Lessons From a Distressed Investing Legend
Negotiating With Union Leaders, Warren Buffett, and Bankrupt Banks
Wilbur Ross was called “King of Bankruptcy” during his long and distinguished Wall Street career. Ross earned that distinction because of his mastery of the U.S. bankruptcy process, which is essential to understanding distressed securities.
Ross headed up bankruptcy restructuring for decades at global investment bank Rothschild & Sons before starting his own firm, W.L. Ross & Co., in 2000. In 2016, President Donald Trump appointed him Secretary of Commerce, a position he held until 2021.
Ross has granted an exclusive advance look to Porter & Co. of his upcoming memoir, Risks and Returns: Creating Success in Business and Life. The excerpt offers the perspective of an investment banker who engaged in the nitty-gritty of negotiations among distressed companies and their creditors. During many of these negotiations, Ross acquired prominent businesses out of bankruptcy and managed their successful turnarounds, earning him and the bondholders handsome profits. That experience provides readers a fresh viewpoint as someone who was in the game – commentaries on bankruptcy are more commonly authored by securities analysts and lawyers.
He begins this essay by sharing a story that sheds light on the importance of labor relations in reviving failed companies, notably in the account of W.L. Ross & Co.’s 2002 acquisition of the steel subsidiaries of Ling-Temco-Vought. Prior to his involvement, the business suffered huge inefficiencies because of internal bureaucracies. For instance, the maintenance team and the operators of a company mill knew how to do each other’s jobs, but if the mill broke down, the operators would sit around playing cards while the maintenance people took over. Ross used a cooperative rather than a confrontational approach with the union to streamline the organizational structure, creating a single, unified team that more efficiently ran and repaired the mill.
Ross also recounts how he outmaneuvered Warren Buffett to win the bidding for the bankrupt Burlington Mills textile company. He also grappled with organized crime in advising the Italian government on restructuring Banco di Napoli. The bottom line is that distressed-debt investors will profit richly from the insights Wilbur Ross gained through his wide-ranging creation of value out of financial failure. – Martin Fridson
The Art of the Steel
One of W.L. Ross & Co.’s first investments was buying the conglomerate Ling-Temco-Vought’s (“LTV”) steel subsidiaries in 2002. I had previously advised the unsecured creditors of LTV in its first bankruptcy in 1986. Now the company was bankrupt again, and this time poised for liquidation. The steel mill was kept on “hot idle,” with just enough molten metal running through it to prevent the mill’s refractory bricks from imploding. That process was costing more than $1 million per week, so creditors were scrambling to auction off the mill.
We studied the business and formed International Steel Group (“ISG”) in anticipation of submitting a bid for it. In the meantime, a bankruptcy court had already terminated the unfunded pension and retiree healthcare obligations, and the workers almost all had been let go. ISG was optimistic about acquiring the mill, but a terrible labor contract had to be fixed before we could submit a bid.
I called Leo Gerard, president of the United Steelworkers of America (“USWA”) union, and told him of our interest in purchasing LTV’s steel operation. He and I soon met in Pittsburgh. ISG proposed to hire back most of the former workers, but to do so on a “nonconforming” contract – meaning that it had more favorable terms than the other steel industry contracts. In exchange, we needed to reduce the number of job classifications from 32 to five.
The existing number of categories created artificial restrictions on who could do what, leading to gross inefficiencies. For example, the operators of a rolling mill and its maintenance team each knew how to do each other’s jobs. But for weeks, maintenance men would sit around playing pinochle until the mill broke down. Then the operators would play pinochle for a few days while the maintenance guys went to work. This structure was simply too wasteful – we needed only one set of workers to both operate and maintain the mill.
As for wages, we left them unchanged, but cut out excess days off. Overtime pay would kick in after 40 hours in a week, instead of beginning each day after eight hours of work. That let us offset overtime on one day with fewer hours on another day. Finally, only people who actually touched steel would be USWA union members, not office workers. The quid pro quo for all this was that we set weekly targets for each shift on each machine and if the workers hit their production targets everyone involved would get a bonus, even if the company was losing money overall.
I am a great believer in productivity bonuses for blue-collar workers. Unions dislike them because they prefer to be the exclusive intermediary between a worker and his paycheck.
At first, Leo, the union president, gagged on these radical proposals. But we broke for two hours and then met at his favorite Italian restaurant, up high on a hill overlooking Pittsburgh. There, while consuming gallons of red wine, we inked an agreement in longhand on a napkin. At the end, I had one more condition: The contract must be applicable to any other steel company we acquired.
Leo was fine with it, but had another stipulation of his own: We must implement our plan to reduce the layers of management from factory floor to CEO office from eight to three. This reduction accelerated decision-making and gave the CEO better firsthand knowledge of what was going on. We also agreed that the CEO’s base pay could not exceed 10 times what an experienced steelworker received, but there could be very large performance-based bonuses.
Separately, W.L. Ross & Co. convinced Cleveland-Cliffs to supply iron ore not on a fixed price, but rather one that varied with the price of hot rolled sheet, our most basic product. This locked in our gross margins.
