Up to Eight Groups Bid for Columbia S&L;’s Junk Bonds
Three large Wall Street companies, a Canadian investment firm and a group led by a former Drexel Burnham Lambert executive are among up to eight prospective buyers of Columbia Savings & Loan’s troubled junk bond portfolio, sources familiar with the sale said Tuesday.
The Wall Street firms include Goldman, Sachs & Co., a group led by Salomon Inc. and one other company, believed to be the Lehman Bros. unit of Shearson Lehman Bros. Holdings, the sources said.
The number of prospective buyers is surprising, given the uncertainty in the junk bond market, although there is no guarantee that a final deal will be reached. Bidders for the risky bonds had until Monday to notify Beverly Hills-based Columbia. It will now begin negotiations with prospective buyers over the next month under the watchful eye of federal thrift regulators. A Columbia executive declined comment.
Other bidders include a partnership led by Toronto-based Gordon Investment Corp., which had agreed to buy the bonds last summer for $3 billion before regulators killed the deal. Also included are a handful of small investment firms, one of which is a group led by former Drexel investment banker Leon Black and the Wall Street investment firm Whitman Hefferman Rhein & Co.
Only two bidders--Gordon and the Salomon group--were among the eight groups that originally sought Columbia’s bonds when they were put up for sale earlier this year. The Salomon group includes the investment firm Odyssey Partners and banking giant Citicorp. Declining to bid this time are New York financier Carl C. Icahn, Bankers Trust and Broad Inc., a Los Angeles-based financial services company.
Columbia agreed last summer to sell the high-yield, high-risk bonds to the Gordon group, which includes Hong Kong billionaire Li Ka-shing. The sale, which required Gordon to make a 10% down payment and for Columbia to finance the rest, was criticized as being risky for taxpayers.
Columbia, which is deeply insolvent, is expected to be seized by regulators once the bonds are sold. Critics argued that taxpayers would be stuck with the bonds if the Gordon group defaulted.
The Office of Thrift Supervision’s director, Timothy Ryan--the nation’s top thrift regulator--vetoed the sale Sept. 10, citing the fact that all-cash bids were not solicited and that the government could not benefit if the bonds recover value. He also cited lack of a government policy allowing financing of thrift junk bond sales.
Junk bond experts expect that new bids will be structured differently, probably with larger down payments and future benefits for the government built in. In any event, bids are expected to be considerably less than the $3 billion the Gordon group was willing to pay, which means that Columbia’s eventual failure is going to cost taxpayers a bundle.
Most experts believe that the most optimistic scenario is that Columbia will cost taxpayers $500 million, but more likely the cost will be more than $1 billion.
Columbia’s bonds, once worth more than $4 billion, were worth $2.9 billion as of June 30, when the thrift last reported its earnings. But junk bond values have tumbled since then, as economic uncertainties have grown following Iraq’s invasion of Kuwait. Junk bond indicators have fallen 10% to 15%, which means the bonds’ value may have dropped another $300 million to $450 million in the third quarter alone.
Kenneth H. Thomas, a Miami thrift consultant familiar with Columbia’s portfolio, said he expects bids to be around $2 billion, depending on how the government decides to structure the deal.
Columbia assembled its collection of junk bonds under former Chief Executive Thomas Spiegel, using taxpayer-insured deposits to invest largely in bonds issued through former Drexel junk-bond financier Michael Milken. Thrift regulators have held off seizing Columbia, hoping that the bonds can be sold without the government having to take them over.
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