FCA Considers a Spin-Off of Problem Loans : Would Help S&L Unit Attract Fresh Capital

December 18, 1985|TOM FURLONG | Times Staff Writer

Financial Corp. of America, trying to give its American Savings & Loan Assn. subsidiary a new lease on life, said Tuesday that it is considering establishing a new unit to liquidate $2.5 billion in troubled or high-risk loans now owned by American.

FCA Chairman William J. Popejoy said the move might enable the Irvine-based holding company to reorganize American Savings into a healthier S&L capable of attracting the capital it needs to meet regulatory standards. Meanwhile, the new subsidiary would sell off the problem assets over the next several years, he said.

FCA's proposal coincides with a growing feeling in the savings and loan industry that the best way to rescue floundering S&Ls is by placing their troubled assets, primarily real estate construction and development loans, into separate companies. The concept is often referred to as the "good-bank/bad-bank" solution.

James Cirona, California's top federal savings and loan regulator, suggested at a recent industry conference in San Francisco that the good-bank/bad-bank approach will be approved after legal and accounting questions are resolved.

Objections Foreseen

Wall Street analysts, however, warned that regulators and competitors will object to the FCA proposal if it would mean extra costs for the financially ailing Federal Savings and Loan Insurance Corp., the government-run, industry-funded agency that insures customers' savings deposits and liquidates insolvent S&Ls' problem loans.

"If the effect could be additional losses for FSLIC, it will be vehemently opposed by the S&L industry," said Jonathan Gray, financial analyst for Sanford C. Bernstein & Co. in New York.

Popejoy maintained, however, that no FSLIC money would be needed under the proposal because the real estate subsidiary, by operating more efficiently than the S&L, should be able to liquidate the problem loans at a profit.

Although Popejoy emphasized that the plan is preliminary and is only one of several options being considered, he said the approach represents a realistic way for American Savings, the nation's largest S&L, to regain its financial health.

"This plan appears to have real merit as a way to rebuild our capital," he said.

American Savings' troubled loans prompted the S&L to place an additional $422 million into loan-loss reserves last year. As a result, FCA suffered a $590-million loss in 1984 and now needs about $1 billion in new capital to bring the S&L's net worth up to federal regulatory requirements.

Furthermore, American's problem assets--largely delinquent loans and foreclosed property--have grown sharply this year to more than $1.7 billion, which represents 6.3% of American's assets. The problem assets are expected to peak at $1.8 billion.

If the new subsidiary is approved, it would be responsible for selling off the $1.8 billion in delinquent loans and foreclosed property as well as another $700 million in high-risk construction development loans.

The proposal also calls for the reorganized American Savings to raise fresh capital by selling new stock to investors. The S&L's stock likely would be more attractive to investors after the problem assets were removed from its books.

Popejoy said a reorganization proposal will be submitted to the Federal Home Loan Bank of San Francisco before the end of the month, but he noted that regulators have given him no assurance that the plan will be approved.

"They are giving us a fair and receptive audience," the FCA chairman said. "Now it's up to us to show that it will work."

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