Defunct Bank Companies Having an Afterlife on the Bond Market
Holland, Kelley, American Banker
Southeast Banking Corp. and Bank of New England Corp. dwell among the ghosts of bank holding companies, but some of their bonds now trade as if the institutions still had some life.
Senior debt obligations of both companies were trading recently at substantial levels - 28 cents on the dollar for bonds issued by Bank of New England and 40 cents on the dollar for Southeast bonds. And the price of Bank of New England's bonds has been rising steadily since January.
Regulators seized Bank of New England's principal bank subsidiaries last January and awarded them to Fleet/Norstar Financial Group in April. Southeast's banking assets were awarded to First Union Corp. on Sept. 20.
Assets of defunct banks are evaluated differently from similar assets belonging to healthy holding companies, whose investors weight the value of a bank's franchise and its growth prospects.
Once a holding company loses its main subsidiaries, investors must consider the value of the remaining assets as if they were a laundry list of itmes to be unloaded at an estate sale.
"You figure out what the (assets) are at the holding company and then you discount it" to allow for the risk that lawsuits could eat up those assets, said a lawyer specializing in banking law.
Bank of New England, for example, now consists of assets such as an overfunded pension plan, a trust company in south Florida, an investment management subsidiary -- mere byproducts of the banking business.
Analysts estimate that these residual assets are worth no more than $100 million, whereas the face value of outstanding senior and subordinated debt is $700 million. And unsettled litigation by investors and the FDIC could result in additional claims against the company.
At Southeast, the holding company still had some equity and loan loss reserves remaining after regulators engineered the sale of the major bank subsidiaries.
"The holding company has substantial assets," said Jules Bagdan, bankruptcy trustee for Southeast Banking Corp. "The full extent of those assets has not been determined."
A High Estimate
A trial balance prepared by company officials for the bankruptcy filing put the value of Southeast's assets at $732 million. …