ORANGE COUNTY IN BANKRUPTCY : Brokerage Offers New Estimate of Fund’s Assets, Loans
How much is left in the Orange County investment fund-- really ?
Salomon Bros. officials acknowledged Monday that they erred last week in their initial estimate of the value of the bankrupt fund’s securities and the total amount of loans it owed.
But they say the error does not change the most important number--the $5.03 billion that the brokerage figures to recover for fund investors by liquidating the portfolio’s bonds. In other words, investing agencies still are looking at a 27% loss on their original principal.
Salomon said it discovered late last week that the fund still owed the Paine Webber brokerage $390 million, an amount that was not included in the $2.56 billion of outstanding loans Salomon listed as of last Tuesday.
But because the Paine Webber loan, like the other $2.56 billion in brokerage loans, was fully collateralized with bonds, the $7.96-billion market value that Salomon had placed on the remaining fund assets also was $390 million too low.
And because the additional loan and additional collateral net each other out, Salomon said the unencumbered part of the portfolio--the amount that belongs to fund investors--stays at about $5.4 billion, of which $5.03 billion is in bonds and the rest in cash or cash due.
In its initial auction sales of fund securities last week, Salomon said it raised $1.39 billion. Of that amount, $792 million went to pay off the Paine Webber loan and to begin paying off the fund’s biggest creditor, Merrill Lynch & Co., which had lent the fund about $2 billion.
The other $598 million raised last week will go back to the fund as cash, as will the $175 million raised Monday when Salomon sold six mortgage-backed bonds held by the fund.
The fund still must repay about $2.16 billion in brokerage loans. Most analysts have assumed that Salomon would seek to retire that debt early in the liquidation process, and sources say Salomon is coordinating its securities sales with Merrill Lynch.
After the loans are paid off, all additional proceeds from securities sales will flow directly to the fund. But because most of the remaining securities owned by the fund are complex “derivative” bonds, they are expected to be difficult to sell.
Salomon is negotiating with the four U.S. government agencies that issued most of the fund’s derivative bonds, attempting to restructure the securities rather than sell them in the open market.
Analysts believe that restructuring those securities to eliminate their high-risk nature could allow the fund to recover slightly more than Salomon now figures the bonds would fetch in the market: 89.9 cents per dollar of face value.
