Prices on taxable municipal bonds backed by the failed Executive Life Insurance Co. of California's guaranteed investment contracts rose as much as three points Tuesday.
Gains in, the bonds came as investors reacted to news that a California court had temporarily halted enactment of a plan calling for bondholders to receive varying prices for their securities.
Late yesterday, traders quoted bids on the bonds at 29 to 30 cents on the dollar, up about two points on the day. But prices of the bonds rose as much as three points higher during the session, traders said.
On Monday, a panel of California appeals court justices acted on a petition filed on behalf of trustees of the municipal bondholders and granted a stay order. The court action puts the California Department of Insurance's rehabilitation plan for Executive Life on hold until a decision is reached, said Karl L. Rubinstein, counsel for state Insurance Commissioner John Garamendi and a partner with the Los Angeles-based law firm of Rubinstein & Perry.
Commissioner Garamendi has until Sept. 14 to file an opposition to the bondholders' petition.
Mr. Rubinstein said a short response was filed with the state Supreme Court immediately after the trustees' petition, adding that a more detailed response will be filed with the appeals court before the Sept. 14 deadline.
Trustees for holders of about $1.93 billion of municipal bonds backed by Executive Life GICs are protesting attempts by California regulators to compensate holders based on the price they originally paid for their bonds.
Under a plan advocated by Commissioner Garamendi, payments to municipal GIC holders would be made according to a two-tiered system based on purchase price, rather than face value. The price that investors would receive for, their bonds would vary depending on whether bonds were purchased before or after Executive Life was seized by insurance regulators.
Many current holders of the bonds are speculators who bought the securities at distressed levels after California insurance regulators seized Executive Life on April 11, 1991. Commissioner Garamendi's plan is designed to limit the gains such speculators may receive on the bonds.
The insurance commission wants to pay those who purchased bonds before April 11, 1991, based on the "account value" of the contracts. Holders who purchased bonds after that date, presumably speculators seeking large gains, would be compensated according to the "market price" paid or the price of the bonds on the date of the seizure, which was about 31 cents on the dollar, said Philip S. Warden, counsel for the trustees and bondholders. Such a price is less than half of what the original bondholders may expect to receive for their securities, he said.
Executive Life, a unit of First Executive Corp., was seized by insurance regulators in April 1991, after problems arose because of its real estate and junk bond investments.
The guaranteed investment contracts were marketed as being a place to park idle bond proceeds until the funds were needed. Problems with bonds backed by the contracts arose after California insurance regulators sought to have the claims of bondholders subordinated to those of Executive Life insurance policyholders.
