Change in Structure to Boost Visibility, Business of Bank
Wall Street West
by Benjamin Mark Cole
California Center Bank, traded on the over-the-counter bulletin board, filed papers with the Securities and Exchange Commission last week revealing plans to alter its legal structure to become a bank holding company.
The name of the bank holding company will be Center Financial Corp., and stock in the new legal entity nearly $100 million worth will be exchanged for existing stock in California Center Bank. The plan must be approved at a shareholder’s meeting slated for Sept. 14.
Simultaneous with the reorganization, the company will become listed on Nasdaq, which should increase the stock’s visibility and liquidity. (Plans to upgrade the bank’s listing were previously reported here.)
The bank’s stock has already risen to about $14 in trading last week from $6 when it was first listed on the bulletin board two years ago.
According to the filing, the change in corporate structure will allow the financial institution to pursue other, non-bank activities, such as acquiring insurance companies or securities firms.
Even at last week’s record-high trading range, California Center Bank still trades for less than 12 times trailing earnings. However, investors should keep in mind that many microcap stocks are orphans on Wall Street, and often remain at low multiples even after years of sustained profits.
Bad Is Good
Just like financial restructuring wizards or bankruptcy lawyers, Larry Hurwitz of Westside-based Lawrence Financial actually does better in bad times than good. Hurwitz, who sometimes calls himself a “money finder,” refers to his commissions as “finder’s fees.”
Companies hire Hurwitz to find capital, usually loans, when the banks are getting tight, the IPO window is shut, and private equity lenders especially the hedge funds want 30 percent effective yields on their loans.
“I am on the verge of having my best year ever. Most of the banks are closing their windows, but we have seen some new alternative lenders come into Los Angeles,” Hurwitz said.
In particular, Nesbitt-Harris, an arm of the Bank of Montreal, has opened a local office. “Their specialty is restaurants and vineyards, and other off-beat stuff like resorts,” said Hurwitz. If a borrower can show profits, Nesbitt-Harris will lend for “prime plus two,” which amounts to about a 6 percent to 7 percent rate in today’s market.
Additionally, local employees of the former Heller Financial (acquired recently by GE Capital) de-camped nearly en masse to Merrill Lynch, which accommodated them by creating Merrill Lynch Commercial Credit. They’ve opened up a cash-flow lending business as well.
The national law firm Howrey Simon Arnold & White LLP has been beefing up its local securities practice. Right now, proper public company compliance with Securities and Exchange Commission and exchange rules is all the rage, so it made sense last week when veteran lawyer Charles (Chuck) Samel announced he is rejoining the firm in its Century City offices.
Samel, a partner, had spent 15 years with Howrey Simon, but left two years ago to join Legal Knowledge Co., an outfit that advises corporations on compliance and ethics issues, and offers training courses.
Last week Samel said public companies are waking up to the need for compliance, if only to retain employees and avoid catastrophes. “Studies have shown that morale and employee retention are better at companies which have good ethics programs… and now boards know that having compliance goals is good business” if such programs avert expensive litigation or regulatory actions.
Actually, good compliance and corporate governance has always done well with long-term investors on Wall Street, said Samel. So why the recent slew of miscues? “I can’t explain that,” he said. “But fish tend to rot from the head.”
Standard & Poor’s is known for issuing credit ratings on corporate bonds, but the New York based financial information service also has a cadre of analysts covering equities.
In fact, S & P; tracks which institutional investors own which stocks, and why. It’s part of S & P;’s somewhat low-profile investor relations business, said Bill Burns, regional manager for S & P; in Los Angeles.
“We offer a targeting service which allows the IR (investor relations) professionals to gain actionable insights into the investment style, portfolios and strategies of buy-side investors,” Burns said.
S & P; determines why individual money managers buy certain stocks, and passes that information along to clients (publicly held companies, or IR consultants) seeking to expand the company’s shareholder base. S & P; will also send its own analyst reports to selected institutional shareholders and brokerages.
For many smaller companies, the S & P; report is nothing more than a distillation of already disclosed information. But on larger companies, the report is often written by an analyst. And that raises a point: S & P; equity analysts, since they are not part of a securities firm that seeks investment banking business, can be severe in their critiques. Would a company hire S & P; to disseminate research, if the report had a “sell” recommendation?
Burns said it’s not a concern. First, the credibility of S & P; is more important than retaining any client. Secondly, even the negative reports are chock-full of information presented in a standardized format. “The analysts might not like the stock, but the money manager may like that kind of company for his portfolio,” Burns said. “The idea is to present your story to money managers who are interested in buying your kind of company.”
In 1992 Rock Hankin, senior partner and founder of investment bank Hankin & Co., wrote an article for Director’s Monthly, the newsletter of the National Association of Corporate Directors, which suggested that boards need to watch their companies closely, to ensure good corporate governance. Now, ten years later, Hankin’s warnings seem to have been vindicated by events. While the banking business is slow, Hankin said he is getting hired often as a consultant, either in securities litigation cases or to help improve corporate compliance programs
The Strategic Research Institute is holding a seminar on PIPEs (private investment in public equities), June 24 at Le Merigot hotel in Santa Monica.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at