Drexel Files Plan to Give Creditors Most of Its Assets : Bankruptcy: The reorganization plan would put $2 billion in a trust to pay debts. Left behind would be a small firm with 20 employees.
Drexel Burnham Lambert Inc., which popularized junk bond financing and left a trail of financial wreckage in its wake, filed a bankruptcy reorganization plan here late Friday that would distribute most of its assets to creditors and other claimants.
Under the plan, filed in U.S. Bankruptcy Court, Drexel would emerge from the Chapter 11 proceedings as a shadow of its once-swaggering self. The plan, which has been under development for 15 months, would settle all securities litigation against the firm.
The bulk of Drexel’s $2.48 billion in remaining assets would be placed in a trust fund for the benefit of its creditors and other claimants.
These include junk bond buyers who contend that they were defrauded by the brokerage firm and the Federal Deposit Insurance Corp., which maintains that it lost $11.3 billion because Drexel allegedly induced dozens of savings and loans to improperly invest in the high-risk, high-yield bonds that became the firm’s trademark during the 1980s.
A small reorganized company, known as Newco and employing about 20 people, is all that would be left of a firm that at its peak employed 11,000 and for a time was the most profitable on Wall Street.
Newco, which will focus on financially troubled companies, will hold and actively manage between $300 million and $400 million worth of “relatively illiquid” Drexel securities positions in order to maximize their value.
Drexel epitomized the high-flying 1980s but collapsed after pleading guilty to six felonies and agreeing to pay a record $650 million in penalties for crimes related to securities trading.
The broad outlines of the settlement were provided in a statement issued by U.S. District Judge Milton Pollack. A Drexel spokesman said he would be unable to provide a specific breakdown of who gets what until Monday morning.
As of Feb. 22, Drexel reported assets of $2.48 billion, including more than $1 billion in cash, and liabilities of $2.8 billion. In addition, more than $20 billion in claims are pending against Drexel.
Under the plan, the “vast majority” of Drexel’s assets will be placed in what is known as a liquidating trust owned by the creditors and litigation claimants, Pollack’s statement said. The trust will also own Newco.
Fixed creditors, such as companies that were owed money when Drexel went under, will be paid for their claims, depending in part on how successful Drexel is at managing and selling off its troubled holdings.
The problem holdings include junk bonds, investment banking loans made to clients, stock investments in other companies and bonds of companies that are themselves in bankruptcy proceedings.
The securities litigants--including the FDIC and parties in more than 100 lawsuits against Drexel--will be placed in a separate pool. It will contain distributions from the main trust plus money recovered in settlements or lawsuits against third parties, such as imprisoned Drexel junk bond chief Michael Milken, who operated his empire a continent away from Drexel’s New York headquarters in Beverly Hills.
The firm plunged into bankruptcy when its credit lines dried up, and it defaulted on short-term debt. The collapse followed a decline in the value of Drexel’s huge junk bond portfolio and the lingering effects of its legal troubles.
The more than 400 pages of documents filed in U.S. District Court and U.S. Bankruptcy Court are just an outline of the reorganization plan. The full plan is expected to take several more weeks to draft.
It then will be a subject to vote by the more than 14,000 creditors in the case, including former Drexel employees whose company stock was rendered worthless when Drexel sought bankruptcy protection.
Pollack, who presides over the case along with Bankruptcy Judge Francis G. Conrad, said the reorganization plan could be approved by the end of the year. It must be endorsed by half the individual creditors, representing at least two-thirds of their total claims.
The reorganization plan trust will be headed by three trustees to be approved by the creditors committees and the securities litigants.
The trustees will defend against disputed claims and oversee the disposition of Drexel’s assets “in an orderly manner designed to maximize distributions to the creditors and securities litigants,” the statement said.
The agreements are subject to resolution of a separate claim against Drexel filed by the Internal Revenue Service for an alleged $5.3 billion in back taxes. Drexel is contesting that claim.
