Coast Federal pulls off $57 million bond offering.

Action fends off feds by boosting thrift firm's capital

Like a veteran quarterback calling on wile to dodge lethal-looking linemen, Coast Savings Financial Chairman Ray Martin, 57, has sidestepped federal regulators for the past two years by tapping capital markets just when it looked like he was going to get sacked.

Martin's latest wiggle: Hiring Chicago-based brokerage house Kemper Securities to successfully issue $57.5 million in corporate IOUs -- high yield, 13 percent bonds.

The bonds, sold in late December, count as capital under federal guidelines and help Martin and the $8.5 billion-in-assets Coast (parent of Coast Federal Bank) stiff-arm regulators for at least another few quarters, and perhaps for good.

"We were very pleased with the reception and appetite in both retail and institutional communities for our bonds," said Martin, a 35-year Coast employee, last week. "It shows Wall Street believes we are a turnaround story."

Ken Funsten, analyst with money manager Wertheim Schroder in Beverly Hills, agreed. "You don't buy bonds if you think a company is going to go kaput," he said. "It shows there is faith in Coast."

The new bond offering comes only two years after Coast bought back $90 million (face value) of existing bonds for just 25 cents on the dollar.

Back then, the Wall Street betting was that Coast would get tackled in the Golden State real estate game, which was turning very rough.

"The investors who sold their bonds back probably thought they would never see their money again," said Allan Bortel, analyst with Dakin Securities in San Francisco. "But now Coast looks like it is going to survive. The market likes the stock lately."

Indeed, Coast stock had rushed to $11 a share in trading last week, up from $6.25 in early October.

The 1990 Coast bond buyback and the new bond offering are part of a four-year-long Coast effort to restructure in the face of the toughest property markets since the Great Depression.

In the past four years, Coast has shed $330 million of high-yield bonds; cut off a $200 million (assets) real estate development arm; forsook apartment lending; got out of out-of-state lending; and foreclosed on many Southland properties, particularly apartment buildings.

Coast has gone back to lending on single-family homes, its old strategy, said Martin. "We are not as impacted as others by the fall in property values," he said. "Our average-sized home loan is $160,000. We don't do much else now."

Coast has a reputation as an aggressive seller of foreclosed properties. "In the last 45 days, we have listed four of their (Coast's) properties and then sold those four. That means they are up to speed at Coast, and know what they doing," said John Kerin, regional manager at Los Angeles branch of Marcus & Millichap, a real estate investment brokerage. "They are serious about selling."

Coast officials last week said the actions have saved the company. "Since September of 1990, we have had a remarkable turnaround," said Robert Hunt, 42, chief financial officer. "We were thinly capitalized back then ... with a lot of risk in the balance sheet (loan portfolio). Since then we have taken out the risk and are much better capitalized."

The 100-branch Coast, at least in one respect, seems to be ahead of the curve of slumping Southland property values: While other thrifts face rising tides of non-performing assets, Coast has been reducing its holdings of sour loans for six straight quarters.

As of the end of the third quarter, for example, Coast reported $353.7 million of problem assets, down from $370.2 million at year end 1991.

Like many other Southland thrifts, Coast is battling the twin dragons of increased federal capital requirements and sour loans.

In short, the feds want thrifts like Coast to keep more money in the bank -- unlent -- as a reserve against bad loans. The riskier a thrift's portfolio, the more the feds want the thrift to set aside for rainy days -- and if a thrift can't keep enough in the vault, the feds take over.

But just as the increased federal capital requirements go into effect, bad loans are ripping through Coast's balance sheet -- cutting into capital.

However, with last month's bond sale, Coast has enough capital to satisfy federal capital requirements and should be set for some time, said analysts.

Martin last week said the thrift's hatches are battened down to survive even a prolonged property recession. "Unfortunately, the turnaround will be slow for Southern California," he said. "With the defense and aerospace industries down, we don't expect any sudden improvements. But we are set up now for the long haul. We have set aside reserves for losses."