Signature Group’s Secret Weapon — Losing $900 Million

San Fernando Valley Business Journal

By JOEL RUSSELL, Staff Reporter

Can a new chief executive reverse the long story of losses at Signature Group Holdings Inc.?

That’s the question shareholders hope will be answered on July 16, when the Sherman Oaks company convenes its annual meeting. The gathering comes on the heels of an aborted proxy battle and executive shake-up that made Craig Bouchard the new top executive.

Signature is the successor company to Fremont General Corp., a publicly traded insurance company that had a history of spectacular flame outs, first in the workers’ compensation industry and later with subprime mortgages.

Now, Bouchard, a Chicago executive who has run large companies both public and private, is trying his hand at the helm.

“My objective is to make this company a Fortune 500 company,” he told the Business Journal. “It has been focused on all kinds of things – but not the shareholders. My theory is that when people invest in a company, it has to do good things for them. That’s the priority.”

Such aspirations may seem farfetched, but Signature is more than a down-on-its luck public company. Real estate magnate and former L.A. Times owner Sam Zell is the company’s largest shareholder, with a 9.3 percent stake valued at $10 million.

And it’s got another big arrow in its quill.

Its disastrous entrees into workers compensation and subprime mortgages have left it with nearly $900 million in net operating losses that can be applied against future profits to shield them from taxes. Bouchard’s idea is to build up the company to critical mass before the NOLs run out. That means acquiring healthy companies that can generate immediate profits, with the transportation, food, water and energy industries as the most likely targets.

“We want consistently profitable, well-managed companies and then we’ll build them with those managers,” he said. “I’m not interested in turnarounds.”

Long history

If Signature rises from the ashes it wouldn’t be the first time. Fremont General was founded in 1963 as an insurance company. In 1976, James McIntyre became chief executive, a position he held until 2004.

During the 1990s, Fremont General became one of the largest sellers of workers compensation coverage. But after the market was deregulated in 1995, it sold insurance so low that it couldn’t cover claims. The state took over the company in 2000 and two years later it divested the workers’ compensation operation. The company avoided bankruptcy by cooperating with state regulators.

The company then moved into subprime mortgage lending. Just six years ago, Fremont General was one of the largest mortgage originators in the U.S. with $7 billion in assets. When the recession hit, the loan portfolio quickly turned toxic. In 2008, McIntyre resigned as chairman and the company declared bankruptcy.

It emerged from Chapter 11 in 2010, changing its name to Signature and adopting a new business model. The plan was to sell its existing mortgage portfolio, spend the money to acquire other companies and use the accumulated losses from its subprime days to shelter any fresh profits from taxes.

According to the company’s latest earnings report, at the end of last year it still had nearly $887 million in net operating losses to offset federal taxes and $980 million to offset California taxes. Also, the company has $51.6 million in cash available to acquire companies, and could raise more by issuing additional shares.

After exiting bankruptcy, the executives charged with finding acquisition targets included former chief executive Craig Noell and former chairman Christopher Colville, who had previously worked together at middle-market investment bank Noell Murphy Capital LLC in Westlake Village. But after several years, the only acquisition the company made was North American Breaker Co. Inc., a distributor of electric circuit-breakers headquartered in Burbank.

Enter Bouchard. The former banker bought almost 1 million shares of Signature and together with his long-time investment partner, Raj Maheshwari of Charlestown Capital Advisors LLC in New York, launched a proxy battle in March to oust the existing leaders and install a new board.

Charlestown has experience in L.A.-based bankruptcies. In 2011, the company formed a joint venture to buy real estate developer Meruelo Maddux out of bankruptcy and install new leadership. The company changed its name to Evoq Properties Inc.

Signature’s proxy statement, issued May 20, looks like a pamphlet from a political campaign, complete with a list of accomplishments, infographics on stock-price gains and a “Fantasy vs. Reality” comparison chart to bolster the former management’s position.

But Bouchard said that the board soon reached a negotiated settlement with the dissident shareholders under which Noell and Colville left and Bouchard became chief executive. He and Maheshwari joined the Signature board together with two current board members and one new one. The company issued a new proxy statement June 6 with the consolidated slate of board candidates.

“This was a compromise to bring fresh life to the company,” Bouchard said.

Zell connection

While the company’s former leaders, stretching back to the Fremont days, were financial experts, Bouchard brings experience managing companies. From 2003 to 2008, he served as president of Esmark Inc., a publicly traded steel manufacturer that was bought by OAO Seversta, Russia’s biggest steelmaker. He later founded Shale-Inland, a distributor of steel pipe, valves and fittings for the oil industry.

Lloyd Greif, chief executive at downtown Los Angeles investment bank Greif & Co., said Bouchard has his work cut out for him.

“They have no business model right now,” Greif said. “Their business model is to be a mini-conglomerate. It’s going to be an interesting company to watch as they develop the next couple of years.”

Greif said the company’s net operating loss carry forwards are best employed by acquiring companies with plenty of free cash flow. But he warned that, at this point in the economic cycle, a lot of private equity funds, merchant banks and strategic buyers are looking to acquire profitable companies, and some of these competitors also have NOLs in their arsenal.

“Signature isn’t the only company plying these waters,” he said.

At this point, Signature has 10 employees at offices in Sherman Oaks and New York. Bouchard lives in Chicago and flies to Los Angeles every other week to check on the company. He said future office locations would be determined by the company or companies Signature acquires.

He’s also sat down with Zell and called him several times for advice. “He’s a great businessman and we have him as the lead investor in a public company,” he said. “How lucky is a CEO to have that?”

Zell did not respond to efforts to reach him for comment. Bouchard noted that shares have gained more than 40 percent since the announcement of the leadership change on June 5. Still, it currently trades in the 90-cent range on the over-the-counter market.

In its most recent quarterly report, filed May 15, the company reported a net loss of $2.8 million, or 2 cents a share. It had revenue of $9.6 million, with nearly 90 percent of it coming from the North American Breaker subsidiary.

With the proxy battle a fading memory, the big question at the shareholder meeting will be whether to expand the number of shares so the company can raise enough capital to purchase the large companies Bouchard favors. The company’s market capitalization is $107 million.

He said until now, management has talked more about the company’s largest asset – those tax breaks – rather than operating a business. He hopes to change that.

“Everyone has focused so much on the NOLs, but they are just icing on the cake,” he said. “You don’t do a transaction because of the NOLs. They are nice to have, but not a must have.”