Investor emerges after 20 years with bid for 10 percent of Greek debt
By Jesse Westbrook
Millionaire investor Paul Kazarian is ready to be noticed again.
Days after his Japonica Partners & Co. announced on June 3 an offer to buy as much as 2.9 billion euros of Greek government debt, about 10 percent of all outstanding bonds, Kazarian sat on an bike in the gym at the Grande Bretagne in Athens, a hotel favored by hedge-fund managers and overseas investors scouring Europe’s worst-performing economy for distressed assets.
Kazarian, 57, wore a t-shirt plastered with the Japonica logo and slogans including “delta force” and “catalyst to create extraordinary value,” according to people who saw him. He put an inch-wide spiral bound presentation covered with the same logo on the bike next to his, placed beside the gym entrance in full view of anyone walking in.
“Without saying anything about the substance of buying Greek bonds, such as whether it’s a good investment, you have to admit it made everyone look up and take notice,” said Michael Lederman, a former Japonica partner who’s now a managing partner of investment bank Spectrum Capital Group LLC in Bristol, Rhode Island. “That kind of move is classic Kazarian.”
The Athens visit, Japonica’s initial June press release and another on July 1 in which the firm said it wanted to buy Greek debt with a face value of as much as 4 billion euros are part of Kazarian’s return to the public eye after two decades outside the spotlight. The former Goldman Sachs Group Inc. banker last garnered this much attention in the late 1980s and early 1990s for deals including an attempted buyout of Borden Inc., a failed $1.6 billion takeover of railroad company CNW Corp. and a three- year stint running Sunbeam-Oster Co., an appliance maker he rescued from bankruptcy.
What hedge-fund managers, investment bankers and analysts can’t figure out is whether Providence, Rhode Island-based Japonica has the money to buy the Greek bonds and if its offer is serious. The firm is offering less than the price the bonds trade at, has rebuffed some bondholders’ attempts to negotiate debt sales and didn’t respond to at least one firm’s efforts to find out more about the offer, said fund managers and bankers interviewed by Bloomberg News.
“It’s structured in a way that doesn’t have a lot of success of working in any serious size because it’s below market,” said Hans Humes, whose New York-based hedge-fund firm, Greylock Capital Management LLC, owns Greek government bonds. “This isn’t put together in a way to get a deal done.”
Kazarian declined an interview request through a spokesman. In its initial statement, Japonica said it had a “long-term perspective on Greece” and that the firm wanted to align its investment interests with those of the country.
“Paul has been working for almost the past two years throughout Europe,” Finance Director Christopher Magarian, who is running Japonica’s Greek bond offer, said in an interview. “We’re hold-to-maturity with no leverage investors.”
Japonica, named after the street Kazarian grew up on in an Armenian community in Pawtucket, Rhode Island, initially said it would pay a minimum of 45 percent of the bond’s principal amount in a tender offer that expired July 1. The day of the deadline, Japonica announced it would cut the minimum price to 40 percent of face value, while extending the tender a month. If Japonica bought all the bonds it says it wants at the minimum price, the firm would spend about 1.6 billion euros.
Lederman, 60, who was general counsel of Sunbeam when Kazarian ran it from 1990 to 1993, said the Greek bond offer came as a shock, because his former partner has “been so quiet and not really risking anything for so long.” Lederman and Kazarian’s business relationship ended in the 1990s amid a legal dispute between the two men over the control of Japonica.
Humes’s Greylock is among funds that took notice of the offer and have been left scratching their heads. After Japonica’s first announcement, Greylock contacted the firm to determine if the proposal was legitimate, Humes said.
A Japonica official said the firm couldn’t negotiate with Greylock or send it documents with details because Greylock is U.S. based, a violation of the tender offer, Humes said. Greylock responded that geography shouldn’t matter because, like many hedge funds, the firm is domiciled in the British Virgin Islands. When Japonica still wouldn’t discuss it, a Greylock employee based in Singapore also contacted the firm to try get around the jurisdictional hurdle, a request that drew no response, Humes said.
Japonica is in contact with more than 80 percent of the “large” holders of Greek government bonds eligible to participate in the tender, Magarian, 38, said. The firm has avoided the “rent-seeking” and “front-running” brokers who are seeking fees and have an interest in driving up bond prices, he added. Japonica has been careful not to reveal information that could undermine its proposal, Magarian said.
“Regarding discussing non-public information, we will not be baited,” he said. He declined to discuss whether any bondholders have tendered their securities.
Japonica’s bid hasn’t moved the price of Greek bonds, suggesting investors don’t consider the bid credible, Humes said. Dimitris Drakopoulos, an economist at Nomura International Plc in London, said the offer hasn’t had “any market impact.”
In the three weeks after Japonica announced the offer, Greece’s 10-year bonds expiring in 2023 fell 15 percent to close at a low of 51.3 cents on the euro on June 24, hurt by concerns that the coalition government might fall apart and uncertainty over whether the indebted nation would secure its latest round of rescue funds. Greece’s 30-year bonds declined even more during the period, plunging 21 percent to close at 36.6 cents on the euro, far below Japonica’s stated minimum offer, data compiled by Bloomberg show.
Japonica reacted to the sell-off by cutting its minimum offer by 11 percent. That moved Japonica below the strip, the average price investors are willing to pay for outstanding Greek government debt. The strip is currently priced at 44 percent of the bonds’ principal amount, according to Athens-based Piraeus Bank SA.
