Cairo Association of Teachers - Newsletter

CAT Tracks for February 3, 2006 PENSION FUNDS

Now here is a story that gives new meaning to the term "retirement home"!

From the New York Times...

Pension Battle May Entangle Mogul's Home

By MARY WILLIAMS WALSH

Ira L. Rennert's colossal house in the Hamptons, built with the riches from his sprawling industrial empire, has withstood lawsuits from angry neighbors, appeals to the local zoning board, even an attempted documentary filming by Michael Moore.

But now a new challenge is looming. The federal agency that insures pensions appears poised to lay claim to Mr. Rennert's 29-bedroom oceanfront estate, along with other assets, to make sure he delivers on hundreds of millions of dollars in pensions promised to a group of steelworkers in Ohio.

In most pension failures, the federal Pension Benefit Guaranty Corporation has little choice but to absorb the liabilities of the pension fund itself. That is because the sponsoring company has filed for bankruptcy and there is rarely enough wealth tucked away in related entities to be worth going after.

But Mr. Rennert's business empire, according to Carol Connor Flowe, a former general counsel for the pension agency, presents a rare opportunity: a bankruptcy with a deep pocket.

"It's especially a situation where they're going to be aggressive," she said of the agency, "because there looks to be quite a bit of value" in Mr. Rennert's holdings � including his $185 million house.

Mr. Rennert built up his wealth by buying a variety of distressed industrial companies, often with high-yield junk bonds that allowed him to avoid putting up much of his own money. Besides his house in the Hamptons, Mr. Rennert owns a Manhattan duplex on Park Avenue and a home in Israel.

With a hearing scheduled for Monday in the United States Bankruptcy Court for the Northern District of Ohio, in Akron, the pension agency declined to discuss the Rennert case specifically. But "in every case where there's value that we can chase to cover the pension liabilities," said Randolph J. Clerihue, a spokesman for the agency, "we're going to do so."

Mr. Rennert is not likely to lose his estate in Sagaponack, the biggest, most expensive home in the Hamptons. But it is a particularly tempting target because of its personal value to Mr. Rennert. To prevent the government from placing a lien on it, he could be forced to hand over as much as $189 million � somewhat more than the value of his property � to cover the government's cost of paying the pensions that he promised to the steelworkers.

A similar tactic worked with the financier Carl C. Icahn, who controlled Trans World Airlines when it filed for bankruptcy in 1992, recalled Ms. Flowe, now a partner at the law firm of Arent Fox in Washington.

The agency, seeing that it was about to be stuck with T.W.A.'s huge, underfunded pension plan, laid claim to Mr. Icahn's vast holdings, including such prized possessions as a racehorse and a beach house. As a result, Mr. Icahn agreed to pay $30 million a year for eight years to help cover the costs of the airline's pensions.

In Mr. Rennert's case, the first step in such a process could come as early as today, with the pension agency going to court to seize the steelworkers' pension fund.

Gary M. Ford, a former general counsel of the pension agency who is now Mr. Rennert's lawyer on pension law matters, said such an outcome would be "an abuse of the rules."

No matter how big and valuable Mr. Rennert's house is, Mr. Ford said, the agency should instead be setting its sights on a group of Wall Street firms that he said were really the ones trying to dump the pension fund.

"They are the ones driving this," said Mr. Ford, now a partner at the Groom Law Group in Washington. Mr. Rennert "has never proposed to abandon the pension plan or not meet its obligations."

"He has made very responsible proposals," Mr. Ford said. "I think he ought to get credit for that."

The steelworkers caught up in these maneuverings are the roughly 2,000 employees and retirees of WCI Steel, a maker of custom steel products in Warren, Ohio. Mr. Rennert's closely held company, the Renco Group, acquired WCI Steel out of bankruptcy in 1988, and he became WCI's chairman. After a strike in 1995, he agreed to create a new pension plan for the workers, whose old plan had collapsed in the previous bankruptcy.

Buying WCI was in keeping with Mr. Rennert's general business strategy of acquiring gritty companies, often in bankruptcy sales, in basic, cyclical industries like mining and metals. Over the years he has amassed holdings that include lead smelters, coal mines, magnesium producers, vehicle assembly lines and other operations as far away as Peru.

The most successful of Mr. Rennert's acquisitions was probably A. M. General, which makes the Humvee armored troop carrier and its civilian counterpart, the original Hummer, which is sold through General Motors. Mr. Rennert bought the company out of bankruptcy in 1992 for $133 million, and sold 70 percent of it to the financier Ronald O. Perelman in 2004 for about $930 million. He still holds the remaining stake.

Elsewhere, Mr. Rennert has used his newly acquired companies to issue junk bonds, capturing a big chunk of the proceeds for his own company, the Renco Group. In 1996, for example, WCI Steel sold $300 million worth of notes, which would come due in 2004, and passed $108 million of the proceeds to the Renco Group as a dividend.

Two years later, Mr. Rennert created a holding company over WCI, Renco Steel Holdings, which did much the same thing, issuing $120 million worth of notes that would come due in 2005. "Substantially all" of that money went to the Renco Group as well, according to bankruptcy court documents.

