Columbia Puts $3.5 Billion in Junk Bonds Up for Sale

Columbia Savings & Loan, the thrift that risky junk bonds built and are now threatening to ruin, has put its entire $3.5-billion junk bond portfolio on the block in what would be the largest sale ever of its kind.

The move to sell the junk bonds was disclosed by Columbia’s new chief executive, Edward G. Harshfield, in a meeting with reporters Wednesday at the thrift’s Beverly Hills headquarters. If successful, the enormous sale--which is by no means a sure bet--would in one fell swoop accomplish one of the most remarkable transformations ever by a savings and loan.

“We’re going to write some history with it,” Harshfield said, commenting about the size of the prospective sale.

Columbia is by far the largest holder among S&Ls; of junk bonds, which are issued by companies with relatively poor credit that pay investors a higher return to compensate for the risk. Junk bonds make up more than one-third of Columbia’s $9 billion in assets.

For most of the 1980s, Columbia functioned largely as a speculative investment firm as opposed to a traditional S&L;, taking full advantage of expanded investment powers granted thrifts under deregulation. Under the leadership of former Chief Executive Thomas Spiegel, Columbia reaped huge profits and drew criticism by using taxpayer-insured deposits to buy the risky bonds.

In the last seven months, Columbia’s fortunes have soured dramatically. Federal legislation signed into law last summer in the wake of the nation’s $200-billion savings and loan bailout requires Columbia and other thrifts to sell their junk bonds by 1994.

Soon after the law went into effect, the junk-bond market collapsed. The downturn in the market was caused by such factors as financial problems with major companies issuing junk bonds, recession fears and, most recently, the collapse of Drexel Burnham Lambert, the Wall Street firm that almost single-handedly developed the junk bond market.

The collapse of the junk bond market has left Columbia, a year ago one of the thrift industry’s strongest firms, with a collection of bonds that experts now believe may be worth close to $900 million less than what they originally cost.

As those bonds have fallen in value and Columbia has devalued them on its books, Columbia’s capital--the financial safety net that thrifts need to protect against losses--has eroded quickly, leading some in the industry to speculate that regulators may eventually take it over. Columbia, however, is still solvent and is expected to meet the most basic of the three new capital standards set by regulators when it releases its 1989 year-end financial results later this month.

Spiegel, whose family controls Columbia, resigned at the end of last year, shortly after the thrift disclosed a $226-million loss in the third quarter. Harshfield was named Monday to replace him.

Although Columbia must sell its junk bonds by 1994, Wednesday’s disclosure was its first acknowledgement that it has put the entire portfolio up for immediate sale. Previously, the thrift had said that Spiegel would form a vaguely defined “entity,” financed by large investors, that would absorb Columbia’s junk bonds. But new chief Harshfield said this plan was too complex.

If Columbia succeeds in selling them all it once, it would be the single largest divestiture of a junk bond portfolio. More junk bonds have been sold at one time, as when RJR Nabisco last year issued $4 billion to finance its $25-billion takeover by the investment firm Kohlberg Kravis Roberts & Co. But that bond issue was a much different transaction, with the bonds being sold to scores of investors rather than in one block.

Harshfield, a former Citicorp and Household Financial executive, clearly wants to move quickly to shed Columbia’s troubled holdings and gain credibility with regulators. He expressed confidence that a major finance company, insurance firm, banking firm affiliate or group of investors could be assembled to buy them.

“Our task is to get rid of all of it,” Harshfield said.

Harshfield said several prospective buyers have looked at the portfolio, but named no names. He did throw out such examples as General Electric’s credit unit, Prudential Insurance and affiliates of the nation’s largest banks as the kind of firms that would have the financial means to make such a purchase.

He said an investor would need a minimum of $350 million to $500 million in cash, and said Columbia might help finance the deal if the buyer was strong financially and the transaction was acceptable to regulators. He also expressed optimism that Columbia could sell the portfolio for its current $3.5-billion market value, or even more.

But junk bond traders and institutions expressed skepticism that Columbia can sell its entire package. With the junk bond market in turmoil, they said, few investors will be interested unless they can buy the bonds at a huge discount.

“I have difficulty seeing how anyone would pull this off or who would pull it off,” said one West Coast portfolio manager.

Some bond experts said there would be no effect if Columbia found one buyer because the transaction would not add to the supply of bonds for sale. But others noted that any buyer would probably choose bonds it wants and dump others, further depressing the market.

Spiegel’s role in all of this is unclear. The sale is being handled by the Wall Street firm First Boston. Harshfield denied that Spiegel is being bypassed by Columbia, noting that he is a full-time consultant working on the sale. But several of his comments clearly suggested Spiegel’s role has diminished considerably.

“He’s not calling the shots. Columbia is calling the shots,” Harshfield said.

He also said that Spiegel will not participate in buying the bonds because of conflicts of interest.

“I can’t have Tom as the buyer, and then the negotiator, point man, consultant and then on the other side being the buyer again. He’d be selling to himself, so that can’t happen,” Harshfield said.

Harshfield, who was instrumental in turning around the Household Financial consumer finance firm, expressed confidence that he could pull off his difficult job as Columbia’s chief executive. “I was chosen because I’ve been a ‘doctor’ all my life, and this is just one more patient. I haven’t lost a patient yet.”