“The 40 price is fair,” Magarian said. “Some analysts now say the fair price for large institutional blocks could be as low as 25 in the near future.”
Buying Greek bonds on a bet that European officials would continue to flinch by rescuing the nation from financial collapse proved a winning trade last year for hedge funds including Greylock, Daniel Loeb’s Third Point LLC and David Tepper’s Appaloosa Management LP, according to investors.
Greek 10-year bonds sold for as little as 13 percent of their face value in May 2012, two months after a restructuring cut by half the 206 billion euros of debt the nation owed to private investors. By the end of last year, the bonds traded at 48 percent of their principal amount, a surge triggered by Greece meeting its bond payments, a pledge by European Central Bank President Mario Draghi to protect the euro currency bloc and the December buyback.
Kazarian’s Japonica is now trying to get in on the trade as Morgan Stanley says the biggest gains have already happened.
The “fair value” for the strip is about 48 percent of face value and dips to 46 percent if bondholders are subject to a second restructuring, analysts Paolo Batori and Robert Tancsa wrote in a July 9 report. It could fall to 25 percent if official-sector holders, such as the International Monetary Fund, as well as private investors, are forced to take further losses on Greek bonds, the analysts said. The bank no longer advises clients to buy the debt on concern the governing coalition may break up and rising bond yields in Portugal may spread to other bond markets in Europe.
Greece, now in its sixth year of recession, got its latest reprieve from bankruptcy July 8 when European governments agreed to release 3 billion euros of aid, as long as the country delivers on economic reforms and spending cuts.
Japonica has been tracking Greece for about 15 months and has 100 people, including outside consultants, working on the tender offer, Magarian said. The firm began contacting banks at least a year ago to ask questions about the Greek bond market, said a trader at one lender who asked not to be identified because the conversation was private.
Kazarian’s son, Charles, spent his break from college last summer as an intern at Japonica, where his tasks included evaluating financial data on European Union members, monitoring news on the region’s debt crisis and preparing a report that assesses changes initiated by the Greek government from 1995 to 2000, according to a LinkedIn profile matching his name.
The size of the offer prompted Lederman to suggest that Kazarian has backing from other investors.
Japonica never discusses its investors or where financing comes from, Magarian said. Japonica isn’t registered as an investment adviser with the Securities and Exchange Commission, a requirement for most U.S. hedge funds and private-equity firms under the 2010 Dodd-Frank financial regulation law. The firm isn’t required to register, because it doesn’t charge fees or provide investment advice, Magarian said.
In the past, Kazarian’s backers included some of the biggest names on Wall Street. Hedge-fund legend Michael Steinhardt and mutual-fund titan Michael Price provided financing for Japonica’s 1989 purchase of Sunbeam.
When Kazarian was competing with buyout firm KKR & Co. for Borden, the producer of dairy products and brands such as Cracker Jacks and Elmer’s glue, he met with billionaire investor George Soros, according to two people with knowledge of the discussions, who asked not to be identified because the negotiations weren’t public. While Soros considered providing Kazarian with financing, they said, the two never struck a deal and KKR bought Borden in 1995 for $2 billion.
Soros declined to comment through a spokesman.
Kazarian’s stint at Sunbeam was one of his greatest business successes. It also damaged his reputation.
As chief executive officer, he turned the company around to a $123 million profit in 1992 from a $95 million loss in 1990. Kazarian was then ousted by the board in January 1993, with the Wall Street Journal reporting that his termination was triggered by complaints from employees about abusive behavior. The alleged infractions, made anonymously, included public hazings and physical intimidation. The National Enquirer followed with an article that labeled Kazarian “The Worst Boss in America.”
Kazarian countered that the allegations were part of a smear campaign used to remove him and deprive the executive of investment profits, according to a lawsuit he filed against companies controlled by Steinhardt and Price. The fund managers’ firms also sued Kazarian, saying his conduct triggered the ouster, according to a 1993 Bloomberg News article. Legal disputes between Kazarian and the money managers were later resolved, with Kazarian walking away with about $160 million for his Sunbeam stake, the Boston Globe reported at the time.
“I only have positive memories of Paul Kazarian, who, I believe, is an unusually capable individual,” Steinhardt said. Price didn’t return phone calls or e-mails seeking comment.
In recent years, Kazarian’s profile has been quieter. The deals touted on Japonica’s website include Sunbeam, CNW and Borden, all of which happened almost two decades ago. Kazarian also heads a charitable foundation that had assets valued at $160 million as of Nov. 30, 2011, according to a filing with the U.S. Internal Revenue Service. The organization focuses on economic-development and education initiatives, particularly in support of Armenian culture, the filing said.
Japonica has made investments that didn’t require public disclosure during the past 15 years and expects to do the same once it completes the auction for Greek government bonds, Magarian said. Kazarian spends about 90 percent of his time on Japonica and the rest on philanthropy, he said.
While Kazarian’s low profile has raised questions about what he’s up to in Greece, Japonica has overcome doubts before. When he and Lederman first targeted Sunbeam’s predecessor, Allegheny International Inc., in 1989 the pair weren’t taken seriously, because they were young and no one believed they could raise enough money to buy the company.
“Having done things with him that seemed impossible at the time, it’s hard to count him out,” Lederman said.