Pessimism Over Great American’s Future Revealed in Bond Trading


Great American Bank’s 8.5% convertible bonds are trading for as little as 8 cents on the dollar bid price, a sign of how poor the financial markets view the troubled S&L;'s chances of survival.

The Great American bonds, which carry a $1,000 face value, are trading at a $80 bid price over the counter and $160 ask price, according to a bond trader in New York who makes a market in the bonds and who asked that his firm’s name not be used.

Another New York trader, who also requested anonymity, said he is quoting the Great American bonds at $100 bid and $180 ask. The bid is the price at which traders try to buy the bonds, while the ask price is that at which traders try to sell the bonds.

Actual sales usually occur at a price somewhere between the bid and ask. One San Diego investor, for example, said he recently bought bonds at a price of $120 each, or 12% of face value.


Since the bonds pay 8.5% annual interest, or $85 a year, investors who buy bonds at these prices could earn their investment back in a year and a half, if interest is in fact paid on the bonds. Great American pays interest on the bonds in two annual installments, with the next payment due June 15.

“What these prices mean is, the markets are perceiving these bonds as very risky investments, and there is a high likelihood that they will eventually be worthless,” one trader said.

Traders said there is very little demand for the bonds, which are mostly owned by institutional investors. There are only about $10 million of the bonds outstanding, according to a spokesman for Great American, which holds its annual shareholders meeting today at 9 a.m. at Symphony Hall.

Bonds are a form of investment by which the issuer--in this case, Great American--borrows money from investors for a specified term, promising to pay an annual “coupon” or interest rate figured as a percentage of the face value. Great American is due to redeem the 8.5% bonds in the year 2011. The bonds are also convertible to common stock of Great American at $18.583 a share.


Investors who buy the bonds now are speculating that Great American will either survive as an independent institution or be acquired by a larger financial institution that would assume the obligation to pay the bonds’ interest and principal payments. In either scenario, the bondholders would do quite well.

But bondholders and shareholders in Great American could receive nothing under a third scenario: a seizure of the S&L; by federal regulators. In most regulatory takeovers, bondholders and stockholders are wiped out, their bond and stock certificates rendered worthless.

And the possibility of a seizure of Great American is considered strong by many analysts. The S&L;'s capital was severely depleted by huge 1989 losses, and its loan problems have continued to mount. Unless it attracts $350 million in outside capital or a buyer for all or part of its assets by the end of this year, Great American has said it faces a possible seizure.

Last year’s losses totaling $263.4 million and a slight first quarter 1990 deficit reduced Great American’s tangible capital to $128 million. And more than half that could be wiped out if Great American loses a dispute with the Office of Thrift Supervision over assets that regulators say are overvalued by $65 million. The dispute will be resolved by the end of the current quarter, the S&L; said.

These factors, plus the inability of Great American’s investment bankers, Shearson Lehman Hutton, to find a buyer so far, add up to a grim picture. And the gloom is reflected in the prices of Great American bonds, which are selling for 50% more than one year’s interest payments.

“The bonds are selling at a level that assumes the bankruptcy or near bankruptcy of the bank,” said a stock analyst who asked not to be identified.

Great American has two other bond issues outstanding: $60 million worth of variable rate bonds due 1991 and $33 million in 13.25% bonds due July, 1995. Quotes on the other two issues were unavailable this week, however.

Another grim portent for Great American is the depressed price of its stock, which closed unchanged Wednesday at $1.875 in New York Stock Exchange trading. The stock price has fallen from a high of $14.875 over the past year.


Despite the precipitous drop in the stock price, more than 8% of the 23 million Great American shares outstanding are still held by “short sellers,” or investors who profit from a decline in the prices of stocks and other securities. The high short interest ratio is an indication that a considerable percentage of shareholders believe Great American’s stock price will fall even more.