Bondholders may get 79% of CalFed's equity via swap.Hanging over proposal is possibility of feds' action In a high-stakes bid for survival, a stock-for-bonds swap has been proposed by giant thrift holding company CalFed Inc., as federal regulators weigh the future of the 67-year-old landmark California Federal Bank California Federal Bank, often abbreviated to "Cal Fed", was a savings and loan bank in California. It existed from 1926 until 2002, when its parent company Golden State Bancorp was acquired by Citigroup, resulting in the bank being merged into Citibank. . CalFed stockholders will vote yea or nay next week on the deal that would give 79 percent of the thrift's stock to bondholders. Los Angeles-based California Federal Bank, a $17.48-billion-in-assets S&L headed by Chairman Jerry St. Dennis, is under heavy federal pressure to boost its level of capital -- just as sour Southland real estate loans rip through the bank's balance sheet. The bank, on an operating basis, has lost $380.8 million in the last three fiscal years. St. Dennis has warned shareholders that California Federal, the nation's fifth-largest thrift, could be seized by federal regulators if his proposal is not approved at a special shareholders meeting Dec. 16. Figuratively speaking, "capital" is money a thrift has in the vault "In the Vault" is a short story by American horror fiction writer H.P. Lovecraft, written on September 18, 1925 and first published in the November 1925 issue of the amateur press journal Tryout. , as opposed to loaned out. The federal Office of Thrift Supervision The Office of Thrift Supervision (OTS) was established as a bureau of the Treasury Department in August 1989 as part of a major Reorganization Plan of the thrift regulatory structure mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C.A. wants the 170-branch California Federal to boost its capital by $25.7 million to $666 million by Dec. 31 or face seizure. By March 31, 1993, California Federal must pony up another $42 million -- and perhaps another $40 million by June 30, 1993, to meet even tougher federal capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. . Another hurdle for St. Dennis: CalFed Inc. owes $160 million to bondholders, due Feb. 20, 1993. Wedged as he is between a rock and hard place, St. Dennis has proposed turning the company over to bondholders. In Dennis' proposed stock-for-bond swap, the bondholders would turn in their corporate IOUs and take back a 79 percent equity stake in a restructured CalFed -- and thus the $160 million in bonds would be converted into thrift capital. With the swap, California Federal would meet capital guidelines through June 1993. The deal, crafted by Mark Maron, Dennis' investment banker Investment Banker A person representing a financial institution that is in the business of raising capital for corporations and municipalities. Notes: An investment banker may not accept deposits or make commercial loans. in the local offices of First Boston First Boston Corporation was a New York-based investment bank, founded in 1932 and acquired by Credit Suisse in 1988, when it became 'CS First Boston'. Globally referred to as Credit Suisse First Boston after 1996, the First Boston part of the name was phased out in 2006. , must be approved by the 5,600 CalFed shareholders. At least half of shareholders (by voting rights Voting rights The right to vote on matters that are put to a vote of security holders. For example the right to vote for directors. voting rights The type of voting and the amount of control held by the owners of a class of stock. ) must vote to accept their 100 percent ownership stake being slashed to 21 percent. They do get a sweetner -- warrants to buy CalFed stock at $2.10 a share in June 1994. If CalFed prospers in years ahead, the warrants would rise in value. "We have kept the shareholders well-informed over the past years and have developed loyalty among them. We are going to trade on that loyalty now -- besides, it is in the conspicuous best interests of shareholders to approve this deal," said James Hurley James Hurley (played by James Marshall) is a fictional character on the 1990-1991 primetime ABC series Twin Peaks. He is the nephew of Big Ed and Nadine Hurley, and lives with them, due to his parents' problems. , CalFed senior vice president. CalFed shareholders, at any rate, are used to setbacks. The thrift's stock traded for $28 a share three years ago, and for as much as $40 a share in 1987, but last week could be snatched off the Big Board for a mere $1.50 a share. But then, bondholders are going to have to hold their noses too. Their $160 million worth of IOUs would be exchanged for a 79 percent stake in a company Wall Street says is worth $38 million -- in other words Adv. 