<<NEW YORK, June 12 (Reuters) - The recent Chapter 11
bankruptcy filing by Sunterra Corp. <OWN.N> poses risks for one
of its large creditors, FINOVA Capital Corp., but not so much
that it will hinder a sale of its parent, FINOVA Group Inc.,
<FNV.N> Merrill Lynch & Co. said in a recent bond credit
report.
"Though the timing was, admittedly, unfortunate for FNV, we
do not think OWN's problems will forestall the possibility of a
sale of FNV," Merrill Lynch said. "Any potential purchase price
will reflect the inherent credit quality of FNV's portfolio,
including the exposure to OWN, and FNV's other 'watchlist'
credits."
Orlando, Fla.-based Sunterra, the world's No. 1 timeshare
operator, has 90 resort locations and about 300,000 owners and
members. It filed for Chapter 11 reorganization on May 31.
Three weeks earlier, Scottsdale, Ariz.-based FINOVA Group
said that banks did not renew $500 million of credit, that it
would draw down backup credit facilities and it was looking at
"strategic alternatives" that experts said included a possible
sale of the company. Its stock and bonds fell 28 and 12
percent, respectively, the next day.
Merrill Lynch estimated FINOVA Capital's exposure to
Sunterra at over $100 million, one of its 10 largest exposures
to a single company. It said FINOVA Capital is comfortable that
the value of the collateral it holds will be sufficient to
cover any exposure.
Merrill Lynch said investors should realize that Sunterra's
bankruptcy, standing alone, does not require FINOVA Capital to
classify its exposure to the company as "non-accruing" or
"non-performing."
Nevertheless, it said, "OWN's troubles have clearly come at
an inopportune time for FNV," and pose the following risks:
-- the market will take a "dim view" if FINOVA attempts to
classify its exposure to Sunterra as anything other than
"non-accruing impaired," even if Sunterra makes payments;
-- Sunterra owners and members may stop making payments to
Sunterra, and FINOVA borrowers who are "somewhat concerned"
about their investment may stop making payments to FINOVA, and
-- if FINOVA forecloses on Sunterra collateral, it may have
difficulty selling it to customers aware of Sunterra's
financial problems.
Still, Merrill Lynch said, a FINOVA sale is likely despite
Sunterra's problems.
"The recent problems at OWN have been another example of
headline risk for FNV bondholders," Merrill Lynch said. "Such
risks are likely to dog FNV and its investors until a sale is
consummated. We remain comfortable that a prospective buyer
will perform sufficient due-diligence to get comfortable with
this exposure. Consequently, we believe a sale remains the
likely resolution to FNV's current challenges."
On May 9, Standard & Poor's said it may change FINOVA
Capital's BBB-plus senior unsecured and A-2 commercial paper
ratings.
A day earlier, Moody's Investors Service on May 8 cut
FINOVA Capital's senior debt rating to Baa2 from Baa1, and its
short-term rating to Prime-3 from Prime-2, and changed its
rating outlook to negative from stable. Moody's said FINOVA and
its units have $11.5 billion of outstanding debt. >>
Let's hope for a continued climb today....would love to get out at a profit!
Chip |
