Gulf Crisis Could Halt Columbia’s Junk Bond Sale
Fighting in the Persian Gulf could jeopardize the $3-billion sale of Columbia Savings & Loan’s junk bond portfolio to a Canadian investment group, according to a clause in the sale agreement.
The clause states that Gordon America, the Toronto-based partnership planning to buy the bonds, has the right to bail out of the deal if there is “continuing, armed hostilities involving the United States or Canada” between now and the scheduled closing date of Oct. 2. The agreement to sell the bonds was reached July 25, a week before Iraq’s invasion of Kuwait and the subsequent military buildup in the Middle East.
Thomas I. A. Allen, a partner with Gordon Investment Corp., which is leading the buyout group, said Friday that Gordon America “has every intention” of going ahead with the purchase, which must be approved by federal and state regulators. But, he said, the Middle East developments and their potential effect on the U.S. economy have increased uncertainty.
“The events obviously increase the risk every day with respect to this portfolio. It is something we are watching very carefully,” Allen said.
Sources familiar with the transaction said similar contracts often allow buyers to back out because of acts of God or extraordinary events. But, they added, the reference to U.S. fighting is more specific than normal and unusually relevant given the events this month.
The clause was revealed in Columbia’s quarterly 10-Q statement, filed with the federal Office of Thrift Supervision.
The filing by the Beverly Hills-based thrift also shows that Gordon may back out if there is a decrease of 7.5% in the Merrill Lynch High-Yield Bond Index. So far, the index has dropped less than 1% since July 25.
The Gordon partnership, which includes Hong Kong billionaire Li Ka-shing, may also back out if it has not received regulatory and corporate approval by Sept. 20. In addition to Columbia’s board, the deal must be OKd by the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and California thrift regulators.
The sale is expected to cost Columbia at least $50 million, including fees for its investment banker, First Boston. Terms also call for interest income received after the deal closes to go to Gordon, not Columbia.
The plunge in value of Columbia’s junk bonds, which it must sell by 1994 under last year’s thrift bailout law, has wrecked the once-healthy thrift. Last week, it disclosed that it lost $136.5 million in the second quarter and that it has a negative net worth of $352.2 million. Even if the bond sale is successful, the thrift’s chances of survival are slim, thrift experts say.