Columbia Will Sell Junk Bonds for $3 Billion : Thrifts: The sale price is higher than expected, which is good news for taxpayers. But the S&L; remains insolvent.
Columbia Savings & Loan, the controversial Beverly Hills thrift that was built and wrecked by junk bonds, said Wednesday that it agreed to sell its entire high-yield portfolio for $3 billion to a Canadian-led investment group.
The sale to Gordon America, a partnership financed principally by the Toronto investment firm Gordon Investment Corp. and Canadian Imperial Bank of Commerce, is the largest single sale of a junk bond portfolio ever. It brought an unexpectedly high price that is $68 million more than the $2.9-billion value the ailing thrift attaches to the bonds on its books.
Most experts attributed the strong price to the recent recovery in the junk bond market as well as to financing arrangements that were offered. Important for Columbia is that the sale excludes some rare, valuable securities the thrift may yet sell. Some experts believe that these may be worth up to $200 million.
Even still, few industry executives and analysts expect Columbia to survive as an independent institution because of the extensive damage caused by about $1 billion in losses over the past year. Even with the junk bond sale, Columbia will be insolvent and may face further losses on real estate developments. Most thrift executives believe a sale of the thrift, either by its current management or through a government takeover, is inevitable.
What the sale of the junk bonds and the other securities may do, however, is minimize the cost of Columbia’s problems to taxpayers--so long as the terms of the sale stand up to regulatory scrutiny. Indeed, sources familiar with Columbia’s financial condition said it could emerge as one of the few large troubled savings and loans mopped up by the government with little or no taxpayer funds.
Regulators handled Columbia with extraordinary caution, sticking out their necks by refraining from seizing it despite its insolvency. Most observers believe that the government does not want to add to its holdings of junk bonds from troubled thrifts, holdings it values at $3.7 billion. They are probably worth much less.
But the sale still faces hurdles, notably approval by various regulators and possible scrutiny from members of Congress. Gordon America is making a $300-million down payment, financing the rest with a $2.7-billion, 10-year loan from Columbia at a 10.5% interest rate. The note is secured by the junk bonds.
Kenneth H. Thomas, a Miami banking and thrift consultant who followed the sale closely, believes that the bonds are worth about $2.5 billion today. Despite the premium, he said, Columbia is still not ridding itself of the bonds’ risk because it is financing the transaction.
“It’s not ‘direct junk’ anymore. It’s ‘indirect junk,’ ” Thomas said.
Columbia Chief Executive Edward G. Harshfield acknowledged in an interview Wednesday that Columbia will carry some risk, but said that is preferable to no sale at all.
“The alternative for Columbia and taxpayers is to carry all of the risk instead of carrying the risk less $300 million,” Harshfield said.
Columbia is believed to have persuaded some bond rating agencies to consider the note “investment grade” because the risk is spread among so many junk bonds. That would mean it would be considered less risky, which might make the sale more acceptable to regulators and Congress.
In addition, Columbia and its investment bankers will likely argue that Gordon America is well financed. Among its participants are the Kuwait Investment Office, the London-based investment arm of the Kuwaiti government; Hollinger Inc., a Canadian newspaper firm that owns London’s Daily Telegraph; Canada Life Assurance Co.; General Electric Capital, the finance arm of General Electric Co.; Hong Kong-based Hutchison Whampoa Ltd. and Japan’s Yasuda Trust & Banking Co. In addition, Gordon America has an incentive to pay off the loan early: It must pay a $5-million annual fee over 10 years as long as the loan is outstanding.
Junk bonds are securities issued by companies with relatively poor credit ratings, rewarding investors with exceptionally high yields for their risk. Under former Chief Executive Thomas Spiegel, Columbia used much of its taxpayer-insured deposits through the 1980s to plunge into junk bonds largely sold through the Beverly Hills office of former Drexel Burnham Lambert financier Michael Milken.
Columbia was the biggest buyer of junk bonds among the nation’s thrifts, and made spectacular profits while the market was healthy. But junk bonds plunged in value over the past year because of concerns about the economy, the financial condition of some issuers and the demise of Drexel.
The sale, which concluded at 1:30 a.m. Wednesday in a New York law office, involved some 300 bonds and related securities issued by about 200 companies. A staggering amount of time was spent on the deal, with one participant estimating that 300 representatives of bidders, investment bankers, lawyers and others were involved.
More than 50 parties expressed interest to Columbia’s investment banker, First Boston, with 30 considering a bid seriously. Eight pre-selected parties ultimately submitted bids on July 16, ranging from $2.2 billion to $3 billion.
Sources said losing bids came from the Tisch family’s Loews Corp.; the Pritzker family of Chicago; the New York banking firm Bankers Trust; the Los Angeles financial services firm Broad Inc.; financier Carl C. Icahn; the New York investment firm Lancer Group, and a group made up of the investment firm Odyssey Partners, banking giant Citicorp and the Wall Street firm Salomon Bros.
Spiegel, whose family still controls Columbia, could not be reached for comment. He has supported selling the bonds in the past, although his relationship with Columbia’s current management is strained. In any event, observers said, any resistance to the sale could be overcome by a takeover by regulators.
Another sticky issue could be raised by losing bidders. The government hired Kidder, Peabody & Co., a unit of General Electric Co., to evaluate the transaction. General Electric Capital, another arm of General Electric, holds about a 3% stake in Gordon Investment Corp., which led the successful bid.
Members of the Gordon group, who did not return phone calls, were said to be concerned about the appearance of a conflict of interest. But officials from the federal Office of Thrift Supervision, who must approve the transaction, said they do not see a conflict because General Electric Capital is a small, indirect investor in the junk bonds.
Separately, Wednesday was the deadline for Spiegel to answer charges brought against him by the OTS this month alleging that he squandered $19 million of Columbia’s assets on such items as corporate jets, condominiums and guns. The government is seeking $24 million from Spiegel, who has vowed to fight the charges. The initial response was not expected to go into much detail on why he denies the charges.
