It is fast becoming a leitmotif of the late 1990s: A newly created company, fresh from an emerging industry, gets walloped by an unforeseen event and then struggles to meet its debt payments under terms it can no longer handle.
Contifinancial Corp., one of a new breed of specialty finance firms, joined the chorus of companies pleading for more time Wednesday when it disclosed it was having difficulty meeting the terms of its $400 million of bank loans. Conti also announced losses of $237.7 million in its latest quarter.
Banking companies have had to cope with a rash of defaults and bankruptcies this year. Nonperforming loans jumped 12.3% in June, to 0.91% of total loans at the nation's 15 largest banking companies, compared with a year earlier, according to a study by Standard & Poor's.
The rating agency also said nonperformers are likely to be higher across the U.S. banking industry.
Despite the worsening of credit quality, analysts stopped short of declaring a credit crunch, but most agreed that in recent years banks have relaxed traditional lending standards to finance new-age companies like Conti.
As a result, many are now paying the price.
"It comes down to a 'nature or nurture' question," said David Keisman, a former credit officer for Citicorp who is now a loan analyst at Portfolio Management Data LLC. "Is it the nature of the loan when it was structured? Or is it that some event outside of the loan caused the default?"
Leo Brand, a Standard & Poor's structured finance analyst, said he believes the "soaring" default rate is the result of credit-quality problems built into the loans from their inception. Lenders and underwriters are lured to credit-challenged companies because they can make substantial fees on these loans. Investors are hungry for the high returns these deals pay. So far, neither of these inducements has shown signs of declining.
"It might be that the market takes a breather and begins to look at this risk," Mr. Brand said "It will happen sooner or later. But in terms of leverage, we're getting to the same levels we saw in the late 1980s."
But Mr. Brand cautioned that, unlike the leverage extended in the late 1980s, today's loans and bonds are being issued to companies with little or no history of profitability. So the debt looks and acts more as venture capital than as secured credit. "The kind of companies that get credit today are more vulnerable because they don't have a track record," Mr. Brand said "The companies' returns are very low."
In addition to ContiFinancial, a number of high-profile defaults have made headlines this week. Among them:
Creditors to Daewoo Group, the cash-strapped South Korean car maker, agreed Wednesday to form a nine-member committee to negotiate repayment of $9.94 billion of debt. Daewoo's lenders include Chase Manhattan Corp. and Citigroup Inc.
Planet Hollywood International Inc. said Wednesday it wants to file for bankruptcy protection with a reorganization plan already on the table. A syndicate led by SunTrust Banks Inc. and Bank of Nova Scotia lent the company $260 million last year. Under the reorganization, the syndicate is expected to take part ownership in the company in lieu of repayment.
Last Friday, Iridium LLC filed for bankruptcy protection in Washington. Banking companies have lent the ailing firm more than $1.2 billion through a syndicated loan led by Chase and