MCorp, the second-largest Texas bank holding company, said Monday that it will seek Chapter 11 bankruptcy protection from creditors, sidestepping three bondholders who asked that the company be put into liquidation.
The developments lent uncertainty to the government’s effort to rescue the troubled banking company.
MCorp said the bankruptcy would not affect its banking business and attempted to reassure customers that their deposits would be safe.
The impact on the jittery savings and loan industry, which suffered heavy record withdrawals concentrated in Texas at the start of the year, could not be gauged.
Breakup Effort Likely
“This really muddies the waters and puts us into uncharted territory,” said banking analyst Frank Anderson of Stephens & Co. in Little Rock, Ark.
Analysts said it is likely the government will try to break the company into pieces rather than accept management’s plan for a government-assisted rescue that would allow the holding company to remain intact.
The bankruptcy filing puts into the hands of a federal judge a key issue that has emerged in the current climate of failing banks--whether holding companies must use money from their financially sound subsidiaries to cover losses at failing units.
“You are definitely breaking new ground here,” said a banking analyst in New York.
Filed Under Chapter 7
The involuntary petition from the creditors was filed under Chapter 7 of the federal Bankruptcy Code. Under this law a company’s assets are sold off and the business is wound up.
MCorp said it will convert the filing to a voluntary Chapter 11, which allows it to continue to operate under court supervision with existing management.
It will also be protected from creditor and other claims while a reorganization plan is developed.
MCorp said it had not seen the court papers filed by the bondholders but had learned late Friday that the legal action was taken against it in the U.S. Bankruptcy Court for the Southern District of New York.
“Since last fall, representatives of MCorp had met several times with noteholders and urged them not to take action prematurely despite the moratorium on payment of principal and interests on borrowed money while the company was proceeding with efforts to recapitalize,” MCorp said.
Despite the pressure from the three bondholders, the company said “many of the noteholders recognized that their interests would be better served by withholding action pending completion of the recapitalization efforts.”
MCorp has been in a tug-of-war with the Federal Deposit Insurance Corp. for five months over various reorganization plans. The FDIC, which insures bank deposits, has been attempting to line up investors for a plan.
Deadline to Expire
While some have argued that the FDIC lacks the authority to order MCorp to use money from its healthy banks to help cover losses at its failing banks, the FDIC has said that bank holding companies have an unlimited obligation to help their failing subsidiary banks.
Throughout the five-month struggle, bankruptcy has loomed, with MCorp seen holding the upper hand because neither regulators nor creditors wanted MCorp to file for Chapter 11 bankruptcy, which they felt would only drive up the cost of reorganization.
“This filing was not unforeseen, but it was unfortunate,” Anderson said.
The announcement came just one week before expiration of a deadline set by the FDIC for acceptance of new bids to buy MCorp.