U.S. Gets Creative to Sell Junk Bonds

The U.S. government, grappling with a massive portfolio of high-risk junk bonds, is launching some untraditional programs to unload the securities in a style that speaks more of private industry than government.

In the next few weeks, Resolution Trust Corp., the government agency charged with selling assets of failed thrifts, is expected to announce that it has hired a major investment banking firm to “collateralize” big pools of these bonds to make them more marketable.

The agency also plans to set up a bond-trading desk much like those at private investment houses, except this desk will be charged only with selling bonds. The RTC will not buy regardless of potential profit opportunities, said Stephen Katsanos, an RTC spokesman.

The programs are coming just in time, according to industry experts.

The RTC is already one of the nation’s biggest holders of junk bonds, thanks to regulatory takeovers of institutions such as Imperial Savings of San Diego and CenTrust Bank in Miami. And if it takes control of troubled Columbia Savings & Loan Assn. of Beverly Hills, as many expect, its junk portfolio will double overnight.

If the government attempted to liquidate these bonds in a hurry, it would decimate the junk bond market and could cost taxpayers hundreds of millions of dollars, many experts said.

“The market is so illiquid that it can drive down prices if someone is selling $5 million in bonds,” said Ronald Vannuki, managing director of Drake Capital in Santa Monica.

The RTC’s portfolio is currently estimated at $3.7 billion, which makes the agency the nation’s third-largest holder of junk bonds, said Kenneth H. Thomas, a Miami-based savings and loan investment consultant. Only First Executive Corp., the parent of Los Angeles-based Executive Life Insurance Co., and Prudential Insurance own more. Columbia Savings ranks a close fourth with $3.69 billion in bonds, Thomas said.

“A fire sale would cause a lot of damage and very little benefit,” said Marko Budgyk, president of Houlihan, Lokey, Howard & Zukin Investment Management in Los Angeles.

Market prices are already depressed, with the average junk issue selling for 80 cents on the dollar, Budgyk added. Troubled issues, such as Integrated Resources and Southmark Corp., sell for just pennies on the dollar.

Speedy liquidation of a large portfolio would cause prices to slide further, possibly causing the overall market to drop another 10% to 15%, Budgyk said.

Although the RTC’s original mandate was to sell assets as quickly as possible, the agency has changed its tune now that it is saddled with billions in junk bonds and hard-to-sell real estate, an agency spokesman added.

“Everything we have is up for sale, but not at any price,” Katsanos said. “It would be erroneous to assume we are rushing to sell any asset, including junk bonds.”

In congressional testimony last week, Elizabeth Spector, director of the RTC’s finance and administration division, said she is hiring “experienced managers specializing in all types of capital markets transactions, including junk bonds” to administer the portfolio.

Spector, a former director of Merrill Lynch Capital Markets in New York, added that the RTC expects to “become a responsible, sophisticated manager of its corporate securities portfolio.” She’s also adamantly stated that the agency will not “dump” the bonds.

Holding the securities puts the agency in a tenuous position, however. Junk bonds are highly volatile, and some industry experts believe that the market could fall further, leaving the government with steep losses and exacerbating congressional criticism of how the regulators are handling failed institutions.

Other bond experts believe that the tactic will prove profitable. Budgyk and Vannuki, for example, think that the junk bond market bottomed out after the collapse of Drexel Burnham Lambert, the investment banking house that put junk bonds on the map.

“At this point, I think (holding junk bonds) creates more opportunities than problems for sophisticated investors,” Vannuki said. “Their biggest problems, like Integrated and Southmark, are already selling at pennies on the dollar, so they can’t go much lower. And we believe there could be substantial recovery on some bonds where the companies are fundamentally strong.”

MARKET BEAT: Columnist Tom Petruno talks about junk bargains. D3

TOP 10 THRIFT JUNK BOND HOLDERS

Junk bond holdings as of Dec. 31, 1989.

Junk bonds Junk bonds to assets Rank Thrift (millions) ratio 1 Columbia Savings & Loan, $3,687 39.5 % Beverly Hills 2 Imperial Savings Assn., 851 8.9 San Diego* 3 CenTrust Bank, Miami* 849 10.3 4 City Federal Savings Bank, 658 6.5 Elizabeth, N.J.* 5 American Savings, 494 3.0 Stockton 6 First Gibraltar Bank, Houston 447 4.6 7 Far West Savings & Loan, 393 9.0 Newport Beach 8 Lincoln Savings & Loan, 363 10.0 Los Angeles* 9 Franklin Savings, Ottawa, Kan. 225 2.4 10 United Savings Assn. of Tex., 199 6.1 Houston

* Under RTC conservatorship or receivership

Source: K. H. Thomas Associates