Just before 9 a.m. on Jan. 21, Statistics Canada in Ottawa formally declared that the economic recession was over. But neither that pronouncement nor any real economic recovery came soon enough for Royal Trust. Indeed, just one day earlier, Royal Trustco Ltd., the holding company that owns the venerable trust company, announced that it was putting itself up for sale. The announcement is just the latest in a long series of disturbing developments for shareholders of the troubled company. But as news of Royal Trust’s need for a cash infusion heightened concern about the company’s fate, the possibility that anxious depositors might join the exodus of shareholders threatened to increase the company’s problems. Herbert Guttman, a 69year-old Royal Trust client who says that he has more than the government-insured limit of $60,000 on deposit with the trust company, visited his downtown Toronto branch the day after the announcement. “I’m getting a little bit worried, but I can’t see them going under,” said Guttman. “I don’t think it is time to panic yet.” Still, Guttman, like several other customers, said that he is now wary about making any new deposits with Royal Trust.
Royal Trustco’s financial difficulties have grown steadily since 1989, when problems with loans at the company’s recently acquired operations in the United Kingdom and the United States first began to appear. As the recession, which began in the United Kingdom, deepened and spread around the world, the company’s problems grew steadily worse. For the first nine months of 1992, it reported a net loss of $227million, and last week it announced that it will set aside even more reserves against the possibility of more loans going sour and will report an even greater, although unspecified, loss for the year. At the same time, however, the company said that it is hoping to arrange a “strategic alliance” with another financial institution by the end of February. The announcement was the first indication that the company’s major shareholder, Trilon Financial Corp., a holding company controlled by Peter and Edward Bronfman’s Edper Enterprises Ltd., is prepared to sell all or part of its 50-percent stake. Royal Trustco president James Miller, who took over the job six weeks ago,
ROYAL TRUST NEEDS A PARTNER WITH LOTS OF CASH AND A TASTE FOR RISK. CANDIDATES ARE RELUCTANT.
acknowledges that the announcement is contributing to the mood of uncertainty surrounding the company. But Miller added, “We believe that this is the right time to enter into this kind of arrangement.”
Financial analysts expressed skepticism, however, that the most likely buyers, Canada’s major banks, will be willing to buy a stake in the entire company. Instead, they said that potential buyers will probably be interested only in key parts of its business, including the $ 150billion trust business and its fast-growing family of mutual funds. That assessment leaves a critical gap between Royal Trustco’s stated desire to find a partner and the reluctance of many of the major financial institutions to buy into a company that could contain unknown financial risks. The risks are twofold. First, even though the books will be opened for potential buyers, it is very difficult for outside buyers to be absolutely certain that there are no serious problems hidden amongst the billions of dollars of loans. And there is the danger that the other key asset of a company, depositors, will become worried about the safety of the institution and pull their money out. “The basic value in Royal Trust is public confidence,” said one banking analyst, who spoke on condition of anonymity. “If you have continuing confusion and stupidity, obviously the confidence level will continue to erode and the situation will get worse.”
The Royal Trust name, however, will almost certainly remain. Royal Trust, founded in 1899 and Canada’s second-largest trust company with assets of $27 billion, is, in the words of one
analyst, “the premier” company in the trust business in Canada. Its name has represented safety and security for millions of Canadians who have entrusted it with their money management. Despite serious losses from ill-fated acquisitions in Britain and the United States, analysts say that the company’s core Canadian operations, with the exception of some real estate loans, appear to be sound, based on the latest numbers available. As a result, Miller says that an information room that the company has set up at its head office to make volumes of financial data available to potential buyers has been under heavy use.
For the moment, however, the Royal Bank of Canada, the country’s largest bank with assets of $138 billion, is the only institution to acknowledge publicly that it is in preliminary discussions with Royal Trustco. Although the Royal Bank declined to provide any details of its discussions with Royal Trustco, Norman Achen, senior vice-president of marketing for its corporate bank division, confirmed that the bank’s long-term strategy calls for it to increase both its corporate and personal-trust business. Until June, 1992, federal legislation prohibited banks from encroaching on the trust business, which includes making independent investment decisions on behalf of individual clients. Because of the legislative changes, said Achen, “We view the trust business as being an important component for a full-service financial institution to provide.”
