NEW YORK - In a highly unusual move, Arcadia Financial Ltd. until recently was heavily advertising its corporate debt on drive-time radio in the New York area.
Between ads for laser eye surgery and Dial-a-Mattress, Arcadia for the last few months has been pitching corporate IOUs called 'subordinated notes.'
The notes pay slightly more than 8 percent interest, for investors who put down as little as $1,000. Investments exceeding $100,000 earn up to 12.43 percent.
The risk is that their investment is not guaranteed or insured in any way, and if Arcadia were to go bankrupt, investors go to the end of the line, behind secured debt holders and Uncle Sam.
In the last five years, Arcadia sold more than $150 million worth of the debentures to more than 2,000 buyers, according to a report filed with the Securities and Exchange Commission.
Now that Associates First Capital Corp. has agreed to buy Arcadia for $200 million, Arcadia should not have to resort to measures such as the subordinated notes.
'Besides the high cost of funds, there is a high cost from the administrative and servicing side,' said Matt Hollingsworth, senior executive vice president of consumer operations for The Associates, which is based in Irving, Texas. Hollingsworth said that where it is allowed, The Associates probably would pay off investors in the subordinated notes early. Some notes cannot be paid off early, and will have to be paid as scheduled, he said.
'That's an expensive way to raise funds,' Hollingsworth said. 'You have to get 12 people to invest $1,000 each to buy one auto contract.'