Bush's Fancy Financial Footwork
By David Ignatius
Columnist
The Washington Post
Tuesday, August 6, 2002
It's not something George W. Bush talks about much -- indeed, it's a fact that has been virtually purged from his official biography -- but for four years in the early 1990s, Bush was a director of a company that ultimately collapsed under the weight of its junk-bond financing and management mistakes.
The privately held company, called Caterair International Inc., was created in 1989 when Marriott Corp. spun off its airline catering business to investors organized by the Washington investment bank the Carlyle Group. If you haven't heard of it, Carlyle is a sleek financial operation that does its deals with help from a roster of former government big shots such as former defense secretary Frank Carlucci, former secretary of state James A. Baker III and even former president George Herbert Walker Bush. As of 2001, a newspaper article pegged Carlyle's value at about $12 billion.
The Caterair deal was a piece of financial engineering known at the time as a "leveraged buyout." It was financed mostly by high-yielding "junk bonds," of the sort pioneered in the 1980s by Michael Milken, who later served jail time for his financial shenanigans.
Carlyle and its investors paid about $570 million for Marriott's In-Flite Services division, which the hotel wanted to sell so it could concentrate on its core business. The investor group was headed by Frederick V. Malek, a Carlyle senior adviser who had served as director of the 1988 Republican convention -- the one that nominated Vice President George H. W. Bush.
Malek resigned in September 1988 as a high-level adviser in the elder Bush's campaign after disclosure that in 1971, at the insistence of his boss, President Nixon, he had compiled a list of Jews at the Bureau of Labor Statistics, who, Nixon suspected, were part of "Jewish cabal" that was distorting his economic achievements. Several on the list were later transferred to different jobs, but Malek said he had no role in personnel decisions and denied he had willingly engaged in anti-Semitic conduct, arguing that he had been coerced by Nixon's repeated requests. The Malek flap didn't hurt his friend the vice president, who was elected as the nation's 41st president in November 1988.
It was Malek who suggested that George W. Bush join the Caterair board in 1990, according to a 1991 article in the New York Times. "I thought George W. Bush could make a contribution to Caterair," the Times quoted Malek as saying. "He would be on the board even if his father weren't President."
A March 2001 profile of Carlyle in the Times noted that the investment bank "gave the Bush family a hand in 1990 by putting George W. Bush, who was then struggling to find a career, on the board of a Carlyle subsidiary, Caterair, an airline-catering company."
Bush remained on the Caterair board until May 1994, according to a Sept. 17, 1994, article in the Dallas Morning News. He said he resigned so he could concentrate on his campaign for governor of Texas. The paper reported that Bush had previously disclosed that he owned between 1,000 and 4,000 shares of "stock appreciation rights." What intrigued the Dallas newspaper was that Bush had dropped the Caterair connection from his official campaign résumé in August 1994.
At that time, Caterair was staggering under its huge debt load, and because of unforeseen changes in the airline catering business. The Dallas paper noted at the time that in SEC filings, Caterair had disclosed $263 million in operating losses and writeoffs since its 1989 founding.
Bush denied the company's financial problems had any effect on his decision to leave the board. He said its problems were "part of a business cycle" caused partly by the fact that "the airline food business is going from hot meals to peanuts." Through those years the company's CEO was former Marriott executive Daniel Altobello. He continued to issue generally optimistic reports about the company's prospects.
Bush's Democratic rival denounced his role with the company. "George W. Bush says he's a successful businessman, but when his company is facing bankruptcy, he jumps ship and lets his partners sink," said Chuck McDonald, a spokesman for then-Texas Gov. Ann Richards, in a Sept. 16, 1994, comment to the Dallas Morning News.
During Bush's four years as a director, Caterair's problems went from bad to worse to insoluble. Because the company was privately held, there's no public record of his role in board discussions. But Caterair is in some respects an early example of the sort of financial engineering that has subverted so many prominent companies recently.
Carlyle financed the deal, as was the practice at the time, mostly through heavy borrowing. After the buyout, Caterair had about $464 million in long-term debt, according to a 1993 Wall Street Journal article based on the company's SEC filings. That article (dug up for me by Post researcher Robert Lyford) noted that Caterair had trimmed that debt load only slightly, to about $426 million, in the four years since it was founded.
The debt load became so heavy that in July 1993, while Bush was a director, Caterair tried to sell $230 million in new "junk bonds." Its filing with the SEC noted that it had failed to make a profit since it was founded -- losing $21 million in 1990, $26 million in 1991 and $400,000 in 1992. Profitability was difficult given Caterair's huge interest costs, which totaled $46 million a year in 1992. The Journal noted that in its SEC filing, "the company said its heavily leveraged balance sheet could prevent it from making certain debt payments." The company also told the SEC it was seeking waivers from lenders for possible violation of covenants in its credit agreements -- a sign it was in serious trouble.
Finally, in May 1995, a year after Bush left the board, Caterair decided to throw in the towel. The company was acquired by Onex Corp., a Toronto-based leveraged-buyout group that owned part of Sky Chefs Inc., a big catering company run by a unit of the German airline Lufthansa.
Onex paid no cash but agreed to assume Caterair's heavy debts. Caterair's creditors agreed to write off $350 million, and two big New York banks agreed to refinance another $650 million in debt. In other words, the financiers who had backed Caterair took a serious haircut. According to a 1996 article in The Washington Post, "Now every dollar Carlyle paid for 'Craterair' is worth 4 cents."
"They [Carlyle] paid so much for the company, it was sinking under its own debt," Onex's chairman, Gerard Schwartz, told the Journal in 1995. Schwartz himself was something of a junk bond king, and the Onex-Caterair deal was described in a 1997 Journal article as an example of the "merger boom" that was sweeping America in the '90s.
So come on, Mr. President. 'Fess up. Here the U.S. economy is tanking and it turns out you have unknown expertise in junk-bond financing and fancy financial footwork. It's time to put that stellar business experience to work.
© 2002 The Washington Post Company
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