Foothill Group Seeks Cash Infusion After Junk Bond Prices Drop : Finance: The sale of preferred stock to Recovery Equity Investors L.P. would boost capital at a thrift and loan subsidiary.

Under pressure to raise cash for shoring up its Foothill Thrift & Loan subsidiary, Foothill Group Inc. needed to find some deep pockets to fund the infusion. Now, Foothill could end up with both the deep pockets and the people wearing them.

Foothill, whose two main units specialize in making loans to new or troubled companies, said that if regulators approve a tentative deal to sell $3 million of convertible preferred stock to Recovery Equity Investors L.P., it will increase the size of its board to eight and add two representatives of the limited partnership.

The partnership would thus get 25% representation on Foothill’s board while buying the equivalent of about 6% of Foothill’s common shares.

For its part, Foothill would get some relief from regulatory pressure. The finance company, which has executive offices in Los Angeles and Agoura Hills, would use the money from the preferred stock sale to boost capital at Foothill Thrift--something the Federal Deposit Insurance Corp. has been pushing for since February.

That would also be an important step in helping stabilize Foothill’s finances, which have been beset from several directions.

For the three months that ended March 31, Foothill’s net income fell 40%, to $1.26 million from $2.10 million a year before, in part because of a $472,000 loss on investments, mainly the result of falling prices for junk bonds.

In 1990, a much larger $16.2-million loss on investments led to a net loss of $1.73 million. And while the junk-bond problems have been playing out, Foothill has been restructuring more than $35 million in debts originally scheduled to mature this year.

Recovery Equity, based in San Mateo, specializes in taking stakes in troubled companies.

The partnership’s $3-million investment, if approved, would provide the capital Foothill Thrift has needed since the FDIC first said in February that it was worried about the subsidiary’s junk-bond holdings and capital levels. (Capital is the reserve that financial institutions must set aside to protect themselves against future losses.)

Jeffrey A. Lipkin, a general partner of Recovery Equity, said his group would not have made the investment without the understanding that it would gain two seats on Foothill’s board.

The partnership’s 100,000 convertible preferred shares could be converted, for a total consideration of $450,000, into 667,000 shares of Foothill’s common stock--or about 6% of the common shares that would be outstanding if such an exchange were made today.

But Lipkin said his partnership didn’t pressure Foothill to get the representation. And he said the partnership is only guaranteed one board seat, although Foothill’s management has agreed to include another Recovery Equity representative on its slate of directors.

“We are not passive investors,” Lipkin said. “We saw this as a partnership.”

Even before this proposed deal, Foothill had made some strides toward bolstering its balance sheet, reducing its total junk-bond holdings to less than 3% of its assets as of March 31 from more than 9% a year earlier.

And in January, the company managed to persuade one lender to convert a $12.5-million revolving credit facility, due to mature in November, into a new term loan due in 1996, while convincing some note holders to extend the due date on $23.1 million in notes from this year to 1995.

In addition to Recovery Equity, Foothill could gain another new major investor.

Santa Cruz Resources, an indirect subsidiary of Tucson Electric Power Co. that owns about 38% of the common shares of Foothill, plans to sell its stake.

Henry K. Jordan, Foothill’s chief financial officer, said it’s likely that Santa Cruz will sell that stake in one or more large chunks to major investors.