GlenFed gets narrow OK for recapitalization plan.

Officials brand move as only way to fend off regulators

GlenFed Inc. shareholders and bondholders last week narrowly approved a plan for new investors to pump $425 million into significantly undercapitalized Glendale Federal Bank to ward off government seizure.

The "yes" vote came from shareholders representing 52.8 percent of common stock. Passage of the plan required approval by a margin of 50 percent plus one share. Holders of common shares will get a 2.1 percent stake in the new company.

Among bondholders, who will get a 4.2 percent stake, 81.9 percent voted in favor of the transaction. GlenFed had earlier received approval from the federal Office of Thrift Supervision to change the needed bondholders' approval rate from 90 percent to 80 percent.

Under the recapitalization plan, new, unnamed institutional investors will receive an 80 percent stake in the new restructured company.

GlenFed Chairman and CEO Stephen J. Trafton, at a press conference last week before the shareholders meeting, declined to name the institutional investors but said more than two dozen were lined up to inject the needed capital.

The identities of the new investors and the pricing of a preferred stock offering and rights offering will be announced in the next few weeks, GlenFed officials said.

Glendale Federal Bank is under OTS orders to come up with more than $400 million in capital by Sept. 30 or face government seizure. If Glendale Federal Bank, with 2,700 employees and $17 billion in assets, were to be taken over, it would be the second largest thrift failure in U.S. history.

At a shareholders meeting, Trafton and GlenFed general counsel Richard Fink faced an angry room of mostly elderly stockholders. Trafton said the only way to save the company was the restructuring, which severely dilutes shareholders' equity.

In response to a question about GlenFed's efforts to merge with another institution, Trafton said, "Quite literally nobody has been willing to pay any money" for Glendale Federal without government assistance.

Under the plan, without laying out more money, existing shareholders will get only four shares of stock in the new firm for every 100 they hold in today's GlenFed. Someone with 100 shares of GlenFed common with an aggregate tangible book value of $694 as of June 30 would get stock with a pro forma tangible book value of $51.32, according to a Trafton letter to shareholders dated Aug. 4.

Shareholders also will get rights to buy 22 shares for every 100 they now hold. Many stockholders questioned whether they should participate in the rights offering.

At the meeting, shareholders applauded when one man stood up and compared the recapitalization to "a rape" of shareholders. "Do you want to put more money into a dying ship that these two gentlemen are captaining?" said the shareholder, pointing at Trafton and Fink.

Trafton said at one point, "I'm well aware that the experience of the shareholders hasn't been a pleasant one and they may not want to (participate in the rights offering)."

He said GlenFed has commitments from standby investors who would provide capital and therefore did not depend on shareholders subscribing to the rights offering.

Although many shareholders were angry, others were resigned. Shareholder John Jordan said, "I bought the stock as just a horse race. ... My horse had a bad day."

Meanwhile, GlenFed announced last week that the U.S. Court of Appeals had granted its request for a rehearing of its $1.4 billion breach of contract suit against the federal government.

The court case centers around a July 1992 federal court ruling that the U.S. government breached a contract with GlenFed when it stopped allowing its subsidiary, Glendale Federal Bank, to count "goodwill" towards its capital ratios.

Before 1989, institutions received goodwill, an intangible asset, when they bought failed savings and loans from the U.S. government. In the 1980s, Glendale had been allowed to count $734 million in goodwill towards its capital base after taking over First Federal Savings & Loan of Broward County, Florida.

But in 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act, which began phasing out goodwill. Because it has lost more than $500 million in goodwill, the thrift does not currently meet federal standards for capital ratios.

In May, the U.S. Court of Appeals reversed the 1992 Glendale victory and ruled the government did not breach a contract.

Referring to the rehearing approval, Trafton said, "Naturally we are pleased with this procedural decision, but it is important to keep in mind that the eventual resolution of the goodwill litigation will very likely take several more years.

"We fully intend to press forward with the recapitalization transactions to ensure the survival of the bank so that it will be able to continue its vigorous prosecution of the government."