In a classic example of distressed investing, Whitman bought the senior unsecured debt of the USG Corp, the wallboard maker in Chicago. The escalating costs to US Gypsum, a USG subsidiary, from legal settlements with victims of asbestos-related diseases prompted USG to announce last month that it might file for bankruptcy.
The mere mention of asbestos might send many mutual fund managers scurrying for safety. Today, the Third Avenue Value fund is USG's largest creditor, holding US$158.1 million of its debt, more than half of the outstanding public debt. Third Avenue's claims on the corporation will be senior to any asbestos claims, said Whitman, who described USG as "a very well-run, very well-capitalized company."
While the time may be ripe for distressed investing, Whitman said he was not sure it was right for most mutual funds, which are intended to be passive investing vehicles.
"Distressed investing done well is by its nature not passive investing," he said. "You have to get in there and bang heads."
Still, Whitman said some distressed securities were suitable passive investments. An example is the first mortgage bonds of Pacific Gas & Electric, a unit of the PG&E Corp that filed for Chapter 11 protection in April. The PG&E unit has more than US$4 billion in debt. Whitman, with a US$7 million stake, does not expect to ever own enough of it to play a management role. In any case, by his analysis, PG&E should never miss an interest payment. Whitman bought the bonds with a yield to maturity of 25 percent.
In other cases, Whitman and his staff are heavily involved in their companies, often sitting on court-appointed committees of unsecured creditors.
A Third Avenue official is the co-chairman of such a committee in the Chapter 11 case of Armstrong World Industries, a subsidiary of Armstrong Holdings that is also involved in an asbestos liability case.
Although distressed companies often end up paying Third Avenue Value Funds' bills for its involvement, the company does not earn extra fees for this work. If it did, it could not be classified as a mutual fund company, Whitman said.
A hedge fund, however, can earn fee income, and a share of a business' profits. As a result, MJ Whitman Advisers has started one -- the Aggressive Conservative fund, a reference to a 1979 book that Whitman wrote with Martin Shubik, The Aggressive Conservative Investor -- and is selling it to institutional investors. The hedge fund, managed by Whitman, Winer and Peter Faulkner, who manages a similar hedge fund for individual investors, has about US$8 million in assets under management.
Whitman continues to plug away in his role as sounding board for his proteges. In a characteristic remark, Whitman called his wife, Lois, 75, founder and executive director of the Children's Rights Division of Human Rights Watch, the real overachiever. She is still working, he said, and working "a lot harder than I am."
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