BUSINESS/ECONOMY

Picking up the pieces

JOHN HOWSE August 31 1987
BUSINESS/ECONOMY

Picking up the pieces

JOHN HOWSE August 31 1987

Picking up the pieces

BUSINESS/ECONOMY

The end came swiftly for Western Canada’s last remaining major financial institution. Last week the Alberta Court of Queen’s Bench ordered liquidators to begin selling off the remaining assets of Edmontonbased Principal Savings and Trust Co., the flagship of bankrupt Principal Group Ltd., by Sept. 1. Just hours prior to the court decision, the Canadian arm of New York-based Metropolitan Life Insurance Co. offered to buy some of the group’s assets, including Principal Securities Management Ltd., the subsidiary which managed seven mutual funds of the bankrupt company. The complex offer, estimated to be worth about $15 million, includes proposals to purchase the mutual funds management firm and selected assets of some other member companies in the Principal Group. But Metropolitan’s bid, which aims to enlarge its presence in Western Canada, was also designed to avoid any liability for the Principal Group’s uninsured debts or for the unsecured losses of thousands of individual savers who have been stung by the trust’s collapse.

The bankruptcy of the $1.3-billion financial-services empire took place six weeks after the Alberta government cancelled the licences of two Principal Group subsidiaries and made First Investors Corp. Ltd. (FIC) and Associated Investors of Canada Ltd. (AIC) insol-

vent. The Canadian Deposit Insurance Corp. (CDIC), the federal agency that insures savings deposits, said that $125 million of the $135 million on deposit with Principal Trust was insured. The collapse of FIC and AIC left 32,000 unsecured investors with estimated losses totalling $150 million to $200 million, according to Alberta Treasurer Richard Johnston. Principal Group had also issued $90 million worth of unsecured promissory notes.

With its purchase offer, Metropolitan Life sought to reinforce its presence in Western Canada and expand the scope of its financial services. The Metropolitan Group, with $9.7 billion in Canadian assets, already operates more than 20 sales offices in Western Canada. Still, trying to capitalize on sullied Principal Group assets in a region where investor confidence has been staggered could pose a major challenge even to asset-rich Metropolitan Life. If its purchase bid is approved, the insurance company would have to convince 10,000 secured depositors of the defunct Edmonton-based trust company to keep their money in the revamped—and renamed—firm.

Said Charles N. (Skip) Armstrong, the Ottawabased president of Metropolitan Life’s Canadian operations: “We thought our name would be a stabilizing influence for institutional and consumer confidence after all the problems.”

Metropolitan Life outbid four other Canadian firms for control of Principal Securities. Through its holding company, Metropolitan Life Holdings Ltd., the insurance company offered to buy Principal Securities Management Ltd., which administered up to $550 million in mutual funds prior to June 30. As well, Metropolitan Life’s offer included the purchase of selected assets—such as office leases and computer softwear—from other Principal companies, but not $90 million in promissory notes and other debts incurred before Principal’s demise.

The proposed deal required approval from the court and the CDIC. Courtappointed bankruptcy trustee Collins Barrow Ltd., a Calgary-based accounting firm, approved most of the deal but last week negotiated with Metropolitan about Principal Trust’s physical assets.

If the Metropolitan deal goes through as proposed, the CDIC, which insured Principal Trust depositors up to a maximum of $60,000 each, would assign $125 million to the life insurance company to deposit in customers’ accounts. Eligible depositors are expected to be reimbursed by mid-September, and customers 2 could decide then

0 whether to stay with § Metropolitan Life or

1 withdraw their money, z But details of the deal’s I impact on the investment assets of Principal

remained uncertain. Metropolitan Life has not made its plans for the assets public, and Armstrong said that he could not predict how they would fit into the insurance company’s existing structure. Still, there is widespread speculation that a new trust company will be established using the equipment and employees of the newly purchased Principal operations.

Clearly, Metropolitan Life would

need to quickly establish investor confidence in the West to build itself into one of the country’s leading financial conglomerates. Nervous investors withdrew an estimated $150 million from Principal’s mutual funds over the past two months even though their money was safe and the value of the fund units, largely invested in common stocks, continued to rise as a result of a strong stock market. “We will have to provide operating funds to get the mutual funds sales going again,” said Metropolitan Life’s Armstrong.

Indeed, the success of the life insurance company’s bid for investor confidence will hinge in large part on its 115-year-old business operations in Canada. Metropolitan Life’s early investments included the purchase of $120,000 worth of Canadian Pacific Railway bonds in 1890. It opened its Canadian headquarters in Ottawa in 1924. Said Armstrong: “Principal’s mutual funds are solvent. We think there will be value added with Metropolitan’s name and we hope to attract new customers.”

Recently, the Metropolitan Group, which currently employs 3,400 Canadians, has been aggressively expanding the range of its financial services. Last year Metropolitan formed an affiliation with Toronto-based Asset Management International, a holding company for a group of investment firms which manages more than $3.5 billion. Last year it also acquired Future Focus Health Systems Ltd., a company that administers dental plans, and Toronto-based Morguard Group Ltd. for an estimated $30 million. Morguard is a diversified group of companies which administers a mortgage portfolio of more than $3.2 billion.

Still, Metropolitan’s proposed expansion in the West and the saga of Principal Group’s demise is far from over. Last week investors, courtappointed managers and inspectors sought to unravel the convoluted intracorporate dealings among member companies of the group. The most obvious tangle involves a $64.2-million loan made by Principal Group to founder Donald Cormie’s family holding company, Collective Securities Ltd. As the Sept. 1 liquidation deadline neared, it appeared that the $1.3billion financial-services empire was destined to follow an unhappy line of Alberta-based financial companies— including the Canadian Commercial and the Northland banks—into oblivion. The savings of tens of thousands of people disappear in the process, while the corporate principals behind the disasters appear to escape largely unscathed.

-JOHN HOWSE in Calgary