Junk Bond Swap Proposed to Save Forest

The largest grove of old-growth California redwoods in private hands could be saved from logging in what state officials and environmentalists are billing as the first U.S. “debt-for-nature” swap.

California officials said Tuesday they are negotiating to preserve the 3,000-acre Headwaters Forest in Humboldt County in a trade involving junk bonds issued by the forest’s owner, Pacific Lumber Co. The state wants to acquire the high-risk bonds, now owned by the federal government, and use them in a trade for the forest land.

Plans to cut the stand of redwoods were the subject of passionate environmental protests, particularly last summer, and were a central issue in voter initiatives that sought to fundamentally alter the California logging business. The most stringent initiative, Proposition 130, failed by a narrow margin.

Pacific Lumber has long been criticized by environmentalists for dramatically increasing its rate of cutting in other timber stands in Northern California to raise money to pay off its junk bonds.

The bonds, reportedly valued at $55 million, were owned by Columbia Savings & Loan of Beverly Hills but were obtained by federal officials in January when they seized the ailing thrift. By reacquiring the bonds in a swap, Pacific Lumber would no longer be obligated to pay off the debt. Junk bonds typically pay high yields and thus are very expensive for a company to issue.

David Galitz, a spokesman for Pacific Lumber, confirmed the negotiations. “It’s been (going on for) a while,” he said. “Certainly we’re trying very hard to make it work, because that seems to be what the general public wants to happen.”

State officials hope to work out a joint state-federal protection effort, John Amodio, environmental policy adviser to Gov. Pete Wilson, said Tuesday night. Wilson has called for protection of the Headwaters stand.

The negotiations with Pacific Lumber “could profoundly affect whether the state plan to protect the Headwaters proceeds as smoothly and relatively painlessly as we believe may be possible,” Amodio said.

A spokesman for the Resolution Trust Corp., the federal agency handling the sale of the junk bonds, said he was unaware of any firm plans for a swap, but added that environmentalists have been discussing the idea for weeks.

Patrick Shannon, a Northern California environmentalist and outspoken advocate of the swap effort, is thought to have conceived of the deal only days after the bonds were seized. Shannon failed to launch a ballot initiative last fall to gain control of Pacific Lumber under the power of eminent domain.

“Patrick came home and said, ‘Debt-for-nature swap, Katherine, let’s do it!’ ” his wife, Katherine Shannon, recalled.

Such swaps have been made in recent years in several developing nations to settle part of those nations’ debts to U.S. banks and to preserve threatened lands.

At first, federal officials said they lacked the flexibility to make such a bond swap, said Amodio.

“We weren’t satisfied with seeing these assets just vaporize on to some secondary bond market, with much less value returned to the public,” Amodio said. The Wilson Administration supported a federal measure, introduced by Rep. Frank Riggs (R-Windsor), to explicitly grant the RTC authority to use the bonds for the swap.

Amodio declined to speculate on when negotiations might conclude, but vowed that the state would continue to press for a swap.

Times staff writer James Bates contributed to this story.