Met focused on debt-for-equity swap plan

The success of Metropolitan Mortgage & Securities Inc.’s bankruptcy reorganization hinges on Washington Insurance Commissioner Mike Kreidler.

The company reaffirmed its desire this week to swap the money owed to thousands of noteholders for common stock in a newly reorganized Metropolitan. Although creditors consider it far from perfect, the plan is considered the best way to return value to investors burned by Metropolitan’s financial meltdown.

About 87 percent of Metropolitan’s assets are tied up in Western United Life Assurance Co., which is now under the direct control of Kreidler’s office.

If the commissioner’s office can successfully operate Western and return it to a reorganized Metropolitan, the debt-for-equity swap plan can work, said Metropolitan Chief Financial Officer William Smith.

“That’s the plan we think will give back the most value to the thousands of creditors,” Smith said. “That’s our main focus around here.”

Last week, a press release issued by Metropolitan raised the possibility the company might abandon its restructuring effort after because Kreidler put Western into receivership. The release was interpreted by many connected with the situation as the first indication Metropolitan’s bankruptcy may be converted to a liquidation.

Smith sought to distance Metropolitan from the liquidation concerns, and Kreidler’s office said Tuesday it intends to “rehabilitate” Western. In a case like this, other options include finding a buyer for the insurance company or selling off assets.

“Every bit of information we have at this point is that Western is solvent,” said James Odiorne, deputy insurance commissioner. “There is no fire sale (planned).”

That’s good news for creditors, said Peter J. Grabicki, a Spokane attorney representing noteholders in the bankruptcy case.

“The Spokane community has a lot riding on Kreidler’s actions,” Grabicki said. “We’re talking about some 15,000 households with a lot of money at stake.”

He said a distress sale of Western could be disastrous for his clients, many of whom are older residents who bought unsecured bonds called debentures from Metropolitan.

“Such a sale of the insurance company would be a very difficult thing for the creditors to swallow,” he said. “What we need to do is sit down and figure out what Kreidler plans to do.”

Therein lies a problem.

Kreidler’s office is in the midst of auditing Western’s troubled books.

In January, outside auditor Ernst & Young LLP abruptly resigned and disavowed three years of Metropolitan and Western audits.

The big auditing firm cited “material misstatements” from Metropolitan executives that raised the specter that the company’s financial statements couldn’t be trusted.

Now Kreidler’s office is trying to unravel the Byzantine bookkeeping of Western. The company engaged in numerous transactions with Metropolitan and its other affiliates, including Summit Securities Inc. out of Post Falls and two related insurance companies, Idaho-based Old Standard Life Insurance Co., and Arizona-based Old West Annuity & Life Insurance Co.

Summit filed for bankruptcy in early February along with Metropolitan, and the two other insurance companies, like Western, were put into receivership by Idaho and Arizona officials.

Odiorne said there’s a good chance that under receivership Western’s asset mix may change.

Western’s holdings reflect the aggressive and riskier investments that were central to Metropolitan’s business as an unconventional lender.

“Generally we don’t like to see as many mortgage loans and real estate,” he said.

Insurance rating agency A.M. Best Co. downgraded Western and its Old Standard and Old West affiliates to a marginal C++ rating.

In its report, the rating agency expressed concern about the heavy concentration of real estate and the high-risk nature of the insurance company’s investments.

Weiss Ratings Inc., generally considered the harshest of the rating firms, gave Western a C-, and saddled the other two companies with D ratings. It listed all three among the largest insurance failures for 2003.