Slow Selloff to Aid 8 California Thrifts : Junk Bond Limits Won’t Hurt S

An agreement reached Wednesday by congressional conferees to require that savings and loan firms sell their junk bonds within five years largely affects a handful of California thrifts that own more than half of the $14.4 billion high-yield, high-risk securities held by the industry.

At the same time, the five-year timetable that the thrifts are being given to sell their junk-bond portfolios is seen by some industry officials as a generous concession by House and Senate members negotiating a massive savings and loan bailout package.

The requirement that S&Ls; sell the bonds is an attempt to rein in some of the far-flung investments that thrifts have made in recent years using government-guaranteed deposits. Junk bonds are the high-yield, low-rated debt securities issued by companies that often have difficulty raising money through more conventional channels.

Junk bond holders fought hard to buy time to sell the bonds in the wake of a House proposal that would have required liquidation in only two years, something the industry complained might have depressed prices and caused havoc in the marketplace. In five years, consultants, thrift executives and traders said, thrifts can probably liquidate their junk bond holdings in an orderly way.

“Five years is even long enough to sell a house in Texas,” said Alex Sheshunoff, an Austin, Tex., thrift and banking consultant, referring to one of the most depressed real estate markets in the nation.

The compromise reached Wednesday also does not mean that savings and loans will be out of the junk bond business, rather that their activities will be limited. Under a provision of the proposal agreed to by the congressional conferees, they can invest in the bonds through separately capitalized affiliates that do not use government-insured deposits.

Relatively few savings and loans own junk bonds. Just 30 thrifts nationwide hold more than 90% of the $14.4 billion in junk bonds held by thrifts. Nearly half of that amount is held by just eight California S&Ls.;

Clearly, the savings and loan firm most affected will be Columbia Savings & Loan, the Beverly Hills-based institution that holds nearly $4 billion in junk bonds, about one-third of its $12.7 billon in assets.

Aided by gains from its junk bond investments, Columbia has grown rapidly and posted strong profits during the past few years, but it has been criticized by those who believe that government-guaranteed deposits should not be used to speculate in high-risk bonds.

Columbia had no comment Wednesday on the congressional compromise, but a spokeswoman said a statement will be released today. Industry officials said they expect that Columbia will set up an affiliate to invest in the bonds as allowed by the compromise.

The reaction by investors was mild, which some said was an indication that they had been expecting a compromise similar to what was worked out. The junk bond market was flat Wednesday, and Columbia’s stock hardly moved, closing at $10.125 in composite trading on the New York Stock Exchange, up 25 cents.

The compromise brought angry responses from firms involved in junk bonds. Drexel Burnham Lambert, the investment banking firm most responsible for developing the market, called the compromise “disappointing and unnecessary.”

In a statement, Drexel cited a General Accounting Office report concluding that no thrift has failed because of junk bonds. “The evidence is clear that high-yield bonds have been superior investments for savings and loans,” Drexel said.

Charles H. Green, acting president of FarWest Savings & Loan in Newport Beach, which is controlled by the Belzberg family of Canada, said FarWest has the capital and management to continue profitable investing in junk bonds. FarWest has 12% of its $4.6 billion in assets invested in the bonds.

“This bill is going to deny us an opportunity to participate in a business that we believe we are well equipped to be in,” Green said.

Little Disruption Expected

The long-term effect on the junk bond market is likely to be mild. David Aylward, executive director for the Alliance for Capital Access, a coalition of corporations that has raised money selling junk bonds, said he expects little disruption in the junk bond market because the thrifts will sell their holdings over five years without a strict timetable.

Portfolio managers, consultants and others also said they believe that the market can absorb the selloff of the bonds by the thrifts. Savings and loans hold only 8% of the value of bonds in the junk-bond market. Industry officials said they expect that new buyers will be available, especially foreign investors, mutual funds and institutions such as pension funds.

“There are plenty of other places to sell the bonds without using taxpayer-insured deposits,” Sheshunoff said.

Some of the junk bond holdings in California are for sale anyway, especially those held by troubled thrifts. Federal regulators who took over Lincoln Savings & Loan, based in Irvine, previously announced plans to liquidate over time the $565 million in junk bonds held by the institution.

And California’s second-largest holder of junk bonds among thrifts, Imperial Corp. of America in San Diego, said earlier this month that it plans to reduce its $1.4 billion holdings in junk bonds as part of a broader restructuring. Junk bonds make up 12% of Imperial’s $11.9 billion in assets.

Another factor that may soften the impact on the junk bond market is that some of the bonds may mature before the five-year period is up or may be refinanced.

Times Staff Writer James S. Granelli in Orange County contributed to this story.

JUNK BOND HOLDINGS AT CALIFORNIA S&Ls;

Level of junk bond holdings for California-based savings and loans as of March 31.

Institution Total assets Junk bonds Columbia (Beverly Hills) $11.6 billion $3.9 billion Imperial (San Diego) 11.9 billion 1.4 billion Lincoln (Irvine) 5.3 billion 565 million Far West (Newport Beach) 4.6 billion 553 million Gibraltar (Beverly Hills) 12.1 billion 469 million Coast (Los Angeles) 12.9 billion 150 million Southern California (Beverly Hills) 2.0 billion 111 million Western Financial (Orange) 2.6 billion 99 million Western Empire (Yorba Linda) 245 million 50 million Santa Barbara (Santa Barbara) 5.0 billion 38 million Homestead (San Francisco) 5.4 billion 29 million United California (Anaheim) 676 million 20 million Century Federal (Santa Monica) 1.1 billion 14 million Home Federal (San Diego) 16.8 billion 12 million Pacific Coast (San Francisco) 903 million 6 million County (Santa Barbara) 1.4 billion 3 million Westside (Los Angeles) 90 million 2.4 million Guardian (Long Beach) 604 million 1.4 million Placer (Auburn) 583 million 86,000 Statewide (all S&Ls;) $398 billion $7.4 billion

% of total Institution assets Columbia (Beverly Hills) 34% Imperial (San Diego) 12 Lincoln (Irvine) 11 Far West (Newport Beach) 12 Gibraltar (Beverly Hills) 4 Coast (Los Angeles) 1 Southern California (Beverly Hills) 5 Western Financial (Orange) 4 Western Empire (Yorba Linda) 20 Santa Barbara (Santa Barbara) 0.8 Homestead (San Francisco) 0.5 United California (Anaheim) 3 Century Federal (Santa Monica) 1 Home Federal (San Diego) 0.07 Pacific Coast (San Francisco) 0.7 County (Santa Barbara) 0.2 Westside (Los Angeles) 3 Guardian (Long Beach) 0.2 Placer (Auburn) 0.01 Statewide (all S&Ls;) 1.9%

Source: Alex Sheshunoff & Co., Austin, Tex.

* RELATED STORY: Part I, Page 1