Kidder Peabody’s Junk Bond Portfolio Is Sold : Securities: The complicated $750-million cash transaction amounts to a recapitalization of the brokerage.
General Electric Co., the parent of the Wall Street brokerage Kidder, Peabody & Co., moved boldly to shore up the financial position of the brokerage Thursday by having another unit, GE Capital Corp., buy Kidder’s troubled junk bond and bridge loan portfolio for $750 million in cash.
As part of the transaction, which amounts to a recapitalization of Kidder, the brokerage will buy back stock held by employees for $51 million and thus boost GE’s stake in Kidder to 100%. GE had bought an 80% stake in Kidder in 1986. Separately, Kidder said it expects to report a $23-million net loss for the first quarter, due mainly to marking down the value of its securities portfolio to reflect market prices.
A Kidder spokeswoman said the recapitalization was first suggested by Kidder’s own management committee and wasn’t the result of any pressure from regulators or the New York Stock Exchange. “We’re doing this to position ourselves to be successful in the ‘90s,” she said. For a variety of reasons, Kidder has never lived up to GE’s expectations, and like most Wall Street firms it has been hit hard by the recent downturn in the securities industry.
The complicated transaction also calls for Kidder to pay to GE Financial Services, a GE division that includes both Kidder and GE Capital, $200 million in the form of a dividend. The spokeswoman said this was being done because the $750 million cash infusion would leave Kidder with far more net capital than it needs.
The spokeswoman said she couldn’t immediately give the figure for Kidder’s total net capital. But she said that after the $200-million dividend is paid, Kidder will still have more than $250 million above the minimum required by regulators. She said Kidder doesn’t anticipate any changes in its business strategy or layoffs due to the deal. GE said the transaction wouldn’t significantly affect its first-quarter earnings.
Although Kidder is getting rid of the junk bonds it holds from financings done for mergers and acquisitions, the firm said it doesn’t intend to withdraw from junk bond sales and trading.
Kidder thus becomes the latest Wall Street firm to undergo a recapitalization or restructuring as a result of the dramatic downturn in the securities industry over the last year. It most recently follows American Express’ announcement several weeks ago that it is buying all the shares it doesn’t already own of its own troubled brokerage unit, Shearson Lehman Hutton Inc., in exchange for a big infusion of capital into Shearson.
Lawrence W. Eckenfelder, an analyst with Prudential-Bache Securities, said Kidder and other firms are moving to recapitalize in part because of pressure from ratings agencies, which have threatened to lower the ratings of the investment banks’ debt. By recapitalizing, the firms can lower their cost of borrowing and also shore up their net capital.
In a statement, Michael A. Carpenter, Kidder’s chairman and chief executive, said: “This transaction will substantially increase our regulatory capital and reduce borrowings, allowing us to more effectively implement our strategy for capitalizing on the global opportunities of the securities industry in the 1990s.”
The Kidder spokeswoman said the $750 million represents that market value of Kidder junk bonds held by the firm’s merchant banking unit, as well as bridge loans and the equity stake that Kidder took in certain companies as part of bridge loans and junk bond financings.
The spokeswoman said the $750 million includes about $375 million for junk bonds, and $250 million representing the value of three bridge loans Kidder has outstanding. The balance represents the equity stake Kidder acquired in several companies in doing financings for them.
