Untold Story of the Survival of the Penn Central by Donald Prell - HTML preview

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The Phone Call

 

Harry Volk, President and CEO of the Union Bank of  California summoned me to his office on the 10th floor of the  Union Bank Building in downtown Los Angeles.

 

“Don, do you remember those Penn Central Notes  Warner purchased for the bank last year; the short-term  ones with the high yield?”

 

“Yes” I replied, “the 3 million Pressprich sold us yielding  12%.”

 

“Well” Volk continued, “There is a problem with them,  and I need your help. Let me get Warner up here, and we  can discuss it together. And, er, what are you doing this  Christmas?”

 

What else would I be doing, I mused, but the traditional  festivities with my family? What I said was, “Just the usual,  Mr. Volk.” Invariably addressed as ‘Mr. Volk” by everyone,  even the management team, he was one of the old-fashioned  stalwarts of complete separation of business from personal  family concerns. Company parties did not happen. He was a  shrewd, capable businessman par excellence who was much  admired.

 

At age 47, I was now a senior officer and a member of  Union Bank’s Management Committee. Because of past  achievements, Volk often called on me to resolve ticklish  credit or personnel problems. His inquiry about my plans for  Christmas was the tip-off that a crucial situation was about  to be revealed.

 

Warner Heineman entered and reported he had been  informed the notes were in default as the Penn Central  Company didn’t have the funds to pay either interest or the  principal. They were offering to restructure the debt with  new notes, which included free warrants to purchase shares  at $4.00 per share. Not a bad deal if you believed the  company would survive. Heineman, who was head of Union  Bank’s International Division, had recommended to the  investment committee that they accept the offer.

 

“So…..exactly what is the problem?” I asked.  Volk replied: “An hour ago I had a phone call from an  attorney, a Lloyd Cutler, who is with a Washington D.C. law  firm. He is representing a group of the note-holders, and  wants our help.”

 

He continued: “There are about 20 holders of the notes –  banks and individuals. The agent for the notes, Schroders  Bank, insists that 100% of note-holders sign off on the  restructure. Should any single one not agree, then  Schroders would be obliged to bring an action to collect the  notes, which would precipitate the filing of bankruptcy by  the Penn Central itself. The railroad is already bankrupt,  and they don’t want that to happen to the holding company.  Cutler said the entire group of note-holders, except for two  individuals, have accepted the exchange offer. Of those two,  the ‘ringleader,’ a Dr. Lauder, holds $300,000 of the Notes.  The other fellow has $150,000."

 

“Now here is the problem, the Penn Central's board of  directors desperately want to effect the restructuring. They  will do almost anything to get the holdouts to sign, but can’t  allow the rest of the note-holders to know what they plan to  do. Each of those banks that own notes - excluding us, of  course - has a conflict of interest. Either they have loans to  subsidiaries of the company or officers of the bank are also  directors of the company. We are the only bank owning  notes that does not have a conflict. Cutler would like one of  our people to go to Zurich and convince the holdouts it is in  their best interest to sign off on the deal”

 

“What I’d like, Don, is for you to fly to Washington D.C  tomorrow, meet with Lloyd Cutler, then arrange to go on to  Zurich to meet with the holdouts – can you do it, please?”

 

We both knew what I would answer, but I appreciated his  asking.