Goldman, GE Unit Seek Effective Control Of Finova, but Some of Its Creditors Balk
By PAUL M. SHERER
Staff Reporter of THE WALL STREET JOURNAL
Goldman Sachs Group Inc. and GE Capital proposed taking effective control of Finova Group Inc. through an investment of about $2 billion and a management contract to run the commercial lender, according to people familiar with the situation.
But the proposal, which would be one of the biggest distressed-debt deals in the current economic slowdown, is facing opposition from some Finova creditors that recently blocked a proposed investment in the company by Leucadia National Corp.
With more than $2 billion in debt repayments due in coming months, Finova officials have acknowledged that a restructuring under Chapter 11 of the U.S. Bankruptcy Code is a strong possibility. If Finova were to default on its $11 billion in debt, that would make it one of the world's biggest-ever defaults, according to Moody's Investors Service.
Finova has drawn heavy interest from distressed-debt and value investors, who have bought up Finova bonds and bank debt at a discount in recent months on the belief that Finova's assets are worth more than is reflected in the price of its debt. These include Warren E. Buffett, who spent several hundred million dollars buying up the bonds in the fall and still owns Finova bonds, according to people familiar with the situation. Other big holders of the debt include Oaktree Capital Management LLC and Angelo, Gordon & Co., which are both big investors in distressed debt and other specialized assets.
A spokesman for Finova declined to comment on the Goldman/GE Capital proposal. "We don't comment on market rumors and speculation," said John Oliver, a spokesman for General Electric Co.'s GE Capital. A Goldman Sachs spokeswoman declined to comment.
In January, Finova announced termination of an investment agreement with Leucadia under which Leucadia would have invested as much as $350 million in Finova. Finova, based in Scottsdale, Ariz., was unable to attract sufficient creditor support for that plan.
The price of Finova bonds, which have been trading recently at about 75 cents on the dollar regardless of maturity, indicates that investors believe a Chapter 11 filing is imminent, bond watchers say. The company's shares closed at $1.20, down 10 cents or 7.7%, as of 4 p.m. New York Stock Exchange composite trading Thursday.
Concerns about Finova grew in March 2000 when the company announced a big loan write-off and the unexpected departure of its longtime chairman and chief executive, Samuel Eichenfield. Following credit-ratings downgrades, the company was unable to roll over all of its revolving credit lines, and was forced to draw down those credit lines so that it could repay maturing commercial paper.
Under their proposal, Goldman Sachs and GE Capital would purchase $2 billion in debt from Finova; whether that would be newly issued debt or debt purchased from existing creditors isn't clear. The deal would take place amid a Chapter 11 reorganization. The two firms would then take over Finova's assets and manage them to achieve the highest possible return for creditors. The two firms aren't proposing to acquire Finova.
In return, the two firms would receive both interest on their debt investment and a management fee, according to people familiar with the proposal. Some creditors have questioned whether such a deal would give away too much of the upside in a Finova restructuring to Goldman and GE.
In interviews conducted before word of the Goldman/GE Capital proposal began to circulate, Finova officials said the value of its assets far outweighs its debts, implying a substantial recovery for debtholders. "This is not a typical bankruptcy situation," said Ted Stenger, a principal at Jay Alix & Associates, a corporate turnaround firm that is advising Finova on its restructuring. "We think there's an opportunity for people to get an appropriate and fair recovery here. As long as we can get additional consensus on how to do that, I think we can have a very successful restructuring, whether in court or out of court."
Finova has about $4.7 billion of bank debt and $6.3 billion of bonds. The bank loans and bonds are equal in seniority, meaning they should be repaid equally in a bankruptcy-court proceeding. As with most investment-grade companies, the bonds and bank loans aren't secured by specific assets.
Looming before the company is a $50 million bond maturing Feb. 27 and about $350 million of other bond repayments between February and May. Then comes the biggest hurdle: $2.1 billion in bank debt due in May.
"We're engaging now with the banks and the bonds in an effort to match up the maturities of the debt with the stream of cash we get from the assets we own," said President and Chief Executive Officer Matt Breyne, speaking before the Goldman/GE Capital proposal came to light.
"We have around $13 billion of assets that support over $11 billion of debt to both bank and bondholders," Mr. Breyne says. "Operationally we have plenty of cash. We continue to meet our customers' needs by funding our commitments we've made to them."
-- Devon Spurgeon contributed to this article.
Write to Paul M. Sherer at paul.sherer@wsj.com |
