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3/20/09

Ira Rennert, Doe Run Peru, Leopards and Spots

Ira Rennert (for it is he)
Seems to me
You don't wanna talk about it
Seems to me
You just turn your pretty head and walk away

The James Gang, 'Walk Away', 1970


We won't really know until the whole story unravels, but right now I'd bet a tenspot that Ira Rennert (above), the owner of Renco which is in turn owner of Doe Run Peru (DRP), has sucked all the money out of his wholly owned Peru operation and left it with no working capital. From here he knows that he can palm off the heavily indebted company to the Peruvian government as the complex is a vital hub in mining activity and the country can't afford to see it close down.

There's little doubt that even though DRP is a private company and under no obligation to disclose its operational results, it has been very profitable over the last four years. For example, Mineweb reports that in 2007 DRP's sales of $1.45Bn outstripped payments to suppliers ($1Bn) very easily. So at first light it seems strange that all of a sudden there's no money left in the coffers after just six months of low spot metals prices and slack demand. It's not just this corner of cyberspace that find this strange, either. Luis Castillo, Sec Gen of Peru's Mining Federation today said that it was suspicious that "the company doesn’t have any working capital despite making money over the past four years.”

But then if you look back at Ira Rennert's past business history, you see that he has a clear pattern that could even be called a modus operandi. This BusinessWeek article dated 2003 is particularly enlightening and here's an extract (the whole article is fully recommended):
  • Two of his companies--a Kentucky coal company and a Utah magnesium producer--have filed for Chapter 11 bankruptcy protection in the past two years. Two others, a steelmaker and a lead producer, both reported big losses in their most recent filings. "Rennert has a track record of dramatically leveraging up companies with debt," says Thomas A. Watters, an analyst at Standard & Poor's. "They're really financially distressed."
  • The $1.5 billion in bonds his companies issued from 1992 to 1998 have now lost about $700 million, or almost half their value, according to a rough tally by BusinessWeek of his companies' 10 bond issues. For example, the steel outfit's bonds are trading for as little as 26 cents on the dollar, while the lead company bonds have fallen to around 20 cents. A Rennert spokesman disputes the figure, calling the calculation "overly simplistic and misleading," but didn't offer another one
  • Some bondholders are gunning for Rennert. He became one of Corporate America's highest-paid chief executives in the '90s by taking a total of about $500 million in dividends and management fees from his companies, according to a 2001 report from Barclays Capital Inc. and Securities & Exchange Commission filings. Now the bondholders are trying to get some of that back: On Jan. 16, AIG Global Investment Corp., Carlyle High Yield Partners, and hedge fund Citadel Equity Fund asked a Manhattan bankruptcy court to appoint a trustee to decide whether the transfer of dividends, management fees, and other funds from Magnesium Corp. of America to Rennert was legal. "We believe the transfers made it impossible for the company to pay its reasonably anticipated debts and may have rendered it insolvent," according to their lawyer, Gerald K. Smith, of Phoenix-based Lewis & Roca LLP.
  • Despite the carnage, Rennert has done very well for himself. He owns a plush duplex apartment furnished with antiques and Impressionist paintings on Manhattan's Park Avenue near his Rockefeller Center headquarters. He has a palatial home in Israel and a Gulfstream 5 jet. And he's building a mansion, allegedly complete with bowling alleys and a huge garage, on 64.8 acres in tony Southampton, N.Y., for an estimated $100 million. Still incomplete after five years, the 100,000-square-foot complex angered neighbors and inspired James Brady's novel, The House that Ate the Hamptons.
  • This isn't the first time that Rennert's companies have run low on cash. BusinessWeek has learned that in 1962, when Rennert was a young securities broker running his own firm, I.L. Rennert & Co., in a Beaver Street office in Lower Manhattan, he was censured by the NASD for operating without enough capital. The NASD treats violations of federal rules requiring brokerages to be capitalized adequately as one of the most serious securities offenses because a lack of capital could leave clients in the lurch if a firm were to run out of money. Then, in 1963, the NASD caught Rennert with insufficient capital again, but it didn't give him another chance: It revoked his license on Nov. 29, 1964, according to securities regulators' documents, in effect banning him from the securities industry.
  • Today, nearly 40 years since he was ousted from the industry, Rennert denies he was punished by the NASD at all. Through a spokesman, he says he shut his firm voluntarily and the NASD revoked his license as a routine administrative matter because he was no longer in business. "Due to market conditions, the firm found itself in violation of the net-capital rule," says spokesman Jon Goldberg. Rennert "raised capital and put it into the firm to bring it into compliance. Again the firm fell below the net-capital requirements, and he voluntarily shut the firm down." But former NASD lawyer Bill T. Singer, a partner at New York-based law firm Gusrae, Kaplan & Bruno PLLC, points out that "you don't revoke your license, you surrender it; there is no voluntary revocation." NASD rules specify that anyone whose license is revoked is not allowed to associate with any NASD firm "in any capacity."
Or in other words, this wouldn't be the first time in a long career that Ira takes the money and runs, leaving other unfortunates to pick up his pieces.

According to reports, DRP owes its suppliers around $100m at the present time. This goes a long way to explaining why a deal led by Peru's Banco de Credito to refinance to the tune of $75m fell through last week and the government said that it would step in to bail out the company. However the news of plant closedown today demostrates that the García government hasn't yet stepped up to the plate. It also suggests that Ira Rennert via his Renco controlling company is willing to let DRP close rather than inject new capital. Thus comes the classic investor's question....

"Where has all the money gone?"

......as only a company used as a cash cow by its controlling company in the year-over-year good times and deliberately vacuumed clean of hard cash and left to wither and die in just months when the markets turned against its sector could run out of money so quickly. No?

Part of the answer may be the reported $200m that Ira Rennert had invested with a certain Bernie Madoff (a guy with a profile these days). But then again, with Rennert's individual net worth at U$6Bn acording to Forbes (update, Forbes March '09 has him at 'just' $4bn), his $185m mansion in The Hamptons and his past history of covering his tush first and watching others carry the can, it's unlikely that the guy is heading for his own personal chapter 11. More likely is that Peru will be forced to pick up the pieces and keep DRP in business, as the country has far more to lose by creating a production bottleneck than anyone else. And Ira knows it.

Update: Know more about Doe Run Peru from enviro-campaigners point of view at this 10 minute youtube. Features a couple of good interviews.