Spinning debts into gold: Recession has been the renaissance of Garry Klesch, who thrives on others' troubles. Jason Nisse reports

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FOR Garry Klesch, other people's clouds are his silver lining, their misfortunes his opportunity. The recession has been his renaissance.

The collapse of Maxwell Communication Corporation and Leyland DAF, the restructuring of WPP, Heron and News Corporation, and the eleventh-hour rescue of GPA Group have thrust the former doyen of the Eurobond markets back into the limelight - just four years after Quadrex Securities, his previous financial services group, collapsed. He and his West End securities firm, Klesch & Co, have become the public face of the burgeoning market in what is euphemistically called distressed or value- impaired debt - loans to companies in trouble.

Together with Bankers Trust, Mr Klesch was instrumental in setting up the distressed debt market in London. As recession plunged more and more companies into trouble, turnover in the market has risen rapidly to around pounds 4bn. After Bankers Trust, Mr Klesch is probably the largest player - a lone entrepreneur in a market dominated by big names such as Continental Bank, Morgan Grenfell and SG Warburg.

In the past week, he has popped up quoting prices at which GPA debt was trading (and being attacked for his trouble, though not in name, by GPA's chairman). He then appeared as the spokesman for angry bondholders in Heron, attacking the group's debt restructuring proposals and the pounds 5m package to retain the services of Gerald Ronson, its discredited chief executive.

Then there are his other sidelines, such as producing a critique of the Isosceles rescue package, calculating how much the sale of Official Airline Guides is worth to creditors of MCC and revealing that the only loans worth less than ones to Polly Peck are those to Sudan and Liberia.

Operators in the distressed debt market provide a highly specialised service. A bank may once have lent money, say pounds 10m, to a company that has since run into trouble and is unable to service the debt. The bank wants to get the loan off its books. Mr Klesch or one of the other brokers in the market will undertake to find another bank willing to buy the loan in the hope of the company recovering. He arranges a deal where the first bank sells its pounds 10m loan for pounds 6m to the second bank. The vendor is willing to accept the discount in return for immediate cash, while the buyer stands to make a massive profit if the company recovers and the loan returns to its original value. The broker gets paid handsomely and everyone is happy.

About a third of the pounds 1.6bn debt of MCC has been traded by the company's creditors in this way, and up to a half of WPP's. The debts of Canary Wharf, Eurotunnel and GPA have also been changing hands.

But is Mr Klesch the personification of an important new market, or is he just a self-publicist who has grabbed the limelight simply because others in the distressed loan market are more retiring?

He was born 46 years ago in Cleveland, Ohio. Neither Garry nor Klesch are his real names - his birth certificate states his forenames as Alan Edward and the family name was Sakovsky. His father was a boxer - briefly holding the world middleweight title in 1919 - and assumed his trainer's name as Sakovsky was too long to fit on his robe.

Klesch junior was educated by Jesuits and, at 22, joined the Wall Street securities broking firm of MacDonald & Co, where he became the youngest- ever partner two years later. He then came to the attention of Bill Simon, who had just been appointed Treasury Secretary under President Gerald Ford. The administration needed a young turk to power through implementation of a new securities deregulation act. The radical new law brought in the US equivalent of Big Bang - known as Mayday - and many of America's most famous brokerages merged, collapsed or struggled to compete. At 28, Mr Klesch became director of capital markets policy - in effect, Washington's man in charge of Wall Street.

He also found himself being loaded with other responsibilities. One of these was the restructuring of Penn Central, the giant railway group that collapsed in the early 1970s and was then the world's largest insolvency.

A number of attempts had been made to put through a deal that would allow it to write off some of its debts and re- emerge as a force in the railway world. All had failed because the federal government, the largest creditor, had opposed them. Finally, it was decided the government should propose its own plan. Mr Klesch spent more than a year talking to banks, insurance firms, trade creditors, unions and management and pulled off a deal.

