First Capital investors search for the missing billion dollars.

They cite rallied junk bond market to make their case

Some investors want to know, "What happened to $1 billion worth of appreciation in First Capital Holdings Inc.'s junk bonds -- and why can't we be made whole?"

First Capital bondholders are talking lawsuit over the "missing" billion bucks.

First Capital Holdings, the $9.7 billion-in-assets Century City-based holding company, is a big investor in junk bonds through its life insurance subsidiaries, a fact which prompted state regulators in California and Virginia to seize the subsidiaries in mid-May of last year.

Junk bonds had sagged in value, causing a policyholder run -- although some say that "grandstanding" by John Garamendi, the ambitious California state insurance commissioner, helped cause a policyholder panic.

Garamendi had appeared before the U.S. Senate on May 7, and stated that First Capital would need a substantial infusion of cash. The policyholders' bolt started thereafter.

But since the mid-May seizures the junk bond market has rallied mightily, increasing First Capital's assets by an estimated $1 billion -- enough to make the insurer solid again, say some.

A recent report, prepared by New York-based brokerage house Salomon Bros. and submitted under seal to U.S. Bankruptcy Court Judge Samuel Bufford, said that First Capital could give policyholders every dime owed immediately, and still have as much as $531 million left over, according to insiders.

A spokesman for Garamendi last week denied any grandstanding, but was mum on the value of First Capital assets.

Garamendi seized First Capital Life Insurance Co., in California, with $4.5 billion in assets, 190,000 policyholders and 63,000 annuity holders, while Virginia officials took over Richmond-based Fidelity Bankers Life Insurance Co., with $4.1 billion in assets, 213,000 policyholders and 97,000 annuity holders.

Publicly held First Capital Holdings declared Chapter 11 bankruptcy shortly after the seizures, and the stock has been de-listed, making for a near-total wipeout of shareholders and bondholders.

"Right now, I have zero," grumped Robert Bland, a First Capital shareholder in Illinois, echoing sentiments of some bond traders. Meanwhile, $130 million worth of First Capital bonds are trading for 4 cents of face value.

First Capital was the brainchild of Robert Weingarten, 50, former publisher of New York-based Financial World magazine.

Like Fred Carr, founder of the flopped First Executive empire, Weingarten invested premium income from policyholders into high-yield junk bonds, which make up about 40 percent of the assets of First Capital's two life insurance subsidiaries.

For shareholders and bondholders, the worst was realized two weeks ago when First Capital Holding's lawyers -- led by Jeff Krause of the Los Angeles-based Stutman, Treister & Glatt -- proposed to Judge Bufford in Los Angeles a reorganization plan which would utterly wipe them out.

Under the Krause plan, First Capital's secured creditors, led by New York-based Citibank, would get ownership stakes in the life insurance subsidiaries.

The New York-based brokerage house Shearson Lehman Bros., in a deal cut with Garamendi, has already agreed to take control of First Capital Life, in exchange for a cash injection of $50 million.

(It should be noted that Krause operates with limited room to maneuver; the state insurance commissioners and state court judges control the insurance subsidiaries. Additionally, he takes his orders not directly from shareholders but from First Capital executives brought in to replace Weingarten, including Peter Cohen, a former Shearson official.)

Insiders said last week that, under deals emerging in bankruptcy court and in state insurance commissioners' offices, Shearson would own 60 percent of First Capital Life Insurance, while Citibank would own 40 percent. Citibank will probably end up owning Fidelity Bankers Life Insurance in Virginia.

Garamendi has proposed that First Capital Life Insurance policyholders get 75 cents on the dollar if they cash in policies now, or 100 cents in five years.

But since First Capital life insurance subsidiaries were seized, the junk bond market has staged a near-historic rally. According to Lipper Analytic Services, a New York-based mutual fund rating service, the average high-yield mutual fund returned 18.69 percent from May 31 of last year to Jan. 31 of this year. For the year 1991, most junk-bond funds earned 30 percent or more, in principal and interest.

The big junk-bond rally has some First Capital shareholders and bondholders wondering if they are getting the short end of the stick in the reorganization plan and the state seizures.

"That First Capital was sunk by junk is bunk," averred Bland, the Illinois investor. "There should be enough money in the till to keep shareholders, bondholders, creditors and policyholders whole."

Bland points out that First Capital reported to the Securities and Exchange Commission that in the quarter ended March 31, 1991 -- even before the company's two insurance subsidiaries were seized -- there was a rise in the value of its bonds of $344 million.

The junk-bond rally since, calculated Bland, "probably means there is another $1 billion or $1.2 billion of market value in the First Capital Holdings portfolios. I don't know why they (Garamendi and the Virginia state insurance commissioner) are hiding the appreciation."

In fact, Garamendi and Virginia officials are hiding the asset values of First Capital's portfolios, whether intentionally or not.

The state Department of Insurance will only release the reported asset value of First Capital from year-end 1990, while Virginia officials also won't comment on the Fidelity Bankers portfolio.

"Why isn't the Fidelity Bankers portfolio value public record? I really can't answer that," said Ken Schrad, spokesman for the Virginia Corporation Commission.

Some local bond traders are even more livid than Bland with the turn of events, and particularly the Krause reorganization plan. "This is one of the great rip-offs of the century," said one local bondholder.

According to the bondholder, Salomon Bros. reported under seal to Judge Bufford at bankruptcy court that First Capital Holdings has up to $531 million in assets beyond what is needed to pay off policyholders. (A spokesman in Garamendi's office said the commissioner isn't aware of the Salomon report.)

By the bondholders' reckoning, that is enough to pay off First Capital's secured creditors -- the Citibank bank group, which is owed $275 million -- with plenty left over for bondholders.

One bond trader characterized Garamendi this way: "He has political aspirations, and now he can come out looking to California voters like a hero, blaming junk bonds. He says he is going to make policyholders whole, but in fact he is going to tie up their money for five years."

The bondholder added, "What he could do, what he should do, is liquidate the portfolios (of the insurance subsidiaries), sell them to mutual funds. Because of the rally in the junk bond markets, there would be enough to give policyholders 100 cents on the dollar immediately, to pay off the secured creditors, and even enough to make the bondholders mostly whole. I don't know if shareholders would make out OK, because they are the last in line."

One bondholder said that he has seen one ray of hope of late: bankruptcy judge Bufford is apparently sensing there is a lot of appreciation in the First Capital portfolios and has agreed to let creditors and bondholders, who have formed a committee, sue Shearson Lehman Bros. "I expect that suit to be filed shortly," said the bondholder.

At Garamendi's office, a spokesman said that if Shearson Lehman is getting such a great deal, then other companies can come forward and make a bid on the assets of First Capital Life Insurance, the California subsidiary.