Integrated Resources, Facing Massive Losses, Seeks to Restructure
Integrated Resources, the once high-flying tax shelter syndicator that has seen its sales erode since defaulting on its bank debt two months ago, said Tuesday that it now plans to unload virtually all of its financial services businesses.
The cash-strapped New York-based company also said it would report a massive $600-million loss in its second quarter, due largely to writing down the value of its assets. And it said it will suspend sales of its limited partnerships and other products beginning next year.
“We think it’s the best plan we can come up with for creditors,” said Stephen Weinroth, a Drexel Burnham Lambert senior official brought in recently as Integrated’s chairman and co-chief executive. “Unless there are violent objections (from creditors), we plan to pursue it.”
The move, if completed, will leave Integrated largely as it started, as a business that just manages limited partnerships and real estate investment trusts. However, the proposed plan still faces numerous hurdles, including possible resistance from creditors and continued defections from among its 4,500-member national sales force, including hundreds in Southern California, one of its largest markets.
The news is the latest in a series of woes to hit Integrated and the once prosperous tax shelter industry that it helped spawn. Other tax shelter syndicators that enjoyed heydays in the early 1980s--such as Balcor, Southmark, Equitec and Consolidated Capital--have seen sales plummet following the Tax Reform Act of 1986. Several have filed for bankruptcy or disappeared.
Must Act Quickly
In the case of Integrated, it sought to diversify by expanding into mutual funds, life insurance and other products. But that expansion buried the company under a mountain of debt.
The firm announced in mid-June that it would default on $995 million of bank loans and commercial paper (a short-term corporate IOU). In late June, it proposed a financial restructuring that would involve $300 million of new loans. But subsequent events have shown that plan to be inadequate, company officials said.
The latest and more drastic restructuring signals that Integrated’s financial condition has reached a crucial stage, that it must act quickly to stem further declines in sales and defections in its sales force.
“There is a great sense of urgency. The company feels it and so do the creditors,” said Robert M. Miller, a New York attorney who represents holders of about two-thirds of the firm’s subordinated debt and some of its senior debt. “There is an erosion taking place, and we’ve got to move fast.”
“They need to sell it fast before more salespeople defect,” said Anthony Fisher, an analyst at Moody’s Investors Service.
Sales volume of Integrated’s limited partnerships, insurance and other products have fallen 15% below expectations following concerns by investors about the firm’s financial viability, co-chief executive Weinroth said in an interview. About 5% of the firm’s sales force has defected, he added.
“We are aware that the continuing uncertainty about Integrated’s liquidity could have a negative impact on our core financial services businesses,” Arthur Goldberg and Weinroth, Integrated’s co-chief executives, said in a statement. That is why the company decided to sell those businesses before their value deteriorates further, they said.
Interest Shown
Integrated said it will try to sell its two life insurance companies, its investment products distributor (which includes its sales force), and its asset management and securities clearing business. The firm has started preliminary discussions with a couple of parties and hopes to complete a transaction within six weeks, Weinroth said.
If a sale falls through or a fair price cannot be obtained, Integrated will spin off the subsidiaries to senior debt holders, principally banks with short-term loans to Integrated or its commercial paper.
Several investors, including Texas billionaire Robert M. Bass and some financial services concerns, are said to have an interest in buying some or all of Integrated’s businesses.
Integrated said it valued the financial services companies to be sold at $450 million to $525 million and that sale proceeds would be used to meet obligations to senior debt holders.
But the firm’s total assets are worth only $1.17 billion to $1.25 billion, compared to $1.75 billion in total debt, Integrated said. That means that at least some creditors will not be fully paid.
How to deal with that shortfall could prove to be a major stumbling block for acceptance of the restructuring.
The firm may face some resistance from those holding the firm’s $600 million in subordinated debt, primarily high-yield junk bonds issued through Drexel. They rank in line below the senior debt holders and don’t stand to fare nearly as well under the new restructuring.
Signs of Concern
The creditor groups, which met with Integrated management Tuesday, must negotiate how to allocate proceeds of asset sales as well as other details. Any major dissatisfaction among creditors may scuttle the plan, possibly forcing the firm into bankruptcy, which will limit its flexibility and ability to move quickly.
“If any group is too piggish or bullheaded, the deal will fail,” creditors’ attorney Miller said.
Already there are some signs of concern among bondholders. But Miller said it is too early to react on an informed basis since so many details of the plan have yet to be worked out. Subordinated creditors have hired Merrill Lynch to act as adviser to determine if the deal is fair to their group, Miller said.
Under the new restructuring plan, senior debt holders would receive the proceeds from the sale of the subsidiaries plus some new debt and stock, while subordinated debt holders would receive some new debt and equity. Preferred and common stockholders would get new stock that would substantially dilute their current holdings.
In New York Stock Exchange trading Tuesday, Integrated shares closed at $2, down 75 cents.
Standard & Poor’s Corp. lowered Integrated’s credit rating Tuesday, citing the second-quarter loss forecast and the firm’s announcement that it would not be able to pay interest due Tuesday on its 12.25% notes.