Layering big debts onto a cyclical company like WCI Steel is risky, because the interest and principal will come due on schedule, no matter what is happening to steel prices or how long an industry downturn might last. The Renco Group said it disclosed these risks to investors, as well as the fact that Mr. Rennert would be taking a big chunk of the money out of WCI Steel.

In the Hamptons, meanwhile, few were paying any attention to Mr. Rennert's financial activities in the Rust Belt. Attention was instead riveted on Fair Field, the 63-acre estate that was under construction in Sagaponack.

A Renco Group company called Blue Turtles bought what had been a potato field there for $11 million in 1997. Word spread that the plans for the site called for 29 bedrooms, 39 bathrooms, a 164-seat theater, two bowling alleys, a restaurant-size kitchen, a 2.5 million-B.T.U. furnace, and a parking garage that could hold 200 cars.

Shocked neighbors, many owners of trophy houses themselves but on a lesser scale, said Fair Field was going too far. They raised money and filed lawsuits, arguing that such a compound � consisting of five structures and encompassing more than 100,000 square feet � could not possibly be what Mr. Rennert said it was: a private, single-family residence.

But the lawsuits failed.

By 2003, Fair Field was approaching completion, and in Warren, the due date on WCI Steel's $300 million of notes was approaching as well. That fall, WCI declared bankruptcy. An actuary studied the company's pension fund and reported that if it were terminated, it would owe the workers $282 million. But it had only $93 million in assets, leaving a $189 million shortfall.

That made the pension plan radioactive to investors who might want to take WCI out of bankruptcy. But as time went on, WCI itself started to look more attractive; steel prices firmed, and several investment groups, including one led by Mr. Rennert, came forward with reorganization proposals.

Mr. Rennert's offer included a pledge to keep the pension plan going at WCI, reviving it by putting in $66 million over four years. Mr. Ford, the lawyer for Mr. Rennert, said that was sufficient for an continuing pension plan, even though it was less than the $189 million shortfall the actuary had identified, because the money would compound over time if the plan were kept intact.

But the federal bankruptcy judge in Akron handling the case, Marilyn Shea-Stonum, rejected the proposal, saying Mr. Rennert had understated the value of the company and could not be counted on to act in "the most economically reasonable manner."

She cited a deposition in which Mr. Rennert said he did not know who sat on the Renco Group's board, where the company kept its records or what its ownership structure was.

But Judge Shea-Stonum also wrote disapprovingly of the other main reorganization proposal, the one submitted by the Wall Street firms that now hold the notes WCI sold in the late 1990's. They want to pump money into the steel company in exchange for ownership, but they do not want the pension fund. Their proposal calls for abandoning it, contending that the Renco Group should pick up the pension costs.

William Daniels, an expert hired by the Wall Street firms, filed a report with the bankruptcy court stating that "the most likely outcome" if the firms' proposal succeeded would be for Mr. Rennert's holdings to be tapped, with the pension agency forcing him to pay "by threatening an involuntary plan termination."

Despite the temporary loss of the pension plan, the steelworkers have rallied behind that proposal, and it has emerged as the front-runner. Monday's court hearing has been scheduled to consider whether it should be confirmed.

If it is, then the nonpension assets of WCI Steel will soon be transferred, leaving the ailing pension plan in the empty shell of the old, bankrupt WCI Steel.

But by moving quickly, the government may be able to force the Renco Group to pick up the tab. Among its assets is Fair Field, where Mr. Rennert took occupancy in 2004. Its inlaid floors, its frescoes and other splendors have an assessed value of $185 million � uncannily close to the $189 million shortfall that the WCI Steel actuary found.

There are also the Renco Group's other businesses and assets, including the cash Mr. Perelman paid for his stake in A. M. General. As a private company, the Renco Group is not required to disclose the extent of its holdings. But it said in a stipulation with the bankruptcy court that its related companies have more than enough "cash, securities and other assets" to cover all the pension benefits owed to the steelworkers in the future.

Which assets the pension agency can go after, it turns out, depends on the legal structure of Mr. Rennert's holdings.

"The 80 percent test is the critical test to look at," said Edward R. Mackiewicz, the pension agency's general counsel from 1985 to 1987. By law, he explained, all business entities that are at least 80 percent owned by a single parent company are part of a "controlled group" and are jointly liable for their bankrupt brethren's pension debt.

So where does that leave Fair Field?

Mr. Mackiewicz said he once handled a pension case in which a farm was found to be part of a controlled group, so he saw no reason why a house, particularly Mr. Rennert's house, would necessarily be spared, provided that its owner of record, Blue Turtles, was at least 80 percent owned by the Renco Group.

Mr. Ford, speaking for the Renco Group, said he had never heard of Blue Turtles before and could not say exactly how the two companies were related.

But Mr. Mackiewicz, now a partner at the law firm of Steptoe & Johnson in Washington, said the pension agency would have its own records of Mr. Rennert's holdings that would guide its actions.

"They are no shrinking violets," he said. "I would not expect that the agency is going to sit on its hands if there are hundreds of millions of dollars of liability" at stake.