Q&A: MD Helicopters' Lynn Tilton

In 2000, after more than two decades of diverse Wall Street experience, Lynn Tilton started Patriarch Partners, a private equity firm that specializes in buying and fixing distressed companies. Today, Patriarch's diverse multibillion-dollar portfolio holds interests in more than 65 companies worldwide, including Arizona-based MD Helicopters, which Tilton's firm bought in 2005 and brought back to life from near liquidation.

Tilton, who currently serves as CEO of MD, predicted the current economic crisis more than two years ago. She faults a reliance on "synthetic" finances, which she says created the illusion of economic growth while helping to dismantle much of America's manufacturing sector.

Before founding Patriarch Partners, Tilton was an executive at Long Drive Management Trust, a company that managed distressed debt. Earlier, she was the executive managing director of Papillon Partners, a firm she founded to offer research, valuation, and other services to sellers of bank debt. Before launching Papillon, Tilton spent many years in corporate finance and banking positions at such firms as Morgan Stanley, Goldman Sachs, and Merrill Lynch.

Tilton maintains a schedule that even an Olympic athlete would likely find grueling.
Her Gulfstream 200 and MD 902 Explorer helicopter help. So do her drive and combative spirit. She spars with journalists, revels in being "disrespected by my peer group" and delights in defying the predictions of industry experts. "I like to be the little engine that could," Tilton said.
 

When did you start using corporate jets?

I had flown on NetJets [since] around 2002, then switched to my own corporate jet in the latter part of 2006 and it is invaluable every day. I spend 80 to 90 percent of my life on the road and probably 80 percent of the deals that I do I wouldn't do if I didn't have a jet because my body just couldn't take it. I work 20 hours a day, seven days a week.

It has allowed me to take many meetings I would otherwise not have been able to that resulted in great transactions and great relationships. I actually used that corporate jet to fly around and buy parts for MD helicopters when we had 265 [helicopters] on the ground, and I knew the only way to get this company back was to make sure those helicopters were in the air. So that jet often went to pick up parts, at a loss, just to put aircraft back in the air for our customers.

MD Helicopters turned profitable in the fourth quarter of 2007. How was 2008?

We could have had a better year had we not fallen back on our deliveries. We expected to deliver more than 60 aircraft and [were], I think, 10 aircraft short because we had a little bit of a setback on some parts that kept aircraft on the line too long. It is because I [re]built this company bottom up that we understand our cost on every aircraft. We make money on every aircraft we sell and we are still in very good shape.

You've made lots of product improvements to your existing line but some of your competitors have new products with large order books. At what point do you have to stop refining your existing products and introduce new ones to stay competitive?

The MD 902 is the most modern technology in the market and it never really hit its stride. So we have a very new product that is being embraced with great enthusiasm, especially in the Middle East, where the MD 902 can fly all day long in summer when other aircraft need to sit [during parts of the day] because they can't carry the loads in that type of heat.

I can take an MD 902 and change 20 things on it and call it a different aircraft, but the reality is our aircraft still serves the market very well. When I talk to the customer, the customer wants additional speed, additional payload, and additional dispatch. And I don't need a new aircraft for that.

So I'm not worried about the introduction of a new product; I'm worried about keeping our customers happy. Our customer support has been excellent. If we can build 100 aircraft [a year], I have a very nice company. I like being the little engine that could.

Some industry analysts have suggested that MD cannot survive unless a larger company acquires it. How do you view this assessment?

As ignorance. I don't carry the huge infrastructure my peer group carries. I own this company. They have stockholders and are parts of huge conglomerates or big government. On what basis do they pass judgment on MD's survival? If I am the owner and I am happy and MD is making a profit, then why do they think it will not survive? I have always been disrespected by my peer group and, frankly, it hasn't affected me or the ability of this company to go from zero deliveries in 2005 to way in excess of 50 and profitable [last year]. 

When do you think America's economy will recover?

I think we are only at the tip of what is going to affect all companies, which is that we have all been living on borrowed money for a long time and all of a sudden there is no ability to borrow.     

When I buy a broken company, we tear it apart variable by variable so we understand exactly how the company was built up. Then we literally need to throw certain thread out and reweave the tapestry into something that makes sense based on where we are. Then we have to walk that long journey to recover it. I think that's what we need to do with our country and our economy. We have to look at what got us here and what's left after we remove some of these synthetic financial instruments, CDOs [collateralized debt obligations], and leverage, and [decide] what it takes to restart an economy. What does it take to get spending moving on both a business basis and an individual basis? And how do we do that?

Does there need to be a regulatory overhaul of the entire financial system?

I think they [the government] need to understand the financial instruments before they even begin to regulate them and allow them. To my incredible surprise, I talk to people who trade credit default swaps, who work within that market and really don't understand the product. So we have a market where we have built up between 60 and 70 trillion dollars' worth of a financial instrument-which is four-and-a-half times the 2007 gross domestic product—and even those who are experts don't understand the product. There is no way you don't end up with a tragic ending.

Has the government done enough to solve the current liquidity crisis?

No, I don't think they have and I am not sure what they have done is the proper pathway to rebuild America and restart our economy. I believe that the losses in the financial system are so deep and so wide that $700 billion of preferred investment in the banks [during 2008] is not going to make a difference. 

Frankly, with guarantees on fiduciary deposits and interbank lending, they could have kept the fear factor from pulling cash out of the banks and still allowed the banks to have the capital to lend and to earn their way back. I think that $700 billion could have been better utilized to [help] companies that are going through an unprecedented imbalance, a sudden loss in revenues, and the inability to rationalize their expense structure.

I think in the end what we are realizing is that GDP has been built on leverage and synthetic financial instruments for some time and we obfuscated the need for an economic base built on manufacturing, and now we are allowing what we need most to disappear during this moment of crisis. I fear that they [the government] have used their money unwisely in terms of saving us from a very deep and dark and wide recession.

Resume: Lynn Tilton

POSITIONS: CEO of Patriarch Partners, a private equity firm, and MD Helicopters.

PAST POSITIONS: Executive at Long Drive Management Trust ("LDMT"), where she developed strategies for distressed debt management and created investment vehicles. Also, the executive managing director of Papillon Partners, a firm she founded to offer services to sellers of bank debt. Has eight years of experience in research, sales, trading, and investing of distressed debt at Oppenheimer & Co., M.J. Whitman, and Amroc Investments. Began career in mergers and acquisitions at Morgan Stanley and worked in corporate finance and merchant banking at Goldman Sachs and Merrill Lynch.

EDUCATION: B.A. in American Studies from Yale. MBA in Finance from Columbia University.

PERSONAL: Age 48. Lives in New Jersey. Divorced with one daughter.