SAN FRANCISCO -- Glendale Federal Bank's long-shot recapitalization demonstrates that the private capital markets can be an alternative to government intervention -- even for a severely troubled institution.

Last week, Glendale announced agreements with investors ensuring the successful sale of $425 million of common and preferred stock. The offering was the key link in one of the most difficult and complex reorganizations ever carried out by a financial institution.

Had it failed, the federal government might have seized the $17.9 billion-asset institution within weeks.

In addition to attracting fresh money, existing holders of Glendale debt and preferred and common stock had to be persuaded to exchange their securities for new stock. And jittery federal regulators had to be persuaded to stay their hands while Glendale tapped the capital markets.

Not Out of the Woods

"We were told over and over again about the impossibility of getting this deal done," said Stephen J. Trafton, Glendale Federal's chairman and chief executive, in an interview.

While the immediate danger of a failure has passed, the drama at the nation's fifth-largest thrift is far from over. Glendale must add tens of millions of dollars of capital to meet requirements that take effect next June.

On a pro forma basis, the reorganization lifts core capital to 4.77% and risk-based capital to 9.55% of assets, well above requirements - 4.5% and 9% - that take effect on Sept. 30.. Still, Glendale must reach 5% and 10% ratios by June 1994.

That won't be easy. The thrift has warned investors that it may continue to post losses.

Neverthless, Mr. Trafton said Glendale will meet the requirements by restoring profits and employing measures such as asset sales.

"Our plans do not include returning to the capital markets," he stressed.

Glendale expects to complete its reorganization by Sept. 24, the thrift said. The plan includes merging the holding company, Glenfed Inc.. into a subsidiary of the thrift.

In addition, current bondholders and preferred stockholders will exchange their securities for common or preferred stock, recovering roughly half the face value of their holdings. Existing common shareholders will get only about 2% of the thrift's newly issued equity, reducing the value of outstanding shares to less than 40 cents.

The newly raised capital includes a $250 million rights offering to current shareholders at a subscription price of $9 per share. And Glendale is selling $175 million of preferred stock yielding 8.75%, convertible to common stock at $11.70 a share.

Key to completing the rights offering was lining up agreements with standby investors to buy common stock not bought by existing shareholders. About 15 institutional investors committed between $10 and $30 million to the offering, well-placed sources said.

"The [investors] have been through four or five [financial institution] turnarounds" in California and elsewhere, said an individual close to the deal.

The First Boston Corp. and Friedman, Billings, Ramsey & Co., a small Washington, D.C., investment bank, will collect between $15 million and $25 million in fees, sources said.

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