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.