MorningStar Inverviews Bruce Berkowitz on Portfolio Moves: Comments on Pfizer Inc., General Growth Properties, Citigroup, and Winthrop Realty Trust

“What bothers me about the pharmaceutical industry is the use of very low tax rates based on offshore businesses. But that money eventually has to come back to the U.S. It is going to be somehow passed to shareholders where taxes will be taken. So the use of very low tax rates is somewhat bothersome, even though it is GAAP.


And of course, the only other area that always bothers me in almost all industries is the recurring nonrecurring expense. In the pharmaceutical business it seems to be tremendous amounts of recurring nonrecurring expenses, which is the nature of the business.


That is all, those are the parts that bother me, but we are fully aware of them, and the price was right. But with the further collapse of the financials and the health insurers, there became a better proposition.


That is, investing is all about what you give versus what you get. So we are constantly looking at the price of securities versus our expectation of the amount of cash that those securities will generate over the lifetime of the investment. And since a dollar doesn't know how it is made, and we have to put ourselves in the shoes of our shareholders every day, we are going to go for the best possible risk-reward ratio.

“As we study the equity of companies, you just have to study the companies. And we take a look at the entire capital structure of a company, from bank debt to senior secured, senior unsecured, subordinated debt, preferred stock, common stock, and look to understand the returns on each part of the capital structure.


In the past that's led us to the bank debt of bankrupt securities and presently it has led us to the various levels of debt of GGP, General Growth Properties. We own bank debt; we own convertible bonds.”


“Through Chapter 11 in the United States it's all about resuscitation. It's all about giving the company another chance. Chapter 11 allows the debtor, it allows the bankrupt company to decide which contract it can keep, which contract it doesn't have to keep, what it can throw out, what it wants--tremendous flexibility.


And then the process involves having the company get to a stable capital structure in order to get out of bankruptcy and progress in a new life. It's a reincarnation to some extent. It's a giant mulligan.


What happens is there are cram-downs, where bankruptcy, normally the common stock goes to zero and then the preferred, or some junior subordinated debt, may go to zero. And then the more senior debt becomes either new debt or equity or a combination of the two.


That may not be the case in GGP, given the asset values there. That is, there may be some asset value in the equity, I really don't know. But we do believe that the bonds and bank debt are money good, and we built a significant position, which I believe will eventually allow the shareholders of the fund to be at the negotiating table.”

“In the U.S., this was not a bankruptcy, but it's gone through a scrubbing process, very similar to a bankruptcy, by the U.S. Treasury. Citigroup has spent a good amount of time with the U.S. government and many of its financial regulators, going through every liability and asset in the books.


After such a period of time, you normally are able to count the cockroaches. That is, the liabilities have been under a microscope for quite a period of time. There's been huge capital injections by the government. There's been a massive amount of dilution to old shareholders. And you're starting to see some stability, the beginnings.


It's very much what I call now the pig in the python. You have to look at their liabilities. So you have to look at their bad debt, and you have to continue to watch how the company is digesting its bad debt.


At the same time, you have to see the new debt that's coming in, the new loans that they're giving out. It's fascinating. It amazes me, with financial institutions, the extent, the amount of new loans that are being created in relation to the total loan portfolio.


So it's just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans?”


“It's very much what I call now the pig in the python. You have to look at their liabilities. So you have to look at their bad debt, and you have to continue to watch how the company is digesting its bad debt.


At the same time, you have to see the new debt that's coming in, the new loans that they're giving out. It's fascinating. It amazes me, with financial institutions, the extent, the amount of new loans that are being created in relation to the total loan portfolio.


So it's just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans?”

“When I was on the board I got to know the CEO, Michael Ashner, reasonably well. And executive selling, I believe, is the right guy in the right place at the right time to take advantage of distresses in the commercial real estate market. This is exactly what he did last time when he was working in conjunction with Vornado and with the Apollo Group. He did quite well for them and I expect him to do quite well for our shareholders.”