Failed-S&L; Junk Bond Sales Hit $900 Million
The executive overseeing the government’s efforts to sell more than $3 billion in junk bonds inherited from failed thrifts said Thursday that officials have sold $900 million of the risky bonds this year, about $350 million more than previously disclosed.
Elisabeth N. Spector, director of the finance and administration division for the federal Resolution Trust Corp., also said in an interview that the recent softening in the junk bond market has forced the agency to become more flexible during the past two months in dealing with prospective buyers.
Getting rid of the bonds is one of the government’s toughest challenges in cleaning up the thrift debacle and minimizing the cost to taxpayers. Investors are increasingly shunning the high-yield bonds amid growing fears of a recession. Spector said, however, that sales have gone better than expected, especially given the volatile market and the fact that the RTC is trying hard not to harm the market further by dumping bonds.
“I would say we are pleasantly surprised,” she said.
Spector said the RTC has changed its selling procedure because of the increased volatility of the market. In the past, it might have notified five prospective buyers when it decided to sell, giving them as little as 30 minutes to decide, Spector said. Now, to encourage sales, it is notifying 10 or more prospective buyers, sometimes giving them overnight to think about it, she said.
The junk bond market has been pummeled since early August by growing economic uncertainties in the wake of Iraq’s invasion of Kuwait and a subsequent rise in oil prices. Since the invasion, Spector said, the pace of junk bond sales by the RTC has varied considerably--from zero one week to a high of $115 million another week.
Spector would not give the current size of the RTC’s junk bond holdings because an updated list will be released soon. As of July, it owned about $3.7 billion. The amount is now believed to be between $3.3 billion and $3.4 billion.
Spector declined to comment on chances that officials will adopt a potentially controversial policy of helping finance purchases of junk bonds. The controversy stems from Columbia Savings & Loan’s aborted attempt to sell its huge portfolio for $3 billion this summer to a Canadian-led investment group in a deal that Columbia would have financed.
Regulators with the Office of Thrift Supervision scrapped the deal, citing concerns over the financing terms and also lack of government policies allowing thrifts to finance such purchases. Columbia has not been taken over by regulators, although they are watching it closely because it is deeply insolvent.
Columbia on Wednesday put the bonds up for sale again and, at the urging of regulators, released for the first time a complete list of its holdings.
Spector also declined to comment on criticism by some traders and analysts that killing the Columbia sale will cost taxpayers much more than if the government had let the sale go through. Critics of the government action contend that Columbia cannot possibly hope to get a $3-billion offer again because increasing recession fears are making junk bonds even more risky for buyers. Some traders and analysts believe that Columbia will be lucky to get $2 billion.
Spector said the RTC, formed last year to clean up the nation’s S&L; mess, is expected to present the issue of financing next week to the RTC’s policy-setting Oversight Board. She added that the RTC plans next week to also select a firm to advise it on how best to liquidate its portfolio.
