Analyst Wire – Michael Lipsky, Senior Portfolio Manager, MatlinPatterson
January 30, 2012


STEPHANIE RUHLE, BLOOMBERG NEWS: We’re coming off a banner year for distressed debt investing. And we want to know what 2012 will bring. On this morning’s “Best in Business” segment, we have got a biggy.
Michael Lipsy is Senior Portfolio Manager at MatlinPatterson. Now this form is known for investing in bankrupt companies and turning them around.
So Michael, everyone who sits on your seat loves to say macro, macro, macro. But that’s not what you do. What is your 2012 approach?
MICHAEL LIPSKY, SENIOR PORTFOLIO MANAGER, MATLINPATTERSON: I think, look, 2012, you really have to be focused on the left side of the balance sheet, the ability to value assets.
You know, there was a chart that Sara put up at 6:05 this morning that talked about GDP growth in all the European countries – not enough growth for the amount of debt. Take that to the corporate level.
There is just not enough growth for the amount of debt, which is creating a very unique opportunity for experienced distressed investors with a complete business model.
RUHLE: Well, then, what does that mean for you? What are areas you want to avoid this year and where do you want to invest?
LIPSKY: So let’s just take the last couple of months. You had three very large bankruptcies in airline, photographic imaging company, and a global broker- dealer.
Thirty billion of actionable investments that you could argue have nothing to do with economic cycles. One was arguably corporate fraud. One had to do with currencies and commodities.
And basically, there’s an opportunity here to look at disruptive forces in the marketplace that are not just predicate on that kind of thing.
RUHLE: Then break it down. Where do we want to be?
LIPSKY: All right. So if you look at what we like and what we don’t like – what we like are auto parts suppliers and chemicals, particularly in North America, and not because of the economy.
The auto parts supplier – there was a changing industry, non-dynamic (ph). The part suppliers followed the original equipment manufacturers through restructuring, to restructure their balance sheet, restructure their pension and OPEB liabilities.
And now, they’re coming out as very strong companies. We’re also coming off a very low base of about somewhere between 10 and 11 million units versus…
RUHLE: But do you like North America because of that limited European exposure?
LIPSKY: Oh, I don’t think that’s the case at all. I think it’s that we have pent-up CapEx, particularly in autos. The math is the math. A car lasts about 18 years. So we need to scrap about 13 million a year.
RUHLE: Where don’t you want to be?
LIPSKY: We don’t like steel because 70 percent of the industry is unionized labor, which, not the pillory (ph) labor. It’s a very difficult conversation if you’re trying to cut costs, particularly labor costs, your pension and OPEB.
It’s not private-defined benefits. It’s governed by a collective bargaining agreement. So it’s a conversation that needs to be had. Labor is a material constituent, knows negotiations.
We don’t like to be in companies with large pension liabilities. I think Neil Barofsky nailed it on the head when he talked about the unintended consequences of zero interest rate policy.
Pension benefit obligations are discounted back at a discount rate. That discount rate is low. The 10-year’s at a hundred and 90 basis points.
RUHLE: We keep hearing you need to be a trader this year. And this is a trader’s market. But MatlinPatterson – that’s not a trader’s firm.
LIPSKY: Yes, I mean, again, we focus on this complete business model and the ability to look at companies – not just cradle to the grave but cradle to the cradle.
We can operate an asset. That operational expertise is going to be critically important to this cycle for the reasons coming all the way back. There’s too much debt, not enough growth.
You’re not going to grow into these capital structures. So you’re going to need the self-help. How do you that? You have operational expertise to be able to handicap management’s capabilities, to handicap the operations of the company and also calculate the time frame to turn around.
If you think about some of the marquee (ph) bankruptcy cases that distressed investors invested in in ’08, ’09, 2010, they haven’t worked out as quickly as people thought and…
RUHLE: Now, what kind of capital do you need to make these kind of investments? When you talk about typical hedge fund investors…
LIPSKY: Right.
RUHLE: …they want liquidity. That’s not what you’re talking about here.
LIPSKY: Well, again, it’s the full sweep. From the hedge fund side, I want to call it flexible capital. I don’t want (ph) too much about…
RUHLE: Flexible capital…
LIPSKY: Flexible…
RUHLE: …that’s the new term for it (ph).
LIPSKY: Right. Because I don’t want pension (ph) capital – I don’t think time makes something magically better.
But flexible capital, the ability to trade in distressed securities, to be in traffic, so to speak, and then when we see an opportunity where we can get on the game board and change the outcome with operational expertise, that’s a tremendous opportunity for us.
RUHLE: Wow. Mike Lipsky, thank you so much for joining us again. Mike Lipsky…
LIPSKY: Thanks for having me.
RUHLE: …is Senior Portfolio Manager at MatlinPatterson.