Twenty months after financier Michael Klein died in a high-profile plane crash, his Santa Barbara-based hedge fund, Pacificor, is still working through the deals it struck before a private Cesna 172 he chartered flew into a mountain in Panama.
Pacificor is still trying to repair its investment in troubled automobile parts maker Dura Automotive Systems, which it bought out of a Chapter 11 bankruptcy last year, just as demand for new cars crumbled. Then Pacificor’s bet on the latest installment of the Terminator sci-fi movie franchise landed it in court with the makers of “Terminator: Salvation.”
But Pacificor CEO Andy Mitchell, who took over after Klein’s death, says the fund’s basic strategy of investing in high-yield, distressed credit remains unchanged. Mitchell says he sees chances to play in publicly traded debt deals that weren’t around before last year’s financial panic.
“In 2007 the public markets were extremely rich. It was hard to find opportunities for a good value,” Mitchell said. He said the firm saw opportunities in beaten down debt of companies that issued bonds traded on the public markets.
Klein, Pacificor’s founder and investment architect, was on vacation in Panama when he died Dec. 23, 2007 in the crash along with his daughter and pilot. A 12-year-old friend of the daughter survived, and the accident spurred a wrongful death and child endangerment civil lawsuit, still in trial at press time, against Klein’s estate.
The past two years have hit most hedge funds hard, and Pacificor is no exception. Mitchell said the firm’s assets under management stood at $267 million at the end of July, down from the $325 million it told the SEC it managed in 2005.
“Our performance has not met expectations this year. We’ve had a material impact from [‘Terminator: Salvation’] and from Dura Automotive,” Mitchell said in an interview. “Dura has been running on fairly tight liquidity, a function of when and how it exited bankruptcy.”
Pacificor owns a controlling block of Dura, an automobile parts supplier that filed for Chapter 11 in October 2006. In 2007, Pacificor filed a plan to wipe out common stockholders and take Dura private by backstopping a $160 million equity raise. The plan encountered strong criticism from shareholders, and a late 2007 credit crunch killed it. But by mid-2008, Pacificor succeeded in taking control, wiping out common stockholders but keeping the company public by putting $40 million in with other firms who put up a total of $125 million to take Dura out of Chapter 11.
Mitchell said he sees light at the end of the tunnel for Pacificor’s Dura investment as the government’s “Cash for Clunkers” program has brought automobile demand back from the dead.
“Keep in mind that when the industry went really low last fall, the build rate was way below the buy rate … because the [automakers] were trying to get rid of inventory,” Mitchell said. “The industry has been seeing an uptick on the supplier base as the build rate has come back to match the buy rate.”
Outside of its Dura headaches, Pacificor has been tangling with the Derek Anderson and Victor Kubicek, the owners of the Terminator franchise, and their companies, Halcyon Holdings and Dominion Holdings.
All sides agree that Pacificor financed the $30 million acquisition of the Terminator franchise by Anderson and Kubicek in 2007 and then lent them $9 million more to keep their effort going. But after missing a payment to Pacificor in early August and watching Pacificor put a hold on their cash flow, Anderson and Kubicek filed a lawsuit Aug. 17 alleging that hedge fund slapped an illegal lien on one of their companies and choked their ability to pay their debts through Dominion.
In their lawsuit, Anderson and Kubicek allege their agreements with Pacificor were between Halcyon and the hedge fund and didn’t involve Dominion, so Pacificor had no right to put a lien on Dominion. They allege Pacificor’s move was designed to stop them from paying back their debts and was a “desperate and deliberate attempt to seize ownership and control” of the Terminator franchise.
But Mitchell said his firm is only protecting its investment. He said the producers have repaid about $15 million of what they owe. “[Y]ou should see Pacificor as a savvy investor that is taking aggressive action to protect its rights and maximize its gain,” Mitchell said via e-mail. “It should not be surprising that we expect to come out on top when the dust clears.”
Halcyon’s attorneys declined to comment for this story, pointing to their court filings to tell their side of the dispute.
In a separate lawsuit filed the same day, Anderson and Kubicek allege that former Pacificor employee Kurt Benjamin hid the fact that he worked for Pacificor from them while he arranged $39 million in financing from the hedge fund and secretly kept a cut for himself. Moreover, the producers allege that Benjamin funneled his payment from them through a friend to hide it from Pacificor and the hedge fund’s investors.
In an interview, Benjamin, who no longer works for Pacificor, told the Business Times that he believes the producers’ claims have no merit and that he intends to fight them vigorously in court.
“The claims are completely false,” Benjamin said in an interview. “These guys knew I worked for Pacificor. That will be shown very, very clearly.”
The exact nature of Benjamin’s employment with Pacificor and why he left the hedge fund aren’t clear. Benjamin declined to comment about his departure except to say that it was amicable, and Mitchell would only confirm that Benjamin is no longer with the firm. In the past, Benjamin listed his title at Pacificor as vice president of business development.
For their part, Anderson and Kubicek have a short and troubled history in Hollywood. “Salvation” is their only film, but they have already tangled in lawsuits with investors, a “Salvation” producer and Metro-Goldwyn-Mayer, according to reports in the Los Angeles Times.
The same day Anderson and Kubicek filed their lawsuits, their companies filed for Chapter 11. Halcyon listed between $50 million and $100 million in debts and assets.
In addition to Dura and the Terminator owners, Pacificor also tussled with Quality Home Loans, an Agoura Hills-based hard-money lender that filed for bankruptcy in 2007. Pacificor had moved to buy the company, but the transaction allegedly never closed and Quality filed for bankruptcy shortly afterward.
Pacificor claimed it was owed $42 million in that case, and Mitchell said Pacificor has been paid back in cash all but $12 million of that and continues to go after the rest.