He was then brought into a series of government deals - or as he put it: 'Anything that smacked of financial engineering, they came to us.' This process reached its perhaps logical extreme when he found he was being asked to help structure a deal to finance the space shuttle.

After two and a half years in Washington, Mr Klesch took a sabbatical until he was tempted by an offer from Smith Barney, the Wall Street securities house, for a job he describes as 'director in charge of living in Paris'. In fact, he was head of the firm's European office, then based in Paris, but it was hardly demanding work.

After two years, he was tempted by another US broker, Dean Witter, which wanted him to move its European headquarters from Paris to London. The Eurobond market was taking off at the time, but Mr Klesch found his relationship with Dean Witter's board became strained as the London operation grew. 'I realised I was always going back to the board and explaining about what we needed to do to build international business and they would say: 'Hey, Garry. Just put up the Dean Witter shingle and everybody will come running.' '

In 1982 - when Mr Klesch reckoned his name was better known in the City than Dean Witter's - he left and set up Quadrex Securities. Backed by Arab finance, which he later bought out, it started in the Euromarkets but soon moved into acquisition finance, leveraged buyouts and restructurings.

'We tried to bring a lot of creativity to the market,' he says. 'Twice Insitutional Investor (the influential US trade magazine) put us on the cover as best deal of the year.'

In 1985, Quadrex bought RP Martin, one of the small band of London moneybrokers that dominate the world foreign exchange and money markets. The deal sowed the seeds of Quadrex's own destruction.

In the summer of 1987, the firm entered into one of the most celebrated takeover battles of the heady pre-crash market. Mercantile House was on its knees, and British & Commonwealth Holdings, a Canadian group called CrownX and Quadrex circled like vultures.

In a celebrated deal, Quadrex agreed to pull out of the fray and buy Mercantile House's moneybroking operations, WM Marshall in London and William Street in New York, from B&C if B&C's bid succeeded.

The deal was not to be; the market crashed in October. Citibank, which was supposed to finance the pounds 280m purchase of the moneybrokers, pulled out and Quadrex told B&C it could not complete the deal, so sparking one of the largest and most costly legal actions in British commercial history. Faced with massive writs, too much debt and a weak market, Quadrex closed in 1989, the same year as B&C went into administration. The legal action continues now, with B&C's administrators claiming more than pounds 200m from Quadrex and its merchant bankers, Samuel Montagu.

But Mr Klesch did not let this get him down. Peter Phillips, the administrator in charge of the legal action for B&C, remembers being at his health club with his son when he saw Mr Klesch. It being the middle of the court case, the two were not supposed to talk, yet Mr Klesch strode over to him, grasped Mr Phillips' son by the hand and said: 'You must be Peter's boy. You might have heard of me. I'm the bad guy.'

Within a year of Quadrex's collapse, he was back with his new company, Klesch & Co. He had seen the growth of the US market in distressed debt and thought it could be applied to the UK. The recession was starting to bite and many foreign banks that had expanded into the UK now wanted to sell up and go home.

At first it was a struggle. Many banks would not talk to Mr Klesch and even now hardly any UK investors will buy distressed debt - all the buyers are from the US. But Mr Klesch was not deterred. 'I'm a Capricorn. I'm that goat pushing uphill, very slow and very steady, but I refuse to quit.'

He may not be the largest player in the market but he is the most visible, quoting prices on dealing screens, leading deputations to the Bank of England to have banks blackballed for reneging on deals, and being quoted in the press.

He shrugs off the criticism - 'I've got lovers and haters, but heck, I'm not running for office' - and thinks he is providing an essential service. 'Everyone is a closet entrepreneur. There are all these faceless people trying to hide away. They say: 'Hey, Garry, don't rock the boat.' I'm not rocking the boat. I'm trying to find value for my clients.'

The London market might not like his methods, but it cannot doubt that they work.

(Photograph omitted)