Cerberus, owner of Chrysler, gets a harsh reassessment
NEW YORK: Cerberus Capital Management has been humbled in recent weeks by troubles at two of its larger investments, Chrysler and the mortgage lender GMAC.
Those companies problems are merely among the most prominent in a series of bumps hurting a giant in private equity. Cerberus is run by Stephen Feinberg and named after the mythological three-headed dog guarding the gate of Hades.
At the height of the private equity boom, Cerberus made big returns for investors by investing in companies like Vanguard Car Rental Group.
Other good bets it has made have been on investments in AerCap Holdings, based in the Netherlands, and Teleglobe International in Montreal.
But it has made some contrarian bets, like Chrysler, causing some to wonder if Cerberuss Midas touch is fading.
The latest hits came Friday.
GMAC and a subsidiary, Residential Capital, suffered large credit downgrades from Standard Poors. Cerberus bought a majority stake in GMAC from General Motors in 2006.
Scottish Re Group, a reinsurer into which Cerberus injected $300 million last May, said it would try to sell some units and cut costs to preserve capital and liquidity. The reason: Its business plan does not work.
“Cerberus has among the smartest, most connected people the private equity business has ever seen,” said Michael Holland, a money manager who runs Holland Company, and is a former partner at Blackstone Group, the private equity firm. “But it shows you the enormous challenges facing private equity right now.”
Cerberus said it remained “enthusiastic” about Chrysler, which it said was on track to exceed its long-term targets “on all key metrics.”
Last month, The Wall Street Journal quoted Cerberuss No. 2 executive, Mark Neporent, as saying the firm never commits more than 5 percent of its $26 billion under management to any one investment. That would limit risk.
But much of the attention has focused on investments that look unwell, went sour - or never happened.
Chrysler is a major focus, after Cerberus last August acquired an 80.1 percent stake from Daimler in a $7.4 billion transaction, taking on an estimated $18 billion of pension and health care liabilities. It installed the former Home Depot chief executive Robert Nardelli to run the automaker.
The Wall Street Journal reported in December that Nardelli had confirmed that he told employees in a meeting that month that Chrysler, which is cutting thousands of jobs, was “operationally” bankrupt.
In January, Chrysler sales declined 12 percent as demand fell for pickup trucks and sport utility vehicles. On Feb. 8, Chryslers vice chairman and president, Jim Press, said the automaker planned to shrink its dealer network and eliminate slow-selling models.
GMAC, which was once a profit center at GMs otherwise troubled operations, is another area of concern. Cerberus led a group that bought 51 percent of the company, which provided auto loans and mortgages.
But the housing crisis in the United States led to a $2.33 billion loss at GMAC in 2007, including a $4.35 billion loss at ResCap.
Standard Poors on Friday slashed GMACs and ResCaps credit ratings to medium “junk” status, to the same levels assigned by Moodys Investors Service. SP said ResCap might need more capital to avoid tripping its own loan covenants.
Feinberg, the Cerberus chief, acknowledged problems in his Jan. 22 letter.
“GMAC is an investment about which we have significant concerns,” he wrote. “If the credit markets continue to decline and we find ourselves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty.”
Cerberus has stumbled before on mortgages. Last August, its Aegis Mortgage unit went bankrupt, becoming one of dozens of home loan providers to exit the industry since 2006.
Some deals have fallen apart altogether.
Cerberuss $1 billion agreement last year to buy HR Blocks Option One Mortgage subprime unit as demand for risky home loans collapsed.
And in a bigger blowup, Cerberus backed out of a $4 billion agreement to buy equipment renter United Rentals, a decision a Delaware court said it was within its rights to do.
“Walking away from the transaction was very difficult for us because we knew we would get criticized and there would be significant reputational fallout,” Feinberg wrote. “We stuck to our guns, and the truth prevailed.”
In the past six months, Blackstone, J.C. Flowers and Kohlberg Kravis Roberts are among private equity firms to also back out of mergers.
As a result, planned buyouts of such companies as the student lender Sallie Mae, the mortgage and vehicle fleet company PHH and the audio equipment maker Harman International Industries never closed.
