... even as financiers are walking away from obligations ...
quote.bloomberg.com
07/26 15:14
Deutsche Bank May Have Saved $130 Mln By Refusing Genuity Loan
By Mark Lake
New York, July 26 (Bloomberg) -- Deutsche Bank AG, stung by losses on loans to WorldCom Inc. and Enron Corp., may have saved $130 million by refusing to lend to Genuity Inc. when the unprofitable data network operator asked for the money Monday.
The biggest German bank was the only lender to balk at a request for credit from nine firms. Genuity, which defaulted on its debt two days later, has since filed a lawsuit against Deutsche Bank for failing to provide the money.
Deutsche Bank's decision reflects a growing concern among banks of the risks posed by complying with credit arrangements made with companies that have since run into financial trouble. WorldCom and Enron tapped credit arrangements less than two months before they sought bankruptcy protection, handing lenders billions of dollars in losses.
``These are days where it is better to go to court than hand over cash under a cloud when massive losses could come with it,'' said Glenn Reynolds, chief executive of CreditSights Inc., an independent research firm and the former head of corporate bond research at Deutsche Bank.
Genuity, which had a 2001 loss of $3.96 billion amid a glut of Internet service capacity, said eight banks, including J.P. Morgan Chase & Co. and Credit Suisse First Boston, on Monday lent it $723 million. Deutsche Bank rejected a request for about $130 million, said Genuity.
Verizon's Option
At the close of business Wednesday, Verizon Communications Inc. gave up an option to buy back a controlling stake in the company, leading to the default. Genuity said it has taken legal action to require Deutsche Bank to honor its obligation.
As part of its legal defense, Deutsche Bank will argue that Genuity knew of Verizon's intention to give up its buyback option before it asked banks to fund the credit lines, according to people familiar with the matter. Genuity held a board meeting Sunday night, just hours before the request went out to banks Monday morning, people familiar with the meeting said.
Genuity also asked its lenders to provide the funds on the same day it made its request, the people said. Typically, banks get two days to fund the loans. ``One has to speculate who knew what when given these dates,'' Reynolds said.
Genuity was spun off from GTE Corp. in 2000 to win regulatory approval of Bell Atlantic Corp.'s merger with GTE. The combined company changed its name to Verizon.
John Vincenzo, a spokesman for Genuity, declined to comment on the timing of the drawdown.
Falling Earnings
``We can't comment on the legal action commenced by Genuity as we have not yet been served, but any claim that we have failed to fulfill our obligations under the credit agreement is incorrect,'' said Deutsche Bank spokeswoman Rohini Pragasam.
Deutsche Bank had good reason to deny the money to the company. The German bank has set aside more than 1 billion euros to cover losses on loans to WorldCom, Enron and other bankrupt companies in the past year.
The bank, whose earnings have slid to the lowest level in a decade, committed the most to a $2.65 billion credit line that WorldCom used in May. Deutsche Bank lent to the telephone company to increase its chances of getting more lucrative advisory and underwriting work from the long-distance telephone company.
A group of 25 banks, which included Deutsche Bank, sued to freeze the proceeds of the credit line. WorldCom settled the case by agreeing not to sell holdings in its wholly owned subsidiaries for 80 days.
Deutsche Bank was one of four banks that arranged Genuity's $2 billion credit line in 2000. The banks provided the line for no arranging fee because Genuity promised them first shot at underwriting as much as $13 billion of securities in the next five years.
``We will look to these banks first for our future funding needs,'' Dan O'Brien, chief financial officer at Genuity, told Bloomberg News at the time.
Lending and Underwriting
J.P. Morgan, which was lead arranger on the credit line, also arranged a $1.15 billion bond for Genuity in September 2001. This is the only bond the company has sold since Morgan Stanley and Citigroup Inc. arranged Genuity's initial stock sale in 2000.
Public shareholders own 90 percent of Genuity, which is reducing capital spending and cutting jobs to preserve cash. With the recent loan drawdown, Genuity has borrowed $1.87 billion from banks and $1.15 billion from Verizon, which had made $2 billion available to the company. Verizon said today it doesn't have to lend more. |
