Equitable's conversion: Proceed with cautionWhen a mutual...


August 19, 1993|By David Conn | David Conn,Staff Writer

Equitable's conversion: Proceed with caution

When a mutual thrift converts to a stock institution, it's usually one of the easiest investment plays in the market.

That's happening at Wheaton's Equitable Federal Savings Bank. The company is selling up to $6 million worth of stock at $10 a share, and anyone is eligible to buy, not just depositors.

But investors would be wise to use caution here.

Former Fidelity Investments guru Peter Lynch and others view thrift conversions as a sure thing: A mutual thrift is owned by the depositors, and most of the new shares will be sold to those depositors and the thrift's executives. Because of that, and federal regulators' desire to attract capital to the industry, there's plenty of incentive to undervalue the shares when they're offered.

For instance, while the average thrift trades at 80 percent to 100 percent of book value and more, Equitable Federal is selling for 60 percent.

Normally, "by appraising them somewhat below where they might trade post-offering, [thrift conversions] are attractive enough for investors to buy the stock," says Benjamin Crabtree, a bank analyst with Dain Bosworth Inc. in Minneapolis.

Unfortunately, a few red flags are waving over this offering, which started last week and ends Aug. 31.

For one, the company is small, at $200 million in assets, which means the stock won't be very liquid once it starts trading freely, Mr. Crabtree says. It's also undercapitalized based on two of the three regulatory standards.

Although the March 31 quarter was modestly profitable, Equitable lost almost $400,000 in the June 30 quarter. And even though nonperforming assets declined in the most recent quarter, they remained at 5.17 percent of total assets, well above the national average.

Alex. Brown stock fund seeks new beginning

Alex. Brown Inc.'s Flag International Fund has been around for almost seven years. But with a mere $13 million in assets under management -- down from a peak of $50 million -- it has failed to fly.

This week, the stock fund got a new lease on life.

Alex. Brown gave up on its old manager, Bessemer Trust Co. of New York, and turned to Glenmede Trust Co. of Philadelphia.

"A variety of factors has weighed in [for the switch], not the least of which is that the performance has been fairly disappointing," said Edward Veilleux, president of Flag Investors Management Corp., the Alex. Brown unit that runs the company's mutual funds.

Last November, Alex. Brown and Glenmede formed a joint venture, now called Brown Advisory & Trust, to manage trusts and other assets for wealthy individuals and institutions. That's another reason to change, Mr. Veilleux said -- one condition of the joint venture was that Alex. Brown trust customers would use Glenmede's international equities expertise.

The Flag International Fund "will be a separately managed fund, but some of the names I like in my existing accounts will find their way into the Alex. Brown portfolio," said Andrew B. Williams. He manages the Glenmede International Fund, which has about $210 million in assets, and will run Alex. Brown's fund as well.

Some of those names could include Royal Dutch Petroleum; drugmaker Glaxo Inc.; Tesco, a U.K. food retailer; and Singapore Banks.

Speaking of news on mutual funds . . .

As long as we're on the topic of locally owned mutual funds, there are a few more in the hopper:

* Alex. Brown is preparing to enter the fray with a new Maryland tax-free fund, according to Mr. Veilleux. The fund, expected in October, will focus on intermediate maturity bonds, mostly 10 to 12 years.

"Obviously Maryland's a very high-tax state and with the higher taxes expected from the Clinton administration," Alex. Brown is confident the demand will be strong, he said.

* Legg Mason Inc. next week plans to launch its 12th fund, called American Leading Cos. Trust (perhaps establishing a trend whose seeds were sown by T. Rowe Price Associates' Blue Chip Growth Fund, unveiled in June).

Fund manager Eric Leo says the objective is to provide capital appreciation and current income by investing in large, dividend-paying companies. Mr. Leo manages a $150 million equity portfolio as chief investment officer of Legg Mason Capital Management, which has another half-billion under management in fixed-income securities.

The fund will be looking for the blue chips of the 1990s, Mr. Leo said, meaning companies that are large, growing and well-capitalized.

"We think in a capital-constrained world, a strong balance sheet buys you a lot of flexibility," he said.

NationsBank bond sale to aid purchase of MNC

So that's how NationsBank Corp. plans to pay for MNC Financial Inc.

This week the company sold $950 million in intermediate-term bonds to finance the MNC deal and the purchase of $2.3 billion in consumer finance receivables from US West Financial Services, among other purposes.

The securities will be split this way: $400 million in three-year senior debt; and $550 million in 10-year subordinated debt.

NationsBank has said that about half of the $1.4 billion MNC purchase will be paid in cash, the rest in stock.

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