WASHINGTON — Republican congressional candidate Bill Flores said the government could have avoided a $7.5 million loan loss when his former company declared bankruptcy.

Had the government taken a stake in the offshore drilling firm, as private lenders did, it would have fully recouped its money, he said.

But current and former federal officials said Flores’ plan posed difficulties for the government and probably was rejected for the right reasons. Among them:

*  Competitors would have complained that it was a bailout for a single firm at a time when many offshore drilling firms were struggling.

*  The proposal would have required approval from a Republican administration that probably would oppose the government becoming an investor in a private firm.

“Even if it could have been done, there would have been a great reluctance . . . to enter into a deal where one, the government owned some of this (company),” said John A. Gaughan, the federal maritime administrator from 1985 to 1989, during President Ronald Reagan’s administration. “And we were then competing with others that might have had (debt) on their equipment and were out there trying to survive in the marketplace.”

Flores, a retired energy executive from Bryan, has promoted his business background and criticized bailouts as he seeks to unseat longtime Rep. Chet Edwards, D-Waco.

But the 1992 bankruptcy of Marine Rig 200 Inc. has given Edwards an opening to question Flores’ credentials, while Flores argues he did everything he could to repay all creditors, including the government.

When Flores’ company went bankrupt, the U.S. Maritime Administration held the mortgage on one of its drilling rigs. The agency guarantees loans for barges, offshore oil rigs and other vessels.

Flores’ company still owed $10.5 million for the rig when it asked the agency, known as MARAD, to swap the debt for equity in the firm.

In a recent interview, Flores said he disagreed in principle with the government investing in a private company.

But to fully repay the government, “there wasn’t much of an option,” he said.

In a statement, Flores said he was proud of the restructuring effort. The plan saved hundreds of jobs at the drilling company. Private lenders who agreed to the debt-for-equity swap were fully repaid, he said.

Flores also lashed out at Edwards, who began airing a new TV ad this week that attacks Flores on the bankruptcy.

“It is interesting that Chet Edwards has introduced the issue of bankruptcy into this campaign as it is he, together with Nancy Pelosi and President Obama, who are bankrupting the futures of our children and grandchildren — through a failed stimulus bill, bloated budgets, and Wall Street bailouts,” he said.

Reasons for rejection

It remains unclear why MARAD officials rejected the offer at the time. Several former officials who worked on the ship-financing program said they didn’t specifically recall the deal.

But all of the officials said they could not recall a single instance in which the agency approved a debt for equity deal.

David T. Matsuda, the current maritime administrator, said in a prepared statement that MARAD could take a stake in a company as part of a debt workout plan.

“However, the agency examines very closely whether this form of federal assistance is an unfair subsidy in a competitive marketplace as competing ship or rig owners continue to pay their capital debts,” Matsuda said.

Several former administrators said that concern probably would have stopped them from authorizing such a deal.

In the late 1980s and early 1990s, low oil and natural gas prices had reduced demand for rigs in the gulf. According to SEC filings, the number of jack up rigs — the type of mobile platform that Flores’ company owned — fell from 170 in 1988 to 121 in 1992.

Because of that, federal officials would have been loath to rescue a single firm because “they would have to do it for everyone else,” said John E. Graykowski, a former acting administrator of the U.S. Maritime Administration.

“This guy would have been operating a rig entirely debt-free, competing against everybody else out there,” said Graykowski, who led the agency from 1997-98 and 2000-01. “That would have been a source of anger among his competitors.”

Graykowski also criticized Flores for advocating a policy that Flores and other Republicans opposed when President Barack Obama’s administration took stakes in banks, auto companies and insurance firms as part of the bailout to help the nation’s economy.

“What he is suggesting is that the government should have taken an action in 1992 that today he condemns,” Graykowski said.

Flores has argued his proposal is consistent with his opposition to bailouts because it was part of an effort to repay a debt, not a request for a handout.

Gerald Greak, a former executive at Flores’ company, said all of the firm’s officers agreed Flores’ proposal was the best path forward. There was no doubt the government and other creditors would make their money back after oil and natural gas prices rebounded, he said.

But only the government declined the option.

“We were looking at every possible option,” said Greak, who is now retired and lives in Sugar Land. “The one exercised by the other lenders resulted in (them) getting their principal and interest paid. But in the situation of MARAD, you know the result there — MARAD got stiffed. And so did we.”