Thinking Small Is Firm’s Leverage as Takeovers Sink : Buyouts: Heller Financial is enjoying good health at a time when many investment firms are slashing their merger and acquisition staffs.


While multibillion-dollar leveraged buyouts and other massive takeovers made headlines in the 1980s and, often enough, huge profits for those who engineered the deals, Heller Financial Inc. stuck with smaller deals of under $200 million.

Today the big deals have basically vanished, mainly because the junk-bond market--a main source of financial fuel for takeovers--is largely gone and because banks are wary about making more loans for buyouts now that several existing LBOs have soured. But Heller is still earning profits by funding leveraged buyouts for the little guy.

“They’re still aggressive, which is more than you can say for a lot of lenders in this new environment,” said Lloyd Greif, vice chairman and head of investment banking at Sutro & Co. in Los Angeles, which advises and arranges funding for LBOs and sometimes uses Heller as a funding source.

Heller, with total assets of $7.3 billion, is based in Chicago but operates its western U.S. division from Glendale. Heller loans an average of $35 million per deal to companies with annual sales of $200 million or less, what bankers call the “middle market.” Borrowers use the cash for various reasons, namely for leveraged buyouts--purchases made with mostly borrowed funds. They also use the cash for refinancings and for expansion.


Besides funding leveraged deals, Heller is among the nation’s leading factors--firms that buy receivables from retailers, apparel makers and others, thus giving them a source of quick cash. (Receivables are cash owed those companies by customers.) And it provides real estate and other financial services.

“In the middle market, the needs are still there for financing,” said George N. Skegas, who heads Heller’s leveraged funding group in Glendale. “You have companies divesting divisions. You still have aging ownership of companies, post-World War II ownership, that have estate problems and need to sell their companies.”

Six years ago it was Heller that had lots of problems. But now the company is enjoying some of its strongest quarters at a time when many commercial banks and Wall Street investment banks are slashing their work forces, particularly their merger-and-acquisition staffs. Heller earned a record $101.6 million in 1989 on revenue of $824.5 million, nearly twice its profit of $53.5 million two years earlier.

Not that Heller is mistake-free. Its problem loans creeped up during 1990, and the company’s profit slipped 5%, to $63.4 million, through the first nine months of last year. Heller, which employs 1,400 people nationwide, also has laid off a few dozen workers over the past year to keep costs down, although it does not have a hiring freeze.


In any case, Heller’s performance means its Japanese parent company, Fuji Bank Ltd., is now earning a return on its billion-dollar investment in Heller. Fuji, the world’s third-biggest bank with nearly $400 billion in assets, bought Heller in 1984 for $425 million, and has since plowed an additional $700 million into the company.

Heller’s willingness to stick with the dwindling LBO market is not necessarily a surprise. Fuji, in Japanese fashion, has taken a long-term outlook toward Heller since it bought the company.

Heller, then named Walter E. Heller International, was saddled with bad loans and losing millions of dollars when Fuji bought it. Besides its cash infusions, Fuji has closed most of Heller’s 68 offices, replaced its management and redirected Heller to focus on fewer and bigger loans.

Harold B. Stadler, executive vice president in charge of Heller’s Glendale office, said his office handles only six to 10 deals a year--Heller nationwide did 40 last year--and Stadler’s staff rejected 150 other proposals in 1990. Quality over quantity, he said. Indeed, he contends that the willingness of many savings and loan associations, banks and other commercial finance companies to fund most LBOs in the go-go 1980s--without making sure the borrowers could repay the debt--is why many of those firms are no longer in the market.

“They weren’t spending enough time understanding what the risk was,” Stadler said. “We are one of the few still in the marketplace because we were disciplined. During up times in the marketplace, when everybody is feeding at the trough, people don’t have any discipline.”

Last summer, Heller loaned $56 million to help a group buy McDonnell Douglas Corp.'s computer maintenance division for $65 million total. The division, now called Novadyne Computer Systems, is based in Santa Ana.

Other local Heller clients have included Thompson Lacquer, a Los Angeles auto paint distributor; 20th Century Plastics, a Los Angeles maker of plastic office supplies; and A.J. Industries, a fuel tank producer in El Monte.

Those deals weren’t glamorous, but they appealed to Heller because the companies are in markets where competition is relatively slim, boosting their ability not only to repay Heller’s loans but to actually expand.


“We like to participate in deals that grow companies,” said Stadler. “We’re not interested in layering them with debt and then liquidating them” when they can’t repay, he said.

Heller mainly competes against local banks, notably Wells Fargo, and works at finding customers that the banks either missed or rejected without thoroughly examining their prospects, Stadler said. He claimed many banks often focus too much on a client’s credit history without spending enough time evaluating their future potential. (Wells Fargo declined comment on its middle-market lending.)

About 2% of the $700 million in loans outstanding under Stadler’s direction aren’t being repaid because some of his 25 clients are in trouble. But the rate is down from 3.5% a year earlier, Stadler said, and it’s a tad better than the average California bank, whose non-performing loans equaled 2.5% of the bank’s total loans as of June 30, 1990, according to the Austin, Texas, research firm Sheshunoff & Co.

But overall, Heller’s problem loans have been creeping up. As of Sept. 30, its non-performing loans equaled $587 million, or 8.2% of its total loans outstanding. That’s up from 5.3% at the end of 1989 and reflects problems in both Heller’s leveraged financing deals and its real estate projects.

Still, Stadler said his return on average assets (ROA)--his office’s pretax profit as a percentage of its average loans, or assets outstanding--is currently about 2.5%, which would translate into $17.5 million in annual pretax earnings for the Glendale operation. Heller’s overall after-tax ROA is closer to 1.5%, but that would still be considered an excellent showing for a commercial bank.

Stadler said his relatively high ROA is expected by Fuji Bank. “The good thing about having Fuji behind us is that they’re a terrific parent and we have a tremendous amount of independence,” said Stadler, whom Fuji brought in from Wells Fargo Bank in 1988. (Skegas came from Bankers Trust Co. in 1987.) “The tough part is that their return hurdles are pretty high.”

The best example of the leveraged lending that Heller provides is for the leveraged buyout. In some recent big LBOs, problems arose when the new owners found that not only was the debt not being repaid quickly, they couldn’t meet the payments at all. Defaults rose, and some LBOs have sought bankruptcy court protection. Major banks such as Wells Fargo and Manufacturers Hanover Trust last week reported a rise in troubled loans that they made for large corporate buyouts.

But Heller “never got sucked into that and was content with the middle market,” Sutro’s Greif said. By making fewer and smaller loans, “the good news is you don’t get hurt that badly when a loan goes south,” he said.


But being choosy doesn’t guarantee success, as Heller’s own non-earning loans show. If the collapse of the market for big LBOs teaches anything, Stadler said, it’s that leverage is always dangerous if the borrower suddenly can’t repay its loans for whatever reason. “If I make a silly mistake, we’re all going to be out of business,” he said.