First City Bancorp. Bailout Stalls as Creditors Balk

The $970-million rescue of First City Bancorp. of Texas Inc., one of the largest federally assisted bailouts in history, may be tripped up by creditors who are balking at the amounts they are being offered.

Their refusal to accept an offer of 35 cents or 45 cents on the dollar could destroy the current deal, but the Federal Deposit Insurance Corp. swiftly pledged to arrange another bailout should this one unravel.

FDIC Chairman L. William Seidman reiterated the promise on Monday. “The FDIC will use its powers to assure stability at First City banks and throughout the banking system,” he said in Washington.

The First City bailout plan, put together by investor A. Robert Abboud, is second in size only to the government’s $4.5-billion bailout of Continental Illinois National Bank & Trust Co. in 1984.

The plan, announced last September, called for the FDIC to contribute $970 million to Houston-based First City, Texas’ fourth-largest bank, and a group led by Abboud was to contribute $500 million. The plan hinged on at least 90% of the bank’s creditors accepting between 35 cents to 45 cents on each dollar of the bank’s debt.

But the FDIC said Abboud, former head of First Chicago Corp., told federal bank regulators during the weekend that less than the required 90% of the creditors had settled.

The deadline to meet the 90% debt settlement, which has already been extended once, falls at 4 p.m. EST today. Originally, the tender was supposed to expire last week, but First City extended it because it said only 41% of the creditors had agreed to the buyback.

The FDIC said it would start working on an alternative bailout plan if the deadline was not met. Alan Whitney, the spokesman for the regulatory agency, said it had a number of options, among them another extension of the deadline or a reduction in the percentage needed to go along with the buyback.

Initial comments by Whitney seemed to indicate that the FDIC might also consider abandoning Abboud’s plan in favor of another. But Whitney, in a later clarifying statement, said that was not the case.

“We have begun working with Abboud and his investor group to handle First City in an alternative fashion if the tender is not successful,” he said.

In any case, First City will be bailed out, he said.

“There will be a transaction, either this one or another one. It will be done to maintain the stability of First City and the banking system,” Whitney said.

He said the buyback was being held up by stock speculators who anticipate a better offer from Abboud. Banking analysts believe that speculators bought the bank’s shares at rock-bottom prices and stand to make huge profits if they can force a larger deal.

“It’s our longstanding policy that creditors and shareholders should be treated in the same way as if the bank had actually failed,” Whitney said.

“Nobody should get a windfall out of this, which is what some of the arbitrageurs seem to be looking for,” he added.

First City shareholders have already approved the Abboud-led buyout, which will give them only one share in the new First City for every 100 shares they now hold.

Abboud told reporters on Monday that the terms of the current tender offer will stand as they are until today’s deadline. At that time, he said, other alternatives would be explored.

While he said he was prepared to make some changes to push the plan through, he warned those still holding out that “we have no intention of changing the debt tender offer in a major monetary fashion.”

First City lost $1.1 billion last year. Its bad loans, mostly in energy and real estate, come to $1.8 billion.

Under the proposed bailout, these loans would be placed in a new, separate bank that would work to resolve them.

Abboud, who is to become chairman of the bank if the takeover occurs, has said First City would become profitable as soon as the plan is put into effect. He has projected earnings of $92 million this year and $120 million in the next.