Koll Real Estate Says It Will File for Bankruptcy
Ending months of speculation about its financial future, Koll Real Estate Group Inc. said Friday that it will file a petition Monday to reorganize its debts under federal bankruptcy laws.
Executives and industry analysts said the voluntary action is not expected to affect the company’s operations, including its controversial plans to build up to 2,400 homes just outside Huntington Beach on the highlands adjacent to the Bolsa Chica wetlands.
The environmentally sensitive project has been delayed for years because of debate in court and before numerous government agencies, putting a tremendous financial strain on Koll Real Estate. A court decision last week delayed the start of construction at least six more months.
Executives have tried in recent months to persuade bondholders to swap $210 million in debt for 90% of the company’s stock without going into bankruptcy. Bondholders instead preferred the tax advantages the company could get in a Chapter 11 case.
The petition will include a proposed reorganization plan, already approved by bondholders, that accomplishes the same debt-for-stock swap. The bankruptcy, though, gives the company a potential $200-million tax benefit.
Publicly traded Koll Real Estate should emerge from Chapter 11 debt-free and able to borrow millions more to fend off environmental challenges and finally develop the Bolsa Chica highlands, say executives and industry analysts.
Company Chairman Donald M. Koll called the bankruptcy reorganization “only a financial engineering,” yet hailed it as “the final step” in restructuring a company that Koll Real Estate took over in 1993.
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Industry analyst Alfred J. Gobar of Placentia said KREG now may be able to “break the cycle of these problems, take a deep breath and move forward.” He said the company should have no problem borrowing the money it needs.
However, opponents of Koll’s plans for Bolsa Chica, the company’s biggest single asset, see things differently.
“In high-stakes finance, quite often a reorganization will help a company finally develop a project,” said Marcia Hanscom of the Sierra Club, one of several environmental groups that have joined in a suit to halt the Bolsa Chica development.
“But cash isn’t everything they need,” Hanscom said. “The fact is they have some serious legal and environmental problems that have been upheld in court.”
The Bolsa Chica Land Trust, a grass-roots group and plaintiff in the suit, wants to keep Bolsa Chica pristine and says it would like to raise enough money to purchase the highlands area from KREG.
But whether the company’s bankruptcy and shift in ownership will help or hurt environmentalists’ efforts, “we just don’t know yet,” said Nancy Donaven, a spokeswoman for the land trust.
The wrangling helped reduce the scope of the project, which once called for 5,700 units.
Whatever happens to Koll Real Estate, its bankruptcy woes will be looked at as “a totally isolated event,” said industry analyst Ken Agid of Irvine.
“The real estate industry has a pretty short memory, and investors have already reacted to KREG’s decline,” Agid said, referring to the consistently anemic stock price.
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The company’s stock has rarely topped 30 cents a share during the past five years. It closed unchanged at 13 cents a share Friday in Nasdaq market trading.
Though analysts have speculated that a bankruptcy filing could further tarnish Koll Real Estate’s already lackluster image, Koll said the deal will eliminate the company’s quarterly losses and should help revive its moribund stock.
The bonds that pushed the company into financial hot water were issued in 1989 by a previous Bolsa Chica owner, Henley Properties in New Hampshire, four years before Koll took over operations. Many of those shares eventually were acquired by large investment groups, though thousands of individuals still hold shares.
Koll Real Estate was paying about $6 million a quarter in interest on the bonds by issuing new debt securities and writing off the payments as a loss each quarter. Delays in the Bolsa Chica project prolonged the interest payments and kept Koll Real Estate from earning enough money on its huge land investment to offset the interest payment losses.
The bankruptcy agreement values the development company at $130 million and will pay holders of Koll Real Estate’s $170 million in senior debt, the equivalent of 63.4 cents on the dollar. Holders of $40 million worth of debt subordinate to the senior bonds will receive the equivalent of 31.7 cents for each dollar of debt.
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Bondholders, Koll said, “overwhelmingly” approved the Chapter 11 reorganization plan after rejecting the company’s proposal to swap debt for stock without a bankruptcy. The company needed approval from holders of 90% of the bonds to avoid bankruptcy, but received support only from those with 80% of the debt.
If a federal bankruptcy judge in Santa Ana approves the deal, Koll said the company would emerge from bankruptcy by the end of August with no debt and $130 million in net worth.
The plan also calls for election of six new directors, all nominated by the bondholders, to sit on an expanded 10-member board. That provision cements the bondholders’ control of Koll Real Estate, though Koll would remain as chairman and chief executive.
So-called prepackaged reorganization plans are not unusual when a company is not in imminent danger of financial collapse, bankruptcy attorneys say. Koll Real Estate is not in default on any of its debt.
As part of the negotiated plan, Koll Real Estate stock will be dropped from the Nasdaq national market during the bankruptcy and traded instead on one of the less visible Nasdaq over-the-counter markets.
Koll said the reorganization will revitalize the company, “something we’ve looked forward to for many months.”
But the bankruptcy petition won’t affect Koll’s much more substantial real estate interests in other privately held companies that bear his name, say executives and analysts.
He is owner or part owner of three privately held companies that carry his name: Koll, a real estate services and property management firm; Koll Construction, a major industrial and commercial builder; and Koll Resorts International, which develops resorts in Mexico and is a resort industry consultant in the United States and Mexico.
