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Drexel Presents Reorganization Plan to Creditors

June 7, 1990

NEW YORK (AP) _ Drexel Burnham Lambert Inc. on Wednesday presented creditors with a bankruptcy reorganization plan that promises to pay in full the debts of the collapsed Wall Street firm.

Drexel attorneys said the plan envisions creating a separate business entity out of Drexel’s junk bond holdings and giving creditors an interest equal to their claims.

Creditors of the brokerage firm and about a dozen smaller subsidiaries of parent Drexel Burnham Lambert Group Inc. would be paid in cash, Drexel attorney Alan B. Miller said. Creditors of the parent and two commodities trading subsidiaries would receive promissory notes.

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 and was not formally entered into bankruptcy court. Drexel’s parent filed for Chapter 11 bankruptcy court protection in February and its brokerage subsidiary followed suit last week.

Drexel has said it plans to emerge from bankruptcy court as an operating entity on Wall Street, although it is unclear what shape the firm would take.

Under the reorganization, Drexel would create a separate business entity out of its holdings. 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 for what they are owed, Drexel attorneys said. Drexel would redeem a small portion of notes periodically or buy them back if it had the money.

It was left up in the air how and when Drexel planned to value the assets in the unit. Creditors’ lawyers said they presumed the holdings would receive a value at the time Drexel files its reorganization plan with the bankruptcy court.

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.

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.

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

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. A spokesman declined to discuss the plan and Drexel attorneys did not immediately return calls seeking comment.

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 total assets of $3.26 billion and total liabilities of $2.8 billion.

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