1. in other words - otherwise stated; "in other words, we are broke" put differently , $160 million of IOUs for $30.2 million of stock. More than 90 percent of bondholders must give the thumb's up on the deal for it to go through. There are defenders of the stock-for-bond swap. "It's my belief, the only logical action for both bondholders and stockholders to take in this matter is to vote for the exchange. The alternative is to allow the OTS See Office of Thrift Supervision. to possibly close down the institution," said Kenneth Funston Kenneth James Funston (born December 3, 1925, Pretoria, Transvaal, died April 15, 2005, Cape Town) was a South African cricketer who played in eighteen Tests from 1952 to 1958. , senior vice president at Beverly Hills-based Wertheim Schroder Investment Services, a member of a CalFed creditor committee and major bondholder. Funston pointed out that the Wall Street price on CalFed already anticipates dilution caused by the stock-for-bond swap, and thus CalFed's market capitalization Market Capitalization A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares. It's calculated by multiplying the number of shares times the current market price. This term is often referred to as market cap. is temporarily depressed. Like dozens of other local thrifts, CalFed is caught in the jaws of the ongoing Southland property recession, which has sliced values by anywhere from 30 to 70 percent in the last three years. All property lenders face growing rolls of foreclosed properties, and current real estate values are often less than loan amounts outstanding -- i.e., a building, at one time appraised at $10 million, might have an $8 million CalFed loan on it, but be worth only $6 million in today's market. CalFed is a heavy lender on homes and apartment buildings. But, "since 1990, prices on multi-family units (apartment buildings) in the greater Los Angeles area The Greater Los Angeles Area, or the Southland, is the agglomeration of urbanized area around the city of Los Angeles, California, United States. There are two "official" definitions—the Los Angeles metropolitan area consisting only of the Los Angeles and Orange have probably dropped by 40 percent to 50 percent -- not in every neighborhood, but in many areas," said John Kerin For the Australian reproductive doctor, see . John Charles Kerin, AM (born November 21 1937) is an Australian economist and former Labor politician. He worked at the Australian Bureau of Agricultural and Resource Economics (ABARE), before being elected to the , regional manager in the Los Angeles offices of Marcus & Millichap, a real estate investment brokerage, which works heavily in the sales of foreclosed properties. Added Kerin, "Every week, it seems that more and more properties are being put up for sale." Too, like many other lenders, CalFed branched into a variety of other ventures in the 1980s, including real estate development and insurance. In the 1990s, these ventures became millstones. Under $404,052-a-year Chairman St. Dennis, CalFed has been on a strict corporate diet in the past three years, shedding many subsidiaries and lopping lop 1 tr.v. lopped, lop·ping, lops 1. To cut off (a part), especially from a tree or shrub: lopped off the dead branches. 2. off 2,000 employees, about one-third of its workforce. The sold assets generated $200 million of capital for California Federal, according to CalFed disclosure documents. Also, the thrift's eight-member board has been altered, with five members leaving last year -- and more changes on the way. As part of the stock for bond swap Bond Swap A strategy in which an investor sells a bond and at the same time purchases a different bond with the proceeds from the sale. Notes: There are several reasons why people use a bond swap: to seek tax benefits, to change investment objectives, to upgrade a deal, bondholders will have the right to appoint four directors to a 12-member board. The whole board, to be reduced to nine members, will be up for re-election in March 1993. The directors face a rising level of bad CalFed loans. The thrift reported that on Sept. 30 it had $849.3 million worth of non-performing loans, up from $662.5 million a year earlier. Those figures don't count another $370.6 million worth of loans that CalFed has already seized back from deadbeats. Home and apartment loans accounted for 73.3 percent of bad debts. At least one analyst said he would still be wary of CalFed, even if the bond swap is approved. "If it goes through, it will give CalFed some breathing room, but CalFed still faces asset quality problems (bad loans). In our opinion, (even with a national economic recovery) the California real estate market will continue to languish." |
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