Buyer of Columbia Junk Debt Includes Asian Heavyweight
Acting quickly to address doubts about its financial wherewithal, the investment group planning to buy Columbia Savings & Loan’s troubled junk bond portfolio for $3 billion said Friday that it is half-owned by Hong Kong billionaire Li Ka-shing.
The disclosure that one of the world’s wealthiest individuals is involved in the proposed deal comes amid concerns that the transaction still carries risk for Columbia and taxpayers should the Gordon America partnership default on a loan it plans to use to finance the purchase.
As announced Wednesday, the Canadian-led investment group will make a $300-million down payment to Columbia, with the troubled Beverly Hills thrift financing the rest by carrying a $2.7-billion, 10-year note with a 10.5% annual interest rate.
Concerns have been raised by some observers and members of Congress that Columbia, and ultimately taxpayers, still won’t be shedding their risk because Gordon could default on the note. If that happened, they argue, Gordon would walk away from the deal, sticking Columbia with the junk bonds and huge potential losses.
Columbia bought the bonds with taxpayer-insured deposits in the 1980s. The interest payments initially produced huge profits, but the junk bond market collapse caused nearly $1 billion in losses.
Thomas I. A. Allen, a member of the Gordon group, said in an interview that disclosure of Li’s involvement through three companies he controls was made partly to reassure regulators and Congress that the group is solid financially.
“People want to know who we are. We are saying we are responsible people with good backing,” he said.
A former toy salesman, Li, 62, controls a net worth of more than $1.2 billion, according to Forbes magazine. One source close to the deal said Li did not want to disclose his interest but felt it was necessary. Allen, however, said that Li may have had to disclose it anyway because he controls publicly held companies in Hong Kong. Li’s trading firm, Hutchison Whampoa, and a real estate firm, Cheung Kong, will each hold 20% of Gordon America, with 10% held by a private company of Li’s. Li will also put up $150 million of the down payment.
Li’s representatives could not be reached for comment, but in a newspaper interview last year he said he was seeking to further diversify his investments beyond Hong Kong, where 90% of his assets are based. China will take control of Hong Kong in 1997.
Gordon America was formed by Gordon Investment Corp. Hutchison Whampoa is a small investor in Gordon Investment with a stake believed to be less than 5%. The largest institutional shareholder is Canadian Imperial Bank of Commerce with a 26% stake, according to sources familiar with the firm.
Allen said Gordon needed Li’s added investment to make the purchase work. Because of the large size of the portfolio relative to Gordon’s capital, the deal entails high risk.
Allen downplayed the risk Gordon will default, arguing that it is a well-financed group that wants to hold the bonds for years. He said the alternative to selling the bonds to Gordon is for thrift regulators to seize Columbia, which is insolvent, and add the bonds to the federal government’s nearly $4-billion portfolio. If it did that, he said, it would give up Gordon’s $300-million down payment.
Allen added that any future declines in the bonds’ value will have little effect on Gordon’s investment strategy because it doesn’t plan to trade them.
Allen said the group realized that the sale could run into resistance from regulators or Congress.
“Someone called me the other day to congratulate me and said ‘You got the girl,’ ” Allen said. “I said, ‘All we got was the right to speak to her father.’ ”
