Buffett bought Conseco bonds. Here's news:
Buffett, Seeing Value in Junk, Snaps Up Battered Bonds
By PAUL M. SHERER and DEVON SPURGEON
Staff Reporters of THE WALL STREET JOURNAL
Billionaire Warren E. Buffett, long known for seeking out undervalued stocks, has turned his attention to the battered junk-bond market.
The value investor through his Berkshire Hathaway Inc. investment vehicle recently paid several hundred million dollars to buy the junk bonds of Finova Group Inc., a commercial lender, and has also made a similar-size bet on the debt of Conseco Inc., an insurance and finance company.
The sharp fall in the value of junk bonds this year has grabbed the attention of investors looking for cheaply priced securities, but many of them are already big players in the bond markets. Mr. Buffett's moves signify that the battered junk-bond market is now drawing "value" investors who usually invest in stocks.
Indeed, today's bruised stock and bond markets make Mr. Buffett something of a kid in a candy store. He keeps several billion dollars of cash on hand, letting him swoop in quickly when opportunities arise. Earlier this month, Berkshire Hathaway agreed to acquire building-products maker Johns Manville Corp. for about $1.96 billion. Mr. Buffett moved in just two weeks after the collapse of a proposed $3 billion purchase of Manville by a group headed by Hicks, Muse, Tate & Furst Inc. and Bear Stearns Cos.
Mr. Buffett has been an active investor in weakened financial institutions, so it is little surprise that Finova caught his eye. When Finova bonds fell in October to the low 60s from more than 70 cents on the dollar, Mr. Buffett stepped in, spending several hundred million dollars on the bonds.
A spokesman for Berkshire Hathaway declined to comment.
Berkshire Hathaway, based in Omaha, Neb., is primarily an insurance company with ownership of a vast number of businesses ranging from Dairy Queen to Justin Industries, a bricks and boots manufacturer. Mr. Buffett and his company have rebounded this year after a rough patch when his value-investing style fell out of favor. In 4 p.m. New York Stock Exchange composite trading, Berkshire's Class A shares closed at $69,700, up 69% from its $41,300 close on March 10.
Though Mr. Buffett is known as an investor in corporate stocks, he has bought up junk bonds in the past in the secondary markets after they have fallen in value. In 1983, Berkshire's insurance subsidiaries purchased $139 million in bonds of Washington Public Power Supply System, nicknamed "Whoops," and earned 16% in tax-free annual interest and a big capital gain. In the past, it has also bought bonds of Chrysler Financial, the financing arm of the big auto maker, and R.J. Reynolds. And in mid-1997, Mr. Buffett made a big splash in the bond market, buying nearly $10 billion face amount of long-term zero-coupon Treasury bonds at a cost of just over $2 billion.
Finova, the Scottsdale, Ariz., commercial lender, recently announced it had signed a securities-purchase agreement with Leucadia National Corp. under which New York-based Leucadia would invest as much as $350 million in Finova in return for voting control of the company. The Leucadia deal is subject to Finova restructuring its bank and public debt outstanding.
Finova said a debt restructuring was necessary "to avoid the possibility of reorganization under protection of the courts." Finova, with $6.3 billion in bonds and $4.69 billion in bank debt, has $1.6 billion of principal payments due in May 2001.
Though Mr. Buffett's purchases were made before Leucadia stepped in, he may now be in a position to affect Leucadia's deal. The proposed restructuring must be approved by two-thirds of the bondholders and all of the bank lenders. Mr. Buffett hasn't spoken to Finova about his actions or intentions, according to people familiar with the situation. Market watchers say Leucadia will face an uphill battle getting the unanimous approval it needs from the banks.
There has been heavy trading in Finova bonds in recent months, particularly in Finova's benchmark $1.1 billion 7.25% bond maturing in 2004, with a number of distressed-debt investors taking positions. One distressed-debt investor who owns some Finova bonds, which are now trading at about 59 cents on the dollar, figures that in a liquidation bondholders could recover more than 80 cents on the dollar, though he thinks a restructuring is more likely.
A spokeswoman for Finova declined to comment on Mr. Buffett's purchases.
Mr. Buffett has danced around some of the same companies as Leucadia. In May, Leucadia agreed to buy Reliance Group Holdings Inc. for $359 million, but backed out of the deal after a period of due diligence. In August, Berkshire Hathaway looked at providing about $1 billion of reinsurance to Reliance, but a deal never materialized. Financier Carl Icahn subsequently moved in to buy about 25% of Reliance's bank debt and a big chunk of the company's bonds,
A spokeswoman for Leucadia couldn't be reached for comment.
Conseco, in Carmel, Ind., stumbled after acquiring Green Tree Financial Corp. in 1998 for more than $6.4 billion in stock. Investors concluded the company had paid too much for the mobile-home lender, and Conseco's highflying stock began to sink. In April, Chairman and Chief Executive Stephen C. Hilbert was ousted and replaced two months later by former General Electric executive Gary C. Wendt.
Enter Mr. Buffett. In October, Conseco was negotiating with the insurance division of Berkshire Hathaway for $500 million in reinsurance protection, a Conseco spokesman confirmed. But talks ceased after A.M. Best upgraded its rating on Conseco's principal life-insurance subsidiaries on Nov. 7, ending Conseco's need to obtain the reinsurance.
But Mr. Buffett has made a different type of bet on Conseco, buying several hundred million dollars worth of the company's debt in recent months, according to people familiar with the matter.
"I would bet that their look-see at our situation has led to their interest in owning Conseco debt," said Mark Lubbers, a Conseco spokesman.
-- Joseph T. Hallinan contributed to this story.
Write to Paul M. Sherer at paul.sherer@wsj.com and Devon Spurgeon at devon.spurgeon@wsj.com |
