A group of banks has extended more than $500 million of unsecured loans that could be in jeopardy if the borrower, Contifinancial Corp., fails in its lengthy search for an equity partner.
Analysts and investors are anxiously awaiting a capital infusion and say the loans will be in trouble without one. The company, however, says help is on the way.
Banks including Credit Suisse, Dresdner Bank, and Bank of New York arranged a $200 million unsecured revolving loan to the New York-based lender in January 1997, according to Securities Data Co. The same three banks and others, including Chase Manhattan Corp., Bank of Nova Scotia, and Societe Generale, gave Contifinancial a $317 million letter of credit in 1998.
Both facilities fall due in August-but analysts said Contifinancial could be forced into bankruptcy before then, unless it finds capital.
"Without an equity infusion the long-term viability of the company is in question," said Steven C. Nelson, senior analyst at Moody's Investors Service.
With the exception of Bank of Nova Scotia and Societe Generale, which did not return calls, the lead banks confirmed they still hold portions of the loan but declined to discuss client relationships. In a bankruptcy proceeding, repayment would be delayed and ultimately depend on a court- approved reorganization plan.
The situation underscores the exposure commercial banks have to subprime lenders whose profitability plummeted when liquidity in the asset-backed securities market dried up last fall.
Several banks were forced to write off a similar unsecured loan to now- bankrupt United Companies Financial Corp. of Baton Rouge, La., this year. And a bank group has an unsecured loan to Amresco Inc., a Dallas finance company that has suffered with the swings of the asset-backed market.
Banks generally make unsecured loans, which pay higher returns than secured loans, to companies that are believed to be low-risk.
Syndicated credits are often viewed by banks as a way to garner more lucrative, fee-based business from the borrower, said Sean Ryan, a Bear, Stearns & Co. analyst. Even if the banks lose money on the syndicated loan, "the overall relationship can be profitable," he said.
Revolving loans and lines of credit are often used to back up other credit arrangements, but in this case the borrower has used the money.
When Contifinancial reported a $58.8 million loss for its fiscal third quarter, it also said the letter of credit and the $200 million unsecured facility were fully drawn as of Feb. 16.
Contifinancial has been searching for a partner since last year. Cleveland-based National City Corp. and Continental Grain, which holds 75% of Contifinancial's stock, have been named as probable candidates.
Several times the company has been rumored to be close to a deal, but it has never cemented one.
Continental Grain said in November that it would sell most of its grain operations to Cargill. The deal could free up capital to devote to Contifinancial, though Continental Grain's commitment to the finance company is unclear.
National City's chief executive, David Daberko, said in March that the banking company was interested in buying or becoming a partner of a subprime lender.
If Contifinancial comes up with even a portion of the loan amounts before the August deadline, the company may be able to renegotiate the credits with the banks involved, Mr. Nelson of Moody's said.
"Conti seems to have a good working relationship with their bank group," Mr. Nelson said, but "clearly, some parties (in the loan) won't be interested in going forward in the long term."
In addition to searching for an equity partner, Contifinancial has been trying to improve its cash flow by cost-cutting and restructuring.
