Wall Street West—Investment Banker Hitting Milestone in PG & E; Filing

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Though virtually unreported, the vast Pacific Gas & Electric bankruptcy is passing a milestone, said Jonathan Rosenthal, partner with Santa Monica-based Saybrook Capital LLC. Rosenthal is the investment banker for the official committee of unsecured creditors in the utility meltdown, who are owed $10 billion and counting.

“PG & E; has come forward with a plan of reorganization, and the creditor committee has supported that plan,” said Rosenthal.

Last week the utility was working fast to finalize a “disclosure statement,” a process and document Rosenthal and others are vetting closely. The statement will be circulated to the creditors, before the group takes a vote on whether to approve the whole bankruptcy plan for PG & E.;

The PG & E; plan, as proposed, pays back creditors 100 cents on the dollar, plus interest. “I think we have a good plan,” he said, adding that he expects creditors will like what they see,” said Rosenthal.

Some investment bankers eschew working on such politically volatile bankruptcies, such as the Orange County blow-up, or the PG & E; case, given that so many public agenices, including the state PUC, are involved. Investment bankers tend to get the bulk of their compensation at the conclusion of a deal, sometimes called a “success fee.” But in complex, political deals, the finish line can get pushed back, and all the while the success fee is subject to approval by a bankruptcy judge who knows that ratepayers and taxpayers might be watching. The result can be long hours of work, but the same success fee, relatively speaking.

Rosenthal snorted at suggestions that the PG & E; deal is a loser. He noted that Saybrook Capital receives a monthly retainer, and that any banking work is risky. “You can work on a merger deal, and have it die, as many did on Sept. 11,” he said. “In bankruptcy court, there is actually more predictablity. There is an established playing field. Based on precedent, you have reasonable expectations of what the outcome, and fees, will be.”

True, a judge can cut the success fee, and it will yet be perhaps two years before Rosenthal gets the success fee on the PG & E; case. But Rosenthal said, “There is always risk in success fees. That’s the nature of the business.”


Revealing Rise

The yin and yang of misfortune and bounty often interplay on Wall Street. That is seen in the skyrocketing stock of Hawthorne-based OSI Systems Inc. that draws half its $100 million in annual revenues from security-related products.

Until Sept. 11, the small-cap OSI Systems had been sagging, from $8 a share a year ago to under $4 the day of the World Trade Center bombing. But since then, the FAA has gotten serious about ordering new equipment to scan luggage and people boarding commercial passenger jets and that plays to OSI’s strengths.

“The FAA has ordered five of our new, next generation X-ray body scanners, named the Secure 1000,” said Sanjay Sabnani, an OSI spokesman. “They can see right through your clothing, and pick up ceramic knives, or plastic explosives.”

The devices retail for $120,000 apiece, said Sabnani, and are being used by U.S. Customs Service at some locations.

Result? OSI Systems stock was trading last week for more than $16.

The company also has landed a contract from the government of Malaysia to provide scanning equipment that can peer into 40-foot-long cargo containers, and check for weapons, bombs, or drugs.

In short, OSI makes the kind of equipment that likely will be used throughout the world, wherever there is a threat of terrorism or drug smuggling.

Interestingly, the chairman and chief executive of OSI Systems is Deepak Chopra not the New Age leader, but a fellow Indian-American entrepreneur. The pair met recently at a Indian-American business forum in Cerritos and embraced, each recounting episodes where one had been confused with the other.

Said Sabnani, “Well, that Deepak Chopra tries to help your soul. Our Deepak Chopra tries to save your body. I think between the two of them, they are pretty effective.”


No Sustained Rally?

Yes, the stock market is off the bottom, but it’s still acting a bit sickly, said David Ryan, founder and president of Ryan Capital Management LLC in Santa Monica, which manages money for about 90 high-net-worth individuals.


The problem?

“There is no leadership in this rally. One of the key ingredients to a real new bull market is that you see new leadership, new issues surge upwards that hadn’t before,” said Ryan.

He cited San Jose-based Cisco Systems Inc., the networking giant that rose sharply even during the 1991 Persian Gulf War. “Right when the market hit its low, Cisco popped and hit a new high. People never had heard of the stock,” said Ryan.

But today, no key sectors or stocks are emerging, said Ryan. True, the market has recovered from recent lows, but those were depths plumbed in the wake of the terrorist attacks, which probably created an “oversold’ market.

So what to do in this market? Ryan suggests cash is not such a bad place to be.

“A small return is better than a loss,’ he reasoned.

Also, investors should develop “sell disciplines,” so they get out when the market sours. “I have heard too many stories about the guy who started with $500,000 in the 1990s, went to $2 million, and now is back to $200,000,” Ryan said.

One sensible sell strategy is to unload any stock that sinks below a 50-day moving average, said Ryan.

Steadier investors might want to use a 150-day moving average, but the idea is the same force yourself to sell at some point. The often ballyhooed buy-and-hold strategy may not be effective in the current choppy market, and there is no telling when this market will assert itself on a sustained basis on the bullish side, said Ryan.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].

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