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. Though that estimate was rough, it is probably too high, according to a source close to the situation.
Bank of New England's senior and subordinated notes have a face value in excess of $700 million. Southeast's long-term debt obligations had a total face value of $363 million at the end of the second quarter.
For investors who bought Bank of New England debt at a steep discount earlier this year, getting paid even a fraction of their bonds' face value could constitute a substantial gain.
Investors have made a lot of money in the past buying senior debt of bank holding companies whose banks are gone. In the case of First RepublicBank Corp., a failed Texas bank, the Federal Deposit Insurance Corp. wound up paying creditors more than $120 million.
Memory of Profits
"People made so much money on First Republic that the market's conditioned to invest in busted bank bonds," said Craig Davis, an executive vice president at BDS Securities.
In addition, the holding company could wind up with additional assets to distribute. The estate of Bank of New England Corp., whose principal beneficiaries are Bank of New England Corp. bondholders, may sue the FDIC and try to recover additional assets.
As of Wednesday, people who had purchased Bank of New England Corp.'s senior debt earlier this year would have profited handsomely. The 9.5% notes due in 1996 were trading at about 10 cents on the dollar in late January, but they rallied to 18 cents on the dollar by mid-April and they were changing hands at 28 cents on the dollar Wednesday.
Similarly, Southeast's senior notes traded as low as 27 cents on the dollar (excluding accrued interest) when the subsidiary banks were seized, but they were changing hands at about 40 cents on the dollar Wednesday.
These bonds are not for faint hearted investors, according to Lee Meyerson, a partner at Simpson & Thatcher. The supporting assets, insofar as any exist, can be tied up in litigation for years, or they can simply disappear as a result of adverse court rulings. "You could lose everything," Mr. Meyerson warned.