Analysis claims First Capital can afford its debts.

Bankrupt life insurance holding company First Capital Holdings Inc., subsidiaries of which were seized by state regulators last year, could fully honor policyholders' claims and other trade debts and still have $843.1 million left over, according to one confidential liquidation analysis obtained by the Los Angeles Business Journal last week.

Lawyers close to the case said the analysis sounded "optimistic."

The $8.46 billion-in-assets First Capital, based in Century City, ran two life insurance companies, the Richmond, Va.-based Fidelity Bankers Life and the San Diego-based First Capital Life, which invested about 40 percent of assets in high-yield junk bonds.

A policyholder run caused California and Virginia state regulators last May to seize the insurance subsidiaries. The run occurred after California Insurance Commissioner John Garamendi got on national television and pronounced First Capital Life's finances to be shaky.

First Capital Holdings declared Chapter 11 shortly after the state seizures.

However, since the seizures, the junk bond market has staged a historic rally, propelling upward the value of the First Capital insurers' portfolios.

First Capital bondholders and shareholders, nearly wiped out by the seizures and the subsequent bankruptcy, now cry foul and want to know why they can't be made whole.

Bondholders, as part of an official committee of First Capital creditors, have hired Century City lawyer Dean Ziehl, of Pachulski, Stang & Ziehl, to carry their cause into bankruptcy court. Judge Samuel Bufford is presiding over the case.

To date, states' insurance commissioners, including California's Garamendi, have refused to release financial data on the First Capital life insurance subsidiaries.

Data on First Capital Holdings, submitted to Judge Bufford from the investment banking firm Salomon Bros., is under seal.

Indeed, the official creditors committee is only now gaining access to a top-secret room where First Capital financials have been ensconced. "We have been told that in addition to potential bidders, the creditors committee will get access to the data room," said lawyer Ziehl.

Garamendi's office and Virginia regulators have not explained why insurance company financials are being kept behind closed doors -- such financials were routinely filed and available to the public before the seizures.

The insurance commissioners have said that financials will and are being made available to potential bidders for the insurers.

But a "confidential liquidation value analysis," evidently prepared by an investment banking firm close to the bankruptcy, concludes that First Capital's bond holdings, including junk bonds, have surged by $624 million in value since last year.

According to the document, First Capital and its two insurers could honor policyholder claims and other liabilities, and still have $843.1 million in the till.

At that point, First Capital would still owe $115 million to bondholders, $282.4 million to banks and other lenders, and another $28.4 million in undefined liabilities.

Assuming all of those debts were honored, there would be about $417.4 million left over for shareholders, according to the documents.

Evidently, bond traders have sniffed out First Capital's huge reserves; First Capital bonds, which traded as low as 4 cents on the dollar several weeks ago, were trading for 14 cents last week. For those traders in the bonds, which includes clients of brokerage house Jefferies Group in West Los Angeles, handy 200 percent returns have been made, at least on paper.

However, one lawyer representing First Capital Holdings, Bruce Bennett of the Mid-Wilshire-based law firm Stutman, Treister & Glatt, a leading bankruptcy outfit, questioned the accuracy of the liquidation analysis. "I don't recognize these numbers as accurately reflecting First Capital Holdings," said Bennett, after receiving a faxed copy of the purported financials.

But Bennett would not state in what manner the financials were inaccurate, or whether they under- or overestimated First Capital's value.

Bennett hinted that bondholders may be trying to influence the market by releasing phony, overly positive financials. But he also refused to rule out that Salomon Bros., hired by First Capital to prepare financial documents, was the source of the documents.

A First Capital shareholder, Illinois investor Bob Bland, said he had been faxing the "confidential analysis" around, but that he was not the source of the financials.

Bondholders and shareholders have been angered by First Capital's reorganization plan, prepared by Bennett and Stutman, Treister & Glatt lawyers.

The plan wipes out bondholders and shareholders, and basically turns the company over to New York-based brokerage house Shearson Lehman Bros. and the bank Citibank. Former officials of Shearson are now running First Capital, and Citibank led a bank group that lent First Capital $275 million.

Ziehl, lawyer for the creditors committee, has lambasted the plan to give First Capital to Shearson and Citibank. "The creditors' committee firmly believes that a far better proposal for both policyholders and creditors can be achieved than the deal which has been presented to Garamendi and the U.S. Bankruptcy Court. Shearson and Citibank cut a sweetheart deal among themselves," he said. "In doing so, they have proposed a plan that protects their own interests and ignores the legitimate claims of creditors."

Illinois investor Bland was also angry last week. "Everybody says shareholders get wiped out in a bankruptcy," he said. "But I say they don't, not if there is a lot for equity left after creditors have been satisfied. And I think there is a lot of equity here."