THE TROUBLE AT DREXEL BURNHAM LAMBERT : Heavy Fallout Likely for Other Financial Services Companies

The disastrous decline in the junk bond market that has apparently crippled Drexel Burnham Lambert will have a sweeping impact on many other financial services companies, industry analysts said Monday.

And two companies widely associated with the high-risk junk market, First Executive Corp. of Los Angeles and Columbia Savings & Loan of Beverly Hills, could be decimated by losses from their bond portfolios, these analysts said.

Securities firms such as Salomon Bros., Shearson Lehman Hutton, First Boston and Merrill Lynch have huge short-term loans outstanding to highly leveraged companies that are now impossible to refinance because of the junk bond market debacle.

At several big thrift institutions, including Columbia S&L; and San Diego’s Imperial Savings, the junk bond portfolios are larger than the firm’s net worth. And S&L; regulators are pressing them to sell off the troubled debt securities, which could render these big thrifts insolvent.

Several life insurers, including First Executive Corp., Transamerica and Aetna Life & Casualty, have hundreds of millions worth of these bonds in their investment portfolios. If forced to sell these securities or write down their value to the current market prices, these insurers could be hit with huge losses.

Still, to the vast majority of these companies, the junk bond market’s woes are “a headache, not a life-threatening problem,” said Christopher Mahoney, associate director of the financial institutions group at Moody’s Investors Service in New York.

The only two exceptions, according to Vincent and other analysts, are First Executive and Columbia Savings. These companies have such huge junk bond portfolios that further erosions in market prices could decimate profits and net worth.

And Drexel’s announcement Monday that it needs a merger partner or capital infusion because of troubles in its junk bond unit doesn’t help, analysts said. Prices of several high-yield bonds fell precipitously on the news.

“This is the beginning of the end for Columbia,” Mahoney added. “The capital position of the firm is very much exposed to junk, and with the market value of junk falling as it has, they are very much at risk.”

Moody’s downgraded Columbia’s debt ratings on Monday because of concerns about restrictions on Columbia’s lending and dividends and “uncertainty regarding Columbia’s ability to comply with the new (S&L;) capital requirements in view of the declining value of its junk bond portfolio.”

Columbia, which had a $4.1-billion portfolio of non-investment-grade securities, would not comment.

Analysts also believe that the future performance of the junk bond market is pivotal to First Executive Corp., which holds more than $6 billion in junk bonds.

Ironically, Drexel revealed Monday that it has been actively trading First Executive shares and holds a 6.3% stake in the company, assuming the exercise of warrants and conversion of its preferred stock. The company added that it has a “significant short position” in the Los Angeles insurer. Investors take short positions when they expect the price of the target security to fall.

But First Executive and Columbia are only the most severely affected by Drexel’s problems and the decline in junk prices. Other companies will suffer less substantial but possibly longer-term troubles, analysts said.

Securities firms, for example, will be hit on three levels, Mahoney said. First, if they have bridge loans outstanding, they will find it impossible to refinance them. (Bridge loans are short-term credits issued to facilitate a takeover. They are generally refinanced when the takeover is complete and permanent financing is arranged.)

That will not cause losses unless--as was the case with the retail units of Campeau Corp.--the company is unable to make its debt payments, leaving firms such as First Boston and Paine Webber standing in a long line of creditors, hoping to be repaid at least a portion of their loans.

Others with large bridge loans outstanding include Shearson Lehman Hutton, with total takeover-related credits outstanding of $600 million, and Salomon Bros., which had about $233 million in such loans out at year-end, said Doyle Lyons, brokerage industry analyst with Merrill Lynch.

Merrill also has substantial bridge loans outstanding, Mahoney said, but he would not reveal the company’s total exposure.

Yet, even in the worst of circumstances, none of these companies are so exposed to takeover financing that their financial health is threatened, Lyons said.

Brokerages will also find that merger and acquisition activity will dry up as takeover financing becomes harder to come by. That reduces investment banking income and diminishes trading volume, which reduces revenues for retail brokers.

Insurance companies too will find that their investment portfolios are less liquid, or harder to trade. If they are forced to sell their junk bonds or mark them to current market prices, they will suffer losses--although again, few of these losses will prove crippling, analysts said.