Battle On to Salvage FarWest : Thrifts: A large junk bond portfolio has hobbled the high-flying Belzberg brothers, and most agree that only a cash infusion can save their S&L;.
FarWest Savings had long been a good investment for the Belzberg brothers of Canada--Samuel, Hyman and William.
Acquiring FarWest in 1974 gave the Belzbergs a foothold in the United States. Then, using the thrift and and First City Financial Corp. Ltd. in Vancouver, Canada, they became among the most feared corporate raiders and takeover strategists on the U.S. scene during the 1980s. Often acting as so-called greenmailers, their hostile bids made them millions of dollars.
But today, their U.S. flagship is in danger of sinking. On Thursday, federal regulators imposed operating restrictions on FarWest, prohibiting the purchase and sale of assets and the making of any loans without regulatory approval.
The action is a blow to the Belzbergs--and puts greater pressure on them to bail out the faltering institution. Without a fresh infusion of capital, FarWest is likely to join the government’s portfolio of failed thrifts.
“The thrift’s survival is largely predicated on what their principal owners want to do,” said Gerry Findley, a Brea banking and thrift consultant.
Like some other high-flying S&Ls;, Newport Beach-based FarWest’s problem stems not so much from bad loans--the savings and loan has been profitable on an operating basis--but from huge investments in junk bonds.
FarWest officials say it is being brought down by the federal law designed to save the S&L; industry--the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The new law banned junk bonds--high-yield, high-risk debt securities--from thrift portfolios by July, 1994.
The thrift has been staking its revival on a plan that called for trimming assets, selling junk bonds and bolstering capital with a new stock offering to shareholders of its parent firm, FarWest Financial Corp. in Beverly Hills.
FarWest officials have admitted that a failure to get the plan approved could be fatal. “The company’s ability to continue as a going concern depends upon receiving approval of a plan,” the company said in a recent filing with the Securities and Exchange Commission.
But regulators in San Francisco at the Office of Thrift Supervision, which oversees thrifts, last week rejected the plan. FarWest has appealed to thrift regulators in Washington.
Charles Green, chief executive of FarWest, said the regulators, in part, objected to how the thrift wants to treat a subsidiary holding junk bonds and equity real estate investments. The S&L; wants to liquidate the unit and fold it into the thrift as a direct holding.
If the plan’s rejection is upheld, FarWest would have to write off about $60 million in capital, rendering it insolvent with a negative net worth of $23.6 million to $75 million, depending on accounting and tax considerations, the thrift says.
Analysts speculate that another major problem may be an unwillingness by the Belzbergs, who control 57% of FarWest Financial, to commit themselves to putting more of their own money into the thrift.
“Other investors would want the assurance that the Belzbergs are coming in,” said Kenneth H. Thomas of Miami, an industry consultant. “If the Belzbergs don’t come in, investors would wonder why they should step forward.”
Neither William Belzberg, chairman of FarWest Financial and FarWest Savings, nor Samuel Belzberg, chairman of First City, responded to several requests for interviews.
FarWest is among a handful of large thrifts that together acquired billions of dollars of junk bonds through Michael Milken and Drexel Burnham Lambert Inc. Earlier this year, Drexel filed for bankruptcy and Milken pleaded guilty to criminal charges stemming from his junk bond activities.
Most of those who loaded up on junk bonds make up a rogues gallery of troubled thrifts now under regulatory control: Lincoln Savings in Irvine, Imperial Savings in San Diego, Gibraltar Savings in Simi Valley, CenTrust Bank in Miami and Silverado Banking, Savings & Loan in Denver. Columbia Savings of Beverly Hills was the biggest junk bond buyer among thrifts but has not been seized.
While some industry analysts and consultants feel that FarWest once stood a better chance than its beleaguered brethren of surviving, they now say that regulatory restrictions could be a prelude to a federal takeover.
In August, 1989, FarWest Savings had $667 million in junk bonds, about 14% of its $4.8 billion in assets. The company has written down its junk bond holdings since. Its portfolio was valued at $395 million as of June 30.
The S&L; lost $46.1 million last year, $25.8 million in the first quarter of 1990 and $3.7 million more in the second quarter. Most of the red ink is attributed to the writedown of its junk bonds.
While solvent, FarWest does not meet the tougher capital standards imposed by the new federal thrift law. As of June 30, its $37.7 million in tangible capital, one measure of stability under federal law, was $23.6 million short of requirements.
It also faces several troubling lawsuits. Farwest was hit earlier this year with a $24-million judgment by a Denver jury. The civil case, which Farwest has appealed, alleges that the thrift reneged on a $5-million loan and ruined the plaintiff’s business. In another case, four shareholders allege that FarWest wasted assets through its junk bond activities.
While it continues to make a profit on operations, the thrift has been hurt by loans it made in Colorado, Utah and Texas in the mid-1980s. FarWest stopped lending in those states three years ago when the loans soured with the energy bust.
Despite the problems, FarWest executives say they are confident about the thrift’s future if they can overcome regulatory hurdles. They say they have already taken several steps to turn FarWest around.
* Last year, the holding company contributed $12.5 million of its cash in hand to the S&L;’s capital base.
* To help meet capital standards, FarWest is reducing its assets. Thrift officials said that in the second quarter, assets were cut to $3.7 billion, partly by selling a mortgage-banking unit to managers who started it six years ago. The S&L; plans to shrink to as low as $2.7 billion.
* FarWest has cut staff and overhead expenses.
* Under a regulatory mandate, the thrift is reducing costs by eliminating brokered deposits, the large-denomination funds that seek the highest interest rates.
* Lending has been nearly halted.
Clearly the key to FarWest’s survival is more capital, the thrift’s final cushion against losses. But it is unclear whether the Belzbergs are willing to risk any more of their own cash.
“It comes down to whether it is in their interest to preserve this and salvage their investment,” Findley, the Brea consultant, said. “Or they may be at the point of saying, ‘Oh well, let that thing go. We’ve got better things to put our money in.’ ”
The Belzbergs would not be the first to walk away from a thrift investment.
In June, Huntington Beach developer Frank Mola decided that he wasn’t going to add to the $12 million he already had put into Charter Savings Bank in Newport Beach and allowed regulators to seize it. The law’s new standards for determining capital had wiped out the solid base that Charter thought it had.
On Aug. 3, M. Lee Pearce quit as chairman of AmeriFirst Bank in Miami, saying that he would not risk any more funds without more cooperation from regulators. Pearce, who picked up $65 million in his failed takeover bid of American Medical International Inc. in Beverly Hills last fall, had invested $8.5 million in ailing AmeriFirst 14 months ago.
“I’m sure the Belzbergs read about people like Pearce, and they may say, ‘Sometimes, you run up against a team you just can’t beat,’ and they may leave the industry,” Thomas suggested.
The Belzbergs, most observers agree, have a keen eye for what makes economic sense.
Sons of a Polish immigrant, the characteristically close-mouthed brothers built an empire from their base in Calgary, where their father, Abraham, operated a furniture store. Hyman, 63, runs that store, Cristy’s Arcade, today.
Sam, now 62 and the only brother with a college degree, led his brothers first into real estate and oil and gas leases in Alberta. In 1962, needing financing, he started City Savings & Trust Co. in Calgary, the predecessor to First City Financial’s banking unit, First City Trust Co. It grew to become one of the largest financial institutions in Canada.
The Belzbergs gained widespread attention in their native land in 1973 when they sold their majority interest--62%--in a real estate firm for $48 million, without requiring the buyers to offer the same terms to minority shareholders. The following year, in a friendly transaction, they won controlling interest in FarWest Financial.
FarWest Financial owned State Mutual Savings & Loan, a thrift that opened in Los Angeles in 1889 and held $450 million in assets in 1974. The Belzbergs moved the S&L; to Newport Beach and later changed its name to FarWest Savings.
William Belzberg, 57, moved to Los Angeles in 1976 to oversee the family’s first major investment in the United States. He also oversees First City Properties Inc., a real estate development firm in Beverly Hills.
The combined assets of FarWest, First City Financial and First City Properties--estimated at about $7 billion in 1980--allowed the Belzbergs to raise capital for more serious empire building. Their corporate entities often provided financing for corporate takeovers or joined in as investor partners.
