The Finova saga goes on (and on, and on, and on......)
nytimes.com
November 2, 2000
Finova's Plight Mirrors High-Yield Debt
Market's Woes
By RIVA D. ATLAS
rom its out-of-the-way
headquarters in Scottsdale,
Ariz., Finova Group became one
of the fastest-growing independent
finance companies in the 1990's by
coupling aggressive acquisitions
with a liberal policy of lending to
charter airlines, fast-food
franchisees and other middle-sized
businesses.
Finova's portfolio of loans and
leases outstanding ballooned to
$13.12 billion from $2.42 billion
between 1992 and 1999, and it
earned above-average returns
because it was able to borrow
cheaply and lend at a premium to
businesses too small, too new or
too indebted to go to banks. Last
January, Forbes magazine named
the company to its Platinum 400
list of the fastest-growing and most
profitable big companies.
Then, in March, the bottom began
to fall out. Just as weak earnings at
technology and other fast-growing
companies ended a five-year run
of double- digit gains by
benchmark stock indexes, Finova
wrote off a $70 million loan to a computer equipment distributor it
declined to identify, raising questions about other loans, and its chief
executive, Samuel Eichenfield, quit unexpectedly. Moody's Investors
Service cut Finova's credit rating, making it more expensive to raise
capital.
Finova is not the only company squeezed by tight credit. Money is scarce
for all but established businesses in the corporate loan and high-yield
bond markets. But because of its aggressive growth strategy, Finova is
being punished particularly hard. Its stock has fallen 96 percent since
February 1999, and there is no sign Finova's problems will end soon.
The company hired Credit Suisse First Boston in May to look for a
buyer or significant investor. But it is still on the block. Likely buyers have
been bought by others, are struggling themselves or are under regulatory
pressure to reduce their exposure to risky loans.
"We are doing everything we can to remedy our situation, but we are
doing it in a market that is not conducive to financial assets," said
Matthew Breyne, Finova's new chief executive. "We are looking to sell
assets to other finance companies that might have issues of their own."
For now, Finova is scaling back new lending. For the third quarter,
Finova could report new loans "well under $1 billion, compared to
historical norms of $1.3 billion to $1.4 billion," noted a Sept. 25 research
report by Susan Berliner, a Morgan Stanley Dean Witter fixed-income
analyst. "Management anticipates that fourth- quarter new business could
be under $500 million." Mr. Breyne declined to comment on the
estimates.
Most other commercial finance companies are not in nearly as dire shape
as Finova, said Robert Young, an analyst at Moody's. "Finova's
problems are unique to them," he said. Still, he noted that weakening
credit quality throughout the industry could cause other lenders to be
more cautious about making new commitments to small companies.
"These lenders have been targeting 15 percent asset growth and return
on equity," Mr. Young said. "It may be difficult for them to provide that
and maintain the stability of their ratings."
Unlike a bank, which has a core base of deposits to finance its lending,
Finova, like other independent commercial finance companies, depends
on access to the capital markets. Its financing comes from a mix of
short-term commercial paper, investment-grade debt and bank loans.
For much of the 1990's, Finova made good money lending on the
difference, or spread, between its cheap cost of capital and the hefty
rates at which it lent to customers. Last year, that spread was about five
percentage points, one to two points greater than banks typically earn,
analysts said. Finova must win back its investment grade rating if it is to
make loans at a profitable spread, analysts said. That will be hard to do
without fresh equity capital.
Finova does not have an infinite amount of time to raise the money. The
company owes $11.9 billion in bank loans and bonds, and at least $1.6
billion of its bank loans mature next May. Unless Finova has managed in
the meantime to raise additional cash, its banks could refuse to refinance
the debt.
Finova may pacify its lenders by providing some collateral to back the
company's $4.7 billion in unsecured bank loans, one analyst speculated.
If that fails, Finova could be forced to revamp its overall debt obligations.
And given the size and complicated nature of its balance sheet — Finova
has about 80 separate bond issues outstanding — it may end up
negotiating that restructuring as part of a bankruptcy-law filing, said
Stephen G. Moyer, a distressed-securities analyst with Imperial Capital,
a Beverly Hills, Calif., investment bank.
If Finova were to default on its $7.2 billion in bonds as part of a
bankruptcy reorganization, it would be the largest corporate default since
the Great Depression, according to Moody's.
Finova's debt load is so large, it is equal to about half the total capital in
funds devoted to investing in distressed securities.
Based on the prices for Finova's debt, investors are valuing its loan
portfolio at just 58 cents on the dollar. "You'd have to assume a really
large haircut on the portfolio at these prices," said Paul Leff, a senior
managing director at Perry Capital, which manages $2.5 billion in hedge
funds and has traded in and out of Finova's securities.
Still, he said, the risk is that investors do not know the exact contents of
Finova's portfolio, and there could be more surprises lurking. "It's entirely
possible the haircut is warranted," he said, referring to a severe reduction
in the value of the portfolio.
Finova's search for a buyer is further complicated by a deterioration in its
loan portfolio. The company typically makes loans secured by the
borrower's assets. On average, Finova lends 65 to 90 cents for every
dollar of assets, Mr. Breyne said. The trick is to correctly estimate the
value of the collateral — and to be able to sell it in a weak market.
There are signs that increasing numbers of Finova's loans are not as
valuable as the company anticipated. Finova had written off $38.5 million
in loans as of the second quarter, more than double the amount it wrote
off in the period a year earlier.
Finova does not list its customers in its quarterly financial filings. But it has
several loans outstanding to companies that have filed for Chapter 11
bankruptcy protection in the last year, Mr. Breyne confirmed. These
include a $115 million loan to the Sunterra Corporation, a resort
time-share company; $33 million to Sun Healthcare; $24 million to
Genesis Health Ventures and affiliates; $56.6 million to Tower Air;
and $13.5 million to MicroAge, a technology services company. Finova
also has a small loan outstanding — less than $5 million, according to
Mr. Breyne — to ICG Communications, a troubled
telecommunications company.
Mr. Breyne stressed that these loans were collateralized, and that Finova
was confident it would get all or most of its money back.
Since it hired Credit Suisse in May, Finova has made no public statement
about the status of its money- raising efforts. When the company
reported its second-quarter earnings in July, it declined to be host to a
conference call for analysts and investors.
But there are no signs that Finova is close to cutting a deal. The company
recently told its banks that the leading candidate to purchase Finova had
terminated negotiations, according to Mr. Moyer. A spokesman for
Citigroup, one of Finova's lead lenders, declined to comment.
Mr. Breyne said that he had not ruled out selling the company. "We are
still looking at a sale as well as an equity infusion as alternatives," he said,
though he confirmed that Finova recently hired Jay Alix & Associates, a
firm that specializes in restructurings. "They are helping us to evaluate
what businesses we're in," Mr. Breyne said.
The company is also negotiating a possible recapitalization with several
private equity investors, according to a Wall Street executive familiar with
the talks. Mr. Breyne declined to comment on the talks, other than to
note that the company had signed confidentiality agreements with a
number of parties that are examining Finova's portfolio.
According to executives close to the negotiations, potential investors
include the leveraged buyout firm Texas Pacific Group, as well as
Cerberus Partners, which invests in distressed securities and has a fund
that provides asset-based loans. Another potential bidder is the Pritzker
family of Chicago, which controls the Hyatt Corporation. Spokesmen for
Texas Pacific, Cerberus and the Pritzkers declined to comment.
Mr. Breyne would not say when the company might make an
announcement regarding the negotiations. Finova is scheduled to report
its third-quarter earnings on Nov. 14. |