The Royal Bank has already struck a deal to acquire $4 billion worth of assets from the International Trust Co., which specializes in the highly competitive corporate-trust business. Corporate trust services include such things as stock transfer activities, overseeing annual meetings, shareholder record-keeping and other custodial work for companies. But it is also eager to increase the trust business it does with wealthy individual clients. Said Achen: “If you look at the demographics of Canada’s aging population and the wealth creation trends taking place, then you can see that the personal-trust business is a growing one.” Royal Trust also has a large corporate-trust operation. Said Achen: “They are a formidable competitor on the corporate-trust side. They have a reputation for high-quality service and delivery.”
But despite the temptation to grow quickly by making an acquisition in the trust company sector, the Royal Bank, like any other potential buyer, says that it will be extremely cautious because of the potential risks of buying billions of dollars of loans. A senior executive of another leading Canadian financial institution said that Royal Bank chairman Allan Taylor “has to be a very brave man if he announces that he has bought $27 billion worth of assets.” To a bank or trust company loans are classified as assets, and if even only a small portion of them are not repaid, a financial institution can quickly find itself having to dip into its capital base to remain solvent. “This is big, even for the Royal
Bank,” added the executive. “Royal Trust is a big institution with a track record that makes you nervous.”
Despite Royal Trust’s acknowledged strengths, several other financial institutions have indicated that they are not interested in buying into Royal Trasteo, the holding company. AÍ Flood, chairman of the Canadian Imperial Bank of Commerce, said that his bank has reviewed the information provided by Royal Trasteo and “at the moment, we have decided not to pursue that acquisition.” But, added Flood, “If segments of that company become available, we would be interested.”
Canada Trust, which specializes in the retail side of the banking industry focusing on individuals rather than corporate customers, has also looked at Royal Trust. Said Edmund Clark, vice-chairman and chief operating officer of Canada Trust: “It is not in the tradition of Canada Trust to chase acquisitions and we would not do an acquisition unless we were confident that we were not taking asset risk.” Montreal Trust, owned by BCE Inc. of Montreal, had earlier been rumored to be an interested buyer because it has said that it needs to be larger to compete more effectively in the deregulated financial services arena. But last week, Marcel Saint-Germain, senior manager for corporate relations for BCE, said that “no discussions are taking place at this time.” Added Saint-Germain: “We are far away from even contemplating anything that calls for spending more money.”
Despite the apparently limited field of suitors, Royal Trust’s Miller says that he is confident the company will be able to arrange a match. “I absolutely believe that we will find a partner,” he said. “I am not going to talk about fallback positions.” He added that the company is highly liquid and could raise the capital that will be necessary to cover the loss anticipated in the fourth quarter. He said that he
could not specify how much the loss will be, nor give details about the additional loan-loss provisions announced last week. But he did say that the company needed to increase its reserves against bad loans in Britain, the United States and the Canadian real estate sector.
If Royal Trasteo is not able to find a partner, however, it is possible that the federal Canada Deposit Insurance Corp. (CDIC) could again be called in to help unwind the problems. Last December, the CDIC provided $3.5 billion in loan guarantees so that the Toronto-Dominion Bank would take over most of the assets of
Central Guaranty Trust Co. CDIC officials declined to comment on whether it is involved in the discussions between Royal Trust and potential buyers. Michael Mackenzie, the federal superintendent of financial institutions, speaking generally about financial institutions that get into difficulties, explained that negotiations between the troubled institution and potential buyers often fail because they cannot agree on a price. “That was the issue with Central Guaranty,” said Mackenzie. “The company says that the offering price isn’t good enough, that the shareholders want more, and you can get into an endless argument. In the end, it is the system, in the form of deposit insurance premiums, that pays.” As well, he noted that the steady erosion of real estate values has made potential purchasers extremely wary of taking on any new risks.
He said that in the case of Central Guaranty, the situation got worse as the debate dragged on. The continuing decline in real estate values is creating such continuing risk in the financial system that financial institutions are generally unwilling to increase their risk by adding other institutions’ loans to their own already-weak portfolios. “One of my greatest worries is that no one is going to take a risk, no one is going to buy.” said Mackenzie. “Nobody is even going to take it if you say, ‘Take it over for $1, I’ll give it to you. Take it. It’s yours.’ They may say, ‘Drop dead.’ ”
In that anxiety-ridden environment, Royal Trasteo is waiting anxiously to learn whether any of its competitors, who readily acknowledge the superb quality of some of its assets, are tempted enough by the prospect of future glory to wade into the risk of the unknown. And it would be to the advantage of the country’s financial system if that happens before depositors like Herbert Guttman begin to panic.
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