He makes money on bankrupt, dog-eared companies
You might call him the Evel Knievel of the investment world.Skip to next paragraph
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Max Heine, white-haired co-founder and chairman of Mutual Shares Corporation, may not look like a daredevil, but few Wall Street investment advisers have the courage to invest where Mr. Heine puts a substantial portion of his fund's
50 million in assets.
Mutual Shares invests in bankrupt companies, firms going through reorganization for a variety of reasons, and an assortment of low-price, dog-eared firms. Among them: W. T. Grant; Food Fair (now reorganized as Pantry Pride); Vista Resources and Amdisco (essentially assetless shells); and Duplan, a bankrupt textile company now being reorganized as Panex.
In addition Mutual Shares holds bonds in a host of railroads that hit the skids and were taken over by the government in the mid-l970s to be incorporated in that strange hodgepodge of railroads that twine through the Eastern United States - Conrail.
Mr. Heine got his start on Wall Street in the l930s, after escaping from Nazi Germany in l934. He went to work back then, he says, for a private individual investor who ran a few brokerage houses.
''He was a great boss,'' he reminisces, ''he let me run wild.'' Running wild in the early '40s meant investing in the bonds of a group of then-bankrupt railroads like the Missouri Pacific Railroad and the Milwaukee Road. ''We had a series of bankruptcies in the l930s,'' says Mr. Heine. ''Practically every one of the Western roads except the Southern Pacific, Union Pacific, and Santa Fe went bankrupt along with a number of Eastern Roads. In fact, the Erie, which went bankrupt in the 1970s, had been bankrupt in the '30s.''
History repeated itself in the mid-l970s, as the government took over the faltering railroads in the East. This time, Mr. Heine used the small fund he had co-founded in l949 to buy up bonds in the Reading, Penn Central, Erie Lackawanna , Lehigh Valley, and the Boston & Maine Railroads. ''The situation in the l970s was really unique,'' says Mr. Heine, ''About half a dozen very large railroads went bankrupt.'' But many still had assets, particularly property.
''At one time in the mid-l970s, the Penn Central went bankrupt, but had a billion in cash lying around,'' he notes. ''I don't remember how many securities were outstanding, but their market value was nothing. Perhaps in early l976 we found out that the reorganization plan provided for l0 percent of the claims to be paid in cash; 30 percent in bonds; 30 percent in preferred stock and 30 percent in stock.
''The bonds were selling at between
0 and $25.So we knew that with the cash settlement we would get most of our investment back. It seemed to be a lead-pipe cinch.''
In fact, the settlement was even better. Mutual Shares got back the full par or face value of the bonds plus eight years of interest. Similar settlements were reached with the Boston & Maine, the Lehigh Valley, and the Erie Lackawanna.Only the Reading bonds disappointed Heine, returning a mere 80 percent of par.
Such ''lead-pipe cinches'' are what has made Mr. Heine's fund one of the winners of the last decade. Had an investor put $10,000 into the fund in 1970, he would have an investment worth $59,310 at the end of 1980, including dividends and capital reinvestment.