedings.

However myopic or

greed-driven its practices were, Drexel’s influence laid the groundwork for

today’s restructuring market, which is much larger but also more stable than

that of the 1980’s.

After Drexel and the junk-bond market collapsed in 1991, a

certain sobriety descended on the business. Mr. Milken’s absence left a vacuum

at the center of the leveraged-debt market. The sharks couldn’t hold their

highly leveraged empires together without him. And a collective realization

that leveraged debt could not be plied as flagrantly as it had been by the

Henry Kravises and Ron Perelmans seemed to affect Wall Street. Buy-outs and M.&A.

deals began relying much more on equity.

At the same time, the

exchange offer was transformed into the “pre-arranged bankruptcy,” essentially

the same procedure with the addition of a Chapter 11 filing. That draws the

process out, work-out specialists say, but it also gives the debtor breathing


And everyone seems to

agree that today’s market is healthier for everyone involved. “Now, we’re

fixing them,” Mr. Ridings said.

“The pre-arranged

bankruptcies are the zenith of perfection,” said James Schneider, head of

Drexel’s restructuring group from 1981 to 1991. “They have the least damage on

the company and are best for the shareholders.”

Like many of Mr. Milken’s

original minions, Mr. Schneider made enough money through Drexel to retire at

the age of 44. But it cannot be for that reason alone that he clings to his

affection for his old boss. Mr. Schneider, like Mr. Milken himself, speaks of

the “revolution” that Mr. Milken and his junk-bond empire wrought, and believes

that Mr. Milken got a raw deal.

Most of those who were

part of the former Drexel work-out crew feel the same way, even if they were

left broke, as Mr. Ridings said he was. They spoke of Mr. Milken’s

“brilliance,” and of his unfair treatment at the hands of Wall Street and the

government. Mr. Milken did not return calls for comment.

Only David Ying spoke

differently. At the top of Drexel, he said, “there were a few greedy and

unethical people, and one of them went to jail.” Mr. Milken went nameless.

Meanwhile, his minions are out there, still making the world safe for companies

with debt.

Michael Milken’s Minions Profit From Debt