A bank trustee for approximately $200 million of taxable municipal bonds backed by Executive Life Insurance of California has reached a settlement of its claim against the failed insurer, clearing the way for back interest payments to bondholders.
A memorandum of understanding was reached with the trustee, Texas Commerce Bank-Eel Paso, a unit of Chemical Banking Corp.; California Insurance Commissioner John Garamendi; and Aurora National Life Insurance Co., the proposed successor to Executive Life.
The agreement, filed late Monday with Los Angeles County Superior Court Judge Kurt Lewin, is subject to court approval, which is expected this week, according to a source familiar with the proceedings. As part of the agreement, Lewin approved payment of $34..6 million to the bank. That amount includes $31.6 million, which is equal to about 70% of the back interest payments due on the bonds, plus a $3 million advance on legal fees incurred by the trustee.
Through its trustee role, the Texas Commerce Bank is owner of a guaranteed investment contract issued by Executive Life. The contract serves as the sole source of payment of $200 million of El Paso Housing Finance Corp. securitized multifamily housing revenue bonds, Series 1986A, issued in October 1986. Executive Life has not made a payment on the bonds since it was seized by California insurance regulators in April 1991.
In addition to the back interest payments, bondholders must decide whether to "opt in." or participate in the rehabilitation of the insurance company. A meeting will be held within 45 days. If bondholders approve the settlement and decide to participate in Executive Life's rehabilitation, the trustee will receive another $6.5 million in payments. plus any further amounts due participants in the rehabilitation plan, said Christine Franklin, a lawyer with Thelen, Marrin, Johnson & Bridges, which represents Texas Commerce Bank.
If approved, the memorandum of understanding would settle the trustee's objections to Executive Life's modified rehabilitation plan. A hearing on the revised plan is scheduled for today.
The settlement offered to Texas Commerce Bank also is available to trustees for the remaining $1.65 billion of taxable municipal bonds, known as muni-GICs, backed by Executive Life. Attorneys for the trustees have until Friday to accept or reject the settlement, a source familiar with the transaction said. Lawyers for those bondholders could not be reached for comment.
If the settlement is accepted, muni-GIC holders would have to abort their claims to rescind the $3.25 billion sale of Executive Life's junk bond portfolio in October 1991.
Texas Commerce Bank's decision gives the revised rehabilitation plan the support of the majority of Executive Life policyholder and creditor groups, Garamendi said in a press release.
In recent weeks. the revised rehabilitation plan has been endorsed by policyholder groups including the Group Annuity Participant Protection Association, Companies Concerned for the Annuities of Retired Employees, and the National Organization of Life and Health Guaranty Associations.