From Barrons
Warrants on an S&L suit payout
By MICHAEL SANTOLI
Years after all the scandals and convictions, the shakeout
and the cleanup, the savings-and-loan debacle continues
to unfold, and these days is even generating the odd
chance to make a buck.
Golden State Bancorp is one of several thrifts suing the
government for inducing them to buy hobbled S&Ls and
then changing the law in a way that nearly sank them --
and in some cases actually led them to fail. Because it is
seen as likely that major cash settlements will be
awarded to these institutions, some have carved out
special securities to represent the value of this potential
windfall.
Until now, thrifts have issued certificates giving investors
a claim on a piece of any cash award resulting from
these so-called supervisory-goodwill lawsuits. But
Golden State, parent of Glendale Federal Bank, is taking
a novel tack by giving shareholders warrants that,
instead of cash, will entitle them to receive Golden State
securities valued at 85% of the after-tax proceeds from
the litigation, in which it is seeking $1.9 billion. These
Litigation-Tracking Warrants have been trading on a
"when-issued" basis since May 5 on Nasdaq and today
debut on the New York Stock Exchange.
According to
Robert Willens,
who views the
world through
the tax code at
Lehman
Brothers, a key
reason behind
using the warrant
structure is tax
efficiency. With
goodwill
certificates, the
cash received
would be taxable as ordinary income. The Golden State
stock received in exchange for the warrants, though,
would be eligible for capital-gains treatment and, if held
for 18 months, the lower long-term gains rate would
prevail.
The warrants were trading at 5 13/16 late last week,
which pegs the market's guess about the value of an
award at around $980 million, just below the $1-$1.9
billion range most observers presume. Though betting on
legal rulings is never easy, anyone with confidence in the
thrift's case could be tempted by some nice potential
upside: A $1.9 billion award would value the warrants
around $11.25. A late-summer ruling is expected. |
