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Drexel Presents Reorganization Plan to Creditors

June 7, 1990

NEW YORK (AP) _ Drexel Burnham Lambert Group Inc. wants to resolve its bankruptcy by giving creditors a share of its big junk bond holdings.

The former Wall Street powerhouse presented creditors with a reorganization plan Wednesday that promises to pay off debts in full.

Creditors of the company’s brokerage arm and about a dozen smaller subsidiaries would be paid in cash, Drexel attorney Alan B. Miller said. Creditors of the parent and two commodities trading subsidiaries would receive promissory notes backed by the junk bonds and other illiquid investments.

The plan also proposes creating a separate fund for settling more than 400 outstanding lawsuits by investors who say they were defrauded by trading activities by Drexel, whose admission to securities felonies last year sped the firm’s demise.

The plan was announced by Drexel attorneys at a two-hour meeting with about 100 creditors and their representatives. It was not formally entered into bankruptcy court.

The parent company filed for Chapter 11 bankruptcy court protection in February and its brokerage subsidiary followed suit last week. The brokerage, Drexel Burnham Lambert Inc., plans to emerge from bankruptcy court as an operating entity, although it is unclear what shape the firm would take.

Under the reorganization, Drexel would create a separate business entity out of its investments. Creditors would receive promissory notes valued at the amount of their individual claims and backed by Drexel’s assets, Miller said.

Drexel says its holdings are worth about $2 billion, but a large portion consists of junk bonds the firm has been unable to sell because of their low quality and a severe downturn in the high-yield bond market.

The holdings also include so-called bridge loans, which are temporary loans made to clients that remain unpaid, typically because permanent financing has not been obtained.

Miller said Drexel was confident ″there would be sufficient backing in assets for all our constituents and hopefully value left over for our equity shareholders.″ Drexel employees owned the firm’s stock, the value of which vanished when the firm collapsed.

Barry Dichter, an attorney representing Banco de Portugal, one of Drexel’s largest creditors, said determining the value of the holdings ″will be the great debating point in this case.″

″This is really the first step in what will be a lengthy negotiation process,″ he said. ″Creditors will require a lot more information than they now have in order to evaluate the concepts that were put forward.″

Under the proposal, creditors would be free to sell their notes in the open market if they can find a buyer, giving them a way to recoup cash quickly, Drexel attorneys said. Drexel would redeem a small portion of notes periodically if it had the money.

Drexel would manage the portfolio and be allowed to conduct other business activities at the same time. But the composition of Drexel’s management after it emerges from bankruptcy is an open topic for debate, Miller said.

Creditors’ attorney have said they would be likely to oppose allowing current management to be in charge.

Drexel would seek to liquidate the junk bond holdings for maximum value and recoup the outstanding bridge loans from former clients. ″We think you could return 80 percent of those bonds probably within a two-year period,″ Miller said.

Another unresolved issue is some $260 million in bonuses that Drexel paid to executives in the months before the bankruptcy filing.

Drexel has requested a 120-day extension from a June 13 deadline to file a reorganization plan in U.S. Bankruptcy Court.

The firm, which rose to power on Wall Street by dominating the high-yield bond business, failed to recover from a government securities fraud investigation. Drexel last year pleaded guilty to six felonies and agreed to pay $650 million to settle insider trading and other allegations.

As of March 30, Drexel said it had assets of $3.26 billion and liabilities of $2.8 billion.

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