Here we go on banks problems: Bad Loans.
Wall Street Tries to Spot Which Loans And Banks May Face Problems Soon
By CARRICK MOLLENKAMP
Staff Reporter of THE WALL STREET JOURNAL
There is a grim new parlor game on Wall Street: figuring out which bank loans are going to turn sour and hurt bank earnings in the process.
Big problem loans -- loans with broken covenants, missed interest payments, or those simply deemed uncollectable -- have increased by billions of dollars this year. According to an analysis by Goldman Sachs Group Inc., nine highly leveraged companies defaulted on a total of $2.2 billion in debt during the second quarter of 2000, the most recently available period, compared with none in the same period in 1999.
Banks don't have to identify the names of their borrowers, and there appears to be no clear pattern to which loans might turn bad. Huge loans that now appear headed south were originated throughout the late 1990s and as recently as earlier this year. The debts have surfaced at theater, drug-store, consumer-product, asbestos, health-care and textile companies.
At his office in Dallas, Harold Schroeder, a manager at hedge fund Carlson Capital, has combed through securities filings and compiled a list of 150 loans that he believes bear close watching. His conclusion: "It's a really big iceberg, and we've only seen the tip of it."
To be sure, many of the debtors bear close monitoring, even though they might not end up in default. And the solvency of major banks isn't threatened. The deteriorating credit picture, however, portends a new period of uncertainty for banks, their corporate customers and their investors far into next year. As the economy slows and the number of bad loans rises, banks are growing more reluctant to grant new loans to riskier companies and may have to cut earnings as they provide for debt losses. Some in the industry think banks could be facing the biggest string of loan losses since the recession and real-estate overbuilding in 1990 and 1991.
The first alarm bells were triggered in the second quarter when Wachovia Corp., Winston-Salem, N.C., said it would take a $200 million charge to increase its loan-loss reserves, or a provision for bad loans. Then, in mid-November, Bank of America Corp. and First Union Corp., two of the country's biggest banks, said in quarterly securities filings that difficulties with a single problem borrower would cause their uncollectable loans to surge in the fourth quarter. The two banks declined to name the borrower, though people familiar with the loans say it is Sunbeam Corp., the Boca Raton, Fla., maker of camping goods and small appliances. Sunbeam declined to comment.
A First Union meeting with analysts in November turned sour when Treasurer Tom Wurtz walked the analysts through the bank's portfolio of deteriorating loans, without identifying specific borrowers. Analyst Nancy Bush of Prudential Securities said in a report that the meeting's warm and fuzzy feel changed immediately. The meeting "all went to heck," Ms. Bush noted in a report titled, "First Union holds an analysts' meeting and drops a bomb."
Then on Dec. 6, Bank of America surprised analysts at a meeting at New York's ritzy Pierre hotel when it provided more detail on its souring loans. The bank told analysts it had $1 billion of uncollectable debt, and that fourth-quarter earnings would be about 30 cents less than expected because it needed to shore up provisions for bad debt.
That scenario could be a harbinger of the next few weeks as other banks detail their fourth-quarter results. Banks with increasing bad loans face a double jab to their profits. When bad loans increase, banks have to boost their loan-loss reserves, which means taking a charge against earnings. The second punch comes if debtors start missing interest payments. "The marked increase in nonperforming loans we are currently witnessing can have a particularly deleterious effect on net interest income," says Charles Mulford, a professor of accounting at the Georgia Institute of Technology in Atlanta.
One big debtor drawing intense scrutiny on Wall Street is Xerox Corp., says Rosalind Looby, an analyst at Credit Suisse First Boston. Last week, the Stamford, Conn., company, struggling with lower-than-expected sales and a credit downgrade from Moody's Investors Service Inc., said it had used up its $7 billion credit line. Among the banks holding Xerox loans are Bank One Corp., with $375.2 million; Citigroup Inc., holding $375.2 million; and Bank of America, with $219.8 million. Chase Manhattan Corp. and J.P. Morgan & Co., which are merging, have a total of $750.4 million owed to them by Xerox.
Owens Corning, Toledo, Ohio, and Armstrong World Industries Inc., a subsidiary of Armstrong Holdings Inc., Lancaster, Pa., also are being closely watched. Facing millions of dollars in asbestos-liability claims, both have filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Lori Appelbaum, an analyst at Goldman Sachs, predicts in a report that loans to Owens Corning will be classified as nonperforming in the current fourth quarter. Based on her analysis, the banks with exposure to asbestos companies are Wachovia, First Union, Mellon Financial Corp., PNC Corp., FleetBoston Corp., Bank of America, Bank One, and SunTrust Banks Inc.
Ms. Appelbaum believes that Chicago-based Bank One may, much like Bank of America, take a sizable charge to earnings to cover bad loans. A warning, as well, could come from Wachovia, according to analysts who have talked to the bank. Bank One declined to comment on any possible reserve increases, though a spokesman noted that bank management expects to see continued credit deterioration across the industry. Wachovia officials weren't available for comment.
-- Amy Merrick contributed to this article.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com |