Over two years, for instance, the Belzbergs used First City to buy 22.6% of Bache & Co., a major New York brokerage. But Bache found a white knight in 1981 and sold out to Prudential Insurance Co. of America. First City booked a $48.7-million gain on the sale of its shares.
In 1983, FarWest backed a Belzberg-led effort to acquire Bekins Co. in Glendale. The company, however, abandoned this effort to join Texas oilman T. Boone Pickens’ investment group in a raid on Gulf Oil Corp. The hostile bid for Gulf put the giant oil firm in play and sent its stock soaring. Chevron eventually bought Gulf, and FarWest walked away with a profit of $8.4 million.
The Belzbergs did not stop with Gulf. They took runs at many companies, including Blue Bell, H. H. Robertson, U.S. Industries, Masonite and Ashland Oil. But they gained a reputation as raiders and greenmailers, mostly looking to be paid to go away.
They picked up $14 million from Ashland in 1986 when the Kentucky refiner and marketer paid the Belzbergs nearly $6 a share more than it cost them to acquire about 9% of the company. Ashland also extracted a promise from the Belzbergs to leave it alone for 10 years.
So feared were the Belzbergs that in 1986, when they took a small position in Southland Corp., the owner of the 7-Eleven convenience store chain, the controlling Thompson family scrambled to keep the company. The Thompsons took Southland private in a $5.3-billion, leveraged buyout. But the huge debt load forced Southland into bankruptcy this year.
The Belzbergs have taken control of some companies. Analysts thought the brothers had overpaid for Scovill Inc., a Connecticut company that made Yale locks and Hamilton Beach household appliances. They soon sold off all but one division for $176 million, more than they paid for the entire company in 1985.
All the while, FarWest grew steadily, fueled by the profits of attempted takeovers, and from traditional thrift operations and junk bond investments.
It built a mortgage banking operation in six years to a $1.5-billion portfolio at the end of last year. The S&L; moved more aggressively into construction lending for single-family homes and apartment buildings.
But it was junk bonds and brokered deposits that gave the S&L; its biggest boost, helping it grow from $1.1 billion in assets at the end of 1982, when deregulation opened the doors to a wide array of new investments, to nearly $5 billion last summer.
Despite regulators’ concerns about junk bonds, the S&L; continues to emphasize that it is making money on an operating basis. However, it increased reserves for loan and investment losses by $16.9 million in the second quarter. And the company noted that its regular annual examination now under way could result in additional reserves being set aside.
“They’re profitable on a core basis, but it’s hard to divorce the effects of the junk bonds,” said James M. Marks, an analyst at SNL Securities.
Other than the junk bond problem, FarWest is “doing quite well and, given time, will sort itself out,” said industry consultant David L. Smith, managing associate of Kaplan, Smith & Associates in Glendale.
As far as Smith is concerned, FarWest’s losses from junk bond holdings are “absolutely a case where Congress is killing an institution” by the passage of the industry-restructuring law. The ban on junk bonds, he said, was aimed at specific thrift executives disliked by regulators.
FarWest’s junk bond portfolio has several securities that were in default this year, including those of Braniff, Eastern Airlines and Southmark Corp., all of which filed for Chapter 11 bankruptcy. But the thrift maintains that its junk bond portfolio overall, including investments in McCaw Cellular, National Intergroup, RJR Nabisco and Pacific Lumber, is performing well and providing needed income.
Other analysts, however, don’t buy the virtues of junk bonds, at least for thrifts.
Thomas, an expert on junk holdings by thrifts, charges that thrifts simply never had any business putting federally insured deposits at such a high risk by investing them in junk bonds. From the start, he said, the bonds were grossly overpriced by Milken and Drexel.
“With or without (the new federal law), major junk bond defaults were bound to occur,” he said.
And Bert Ely, an Alexandria, Va., consultant, believes that five years is long enough to get rid of portfolios in an orderly fashion.
“It’s important not to shed too many tears for the FarWests of the world,” Ely said. “They were enticed by the high yields and really thought that those issuing junk bonds were giving away a lot of money. I suspect that over time, junk bonds won’t outperform Treasury bonds.”
