Posted on 09/16/2001 12:15:37 PM PDT by jedediah smith
Just over three years ago AP Industries, owner of a successful auto parts chain, sold $100 million in "junk bonds" to finance an acquisition binge.
Numerous acquisitions later, the cash has been spent, mostly on money-losing operations, including one bought from the company's chairman The company says it may have to file for protection under Federal bankruptcy laws because it does not have enough cash flow to service the bonds.
Ezra Harel, 39 years old, the chairman and chief executive, was paid $1.2 million last year. Most of that came from a bonus for helping to arrange the sale of the AP Auto Parts chain, the foundation of the company and the only operation with significant profits.
Money from that sale was spread around to numerous managers and directors, which is one reason the company has now run out of cash and failed to make the latest interest payment on the bond issue.
All told, fees and bonuses to insiders from the sale of the auto parts operations ate up $5.2 million of the $37 million in cash received. AP also got some securities which it is now trying to sell to raise some cash.
Mr. Harel, the sole shareholder, plans to move to Israel, while keeping his jobs, so the company is looking for a chief operating officer.
The bonds, which sold at just above par in June 1986, last traded on the American Stock Exchange a few weeks ago at 23 percent of par value. The company wants bondholders to accept an offer of $79.55 in cash for each $1,000 bond, plus some stock in the company and a bond that will not pay cash interest. The package appears to be worth roughly $200 to $250. Hillel Peled, the company's treasurer, says talks were under way with bondholder representatives but would not give details. Representatives of the bondholders could not be reached for comment.
Even including the interest they did receive, at 12.375 percent per year, bondholders seem likely to lose about half their original investment. That helps to explain why "junk bond" may be a more accurate term than "high yield bond."
"For horror stories about how lousy things can get for a bondholder, this is about as bad as you can get outside of bankruptcy," said John C. Boland, the publisher of Bankruptcy Values, a Baltimore-based newsletter for institutional investors.
Others involved with the company did a lot better than the bondholders. Bear, Stearns & Company, as the bond underwriter, picked up $3 million in fees when the bonds were issued. It gathered $1.8 million more after the bonds were issued for its work in arranging takeovers and the divestiture of the auto parts operation. Uzi Zucker, a managing director of Bear, Stearns, served on AP's board until he quit in November.
Mr. Zucker is on vacation and cannot be reached, a Bear, Stearns spokeswoman said. Mr. Peled, asked about the resignation, responded, "The formal explanation was that he was very busy and had other obligations." He referred further inquiries on the subject to Mr. Zucker.
When the auto parts operation was sold, to a leveraged buyout group organized by the Charterhouse Group, the British merchant banking firm, another director Elie Housman, was part of the buying group and also received a $1 million brokerage fee from the company.
Mr. Peled, in discussing the fees, said the company's financial problems were not so bad last August, when the auto parts operation was sold. "The business plan called for a much earlier turnaround," he explained.
Now, while the company sold could come up with more cash for its bondholders, Mr. Peled said, he thought the money was needed to help turn around operations. An electronics and metal components subsidiary, Nytronics, has been losing money at a rapid rate. Its franchise operations, Lee Myles transmission shops, are alos in the red. Its Burruss hardwood floor and furniture subsidiary is profitable but not nearly enough to offset the others.
All told, AP spent $81.6 million on buying subsidiaries, and so far has lost $43.8 million on them. What is more, each subsidiary has its own debts, with covenants that prevent any substantial amount of cash from being paid to the parent.
AP says it has two options if the bondholders do not agree to the swap. The first, unsurprisingly, is to file for bankruptcy. But it is the other that is indicative of the era: it would gamble with the money it does have left, spending cash and taking on new debt, to buy another company or two. The new debt would have first call on AP's assets, ahead of the current bondholders.
With his record, could Mr. Harel really pull that off, even with aid from Drexel Burnham Lambert, Inc., the firms new investment banker? Probably not. But a decade ago, no one would have thought to suggest it as an option. The fact it is considered now is one more piece of evidence of just how speculative the investment world has become.
Thanks for this very comprehensive work up of "Motivations" for the WTC takedowns. You got a lot of it together that explains how much more has been accomplished than just the apparent "Kill the Great Satan" that most are looking at.
I'm sure some details of this will be focused in on and torn apart in minute detail, but still, things are not as simple as they appear and that's certain.
Couldn't have an old fashioned war anymore for many reasons, now they've Redefined War. But the purposes are still the same.
Much better written than I can do.
I don't know about the Committee of 300 but I agree with your ideas about the most likely outcome of WWWIII.
Was flamed big time for an earlier post I put on suggesting Democrats may have collaborated in this along with others. Thanks for a wonderful article giving motive to their madness.
Something tells me the above links may not last too long.
Golitely, I think the same thing about Hillary whenever I am forced to view her. But Barbara Olson may have the last laugh. Her second book about the Clintons comes out in a week.
(MS)/(C)NBC has gone with the "Attack on America" you mentioned. CNN is playing up "America's New War." Fox is "America United."
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