Regulators Reject Columbia S&L;’s Junk Bond Sale : Thrifts: The decision by the Office of Thrift Supervision virtually guarantees that the Beverly Hills thrift will be seized. Recession fears may scare off any new bidders.
Federal thrift regulators on Monday rejected the $3-billion sale of Columbia Savings & Loan’s junk bond portfolio to a Canadian-led partnership, all but guaranteeing the thrift will be seized by regulators.
In their unprecedented action, regulators with the Office of Thrift Supervision said the deal as currently structured carried undue risks for Columbia and taxpayers, and could violate last year’s thrift bailout law. They asked the Beverly Hills thrift to seek new bids, and OTS Director Timothy Ryan said in a statement that he hopes additional bids “will result in a proposal that we can quickly approve.”
Industry executives doubted, however, that many substantial new bids for the high-yield securities would be forthcoming, especially cash ones. For one thing, few bidders have the money required.
Junk bond investments also are increasingly risky. Default rates are running at exceptionally high levels. Values last month plunged as investors shunned the bonds because of growing recession fears and uncertainty caused by Persian Gulf tensions. Rejection of the Columbia deal could hammer the market even further because traders fear the thrift’s bonds may eventually be dumped on the market if a sale of the entire portfolio can’t be arranged.
Some thrift executives suggested that rejecting the deal means seizure of the once high-flying thrift will be sooner rather than later, and require a significant taxpayer bailout. Indeed, the OTS took the highly unusual move of suggesting in a statement Monday that a takeover “is a possibility” in light of the serious deterioration of Columbia’s financial condition. Regulators normally avoid any suggestion whatsoever that they might seize an institution.
But sources close to Columbia disputed that, saying the government still wants to avoid taking on Columbia’s portfolio, which would double its junk bond holdings acquired through seizures of failed thrifts. They added that regulators have Columbia on such a short leash that it is being run almost as if it were operated by regulators anyway.
Columbia Savings Chief Executive Edward G. Harshfield said in a brief statement that the thrift is confident that it obtained “the most favorable bid.” But in light of the regulators’ action, he said the firm will move quickly to seek other bids.
Specifically, regulators have reservations about Columbia’s willingness to finance 90% of the purchase of the risky securities by Toronto-based Gordon America.
The OTS criticized the bid process, saying no all-cash bids were sought by the ailing thrift’s management and no bids were considered that would have allowed Columbia to benefit should the junk bonds regain some of their value. As a result, the agency said, it is unsure whether Columbia is getting the best deal.
Regulators also questioned whether the sale would comply with a requirement in last year’s thrift bailout law that savings and loans rid themselves of junk bonds by 1994. Columbia, which agreed to finance the sale over 10 years, could have ended up with the risky securities if the Gordon group defaulted, meaning that it might own junk bonds again after the date thrifts were supposed to have totally divested them.
Gordon was to put up a $300-million down payment, financing the remaining $2.7 billion with a loan from Columbia. Critics had argued that Columbia still carried the risk because Gordon could default on the note, walk away from the deal and not face penalties. That would stick Columbia, and ultimately taxpayers, with the risky securities, critics argued.
Under former Chief Executive Thomas Spiegel, Columbia was one of the nation’s most profitable and strongest thrifts as it reaped big profits from its junk bond holdings, bought mostly through former Drexel Burnham Lambert financier Michael Milken.
The value of its bonds, however, plunged by about $1 billion over the past year as companies that issued them ran into financial troubles and investors shunned junk bonds because of recession fears. Spiegel, who resigned Dec. 31, is now being charged by the OTS with squandering Columbia assets. The agency is seeking at least $24 million in restitution and fines from him.
Because of Columbia’s losses, government regulators now have clear grounds to seize the thrift because it is insolvent by a staggering $352 million.
Beyond that, Columbia needs $464 million just to meet the most basic of three federal requirements for capital, the financial shock absorber it must maintain to protect against losses. It needs $576 million and $700 million, respectively, to meet the other two measurements, amounts most thrift experts believe is impossible to raise.
Columbia officials had argued that they could get a better price by financing the deal despite the risks.
Miami thrift consultant Kenneth H. Thomas, a critic of the Columbia-Gordon deal, estimates that Columbia’s bonds, now valued on its books at $2.9 billion, would be worth only about $2.5 billion if sold for cash. That means that Columbia’s negative net worth could swell another $400 million or more if they are sold for that amount.
Despite the huge losses, regulators have let Columbia operate independently, hoping for a private sale of the junk bonds to avoid taking them over themselves. Many thrift experts believe that keeping Columbia open much longer may might subject the OTS to extensive criticism in Congress.
“At some point you have to ask why are they allowing Columbia to keep operating under special conditions and exceptions. It’s like grading a test, giving the student an incomplete and letting the student have another chance,” Thomas said.
Gordon was selected in July from among eight investment groups that bid between $2.2 billion and $3 billion for the junk bonds. The losing bidders included the banking firm Bankers Trust; a Los Angeles financial services company Broad Inc.; financier Carl C. Icahn; the billionaire Pritzker family of Chicago; Loews Corp.; a New York investment firm Lancer Group, and a group that included Citicorp, Salomon Bros. and Odyssey Partners.
Officials from Gordon America, whose principals are the Gordon Investment Corp. of Toronto and billionaire Hong Kong businessman Li Ka-shing, could not be reached for comment. Executives from the other bidders could not be reached as well. Sources said two of the losing groups, Odyssey Partners group and Bankers Trust, were clearly more interested and doubted some of the others still would be.
Sources said regulators clearly prefer a cash sale in which Columbia gets rid of the bonds and their risks for good, even if the price is lower than what Gordon bid. Sources close to Columbia said one of the strongest proponents of such a deal is L. William Seidman, chairman of the Federal Deposit Insurance Corp. and the Resolution Trust Corp., the agency formed last year to mop up dead thrifts.
But David Kelso, a top assistant to OTS director Ryan, said OTS officials have had reservations for some time, and had made it known to bidders early on that they were skeptical of the financing terms. Kelso emphasized that the decision was Ryan’s, not Seidman’s.
California Savings & Loan Commissioner William D. Davis, who also must approve the deal, said he had reservations as well. Davis said he believes that it may be hard to find bidders willing to pay cash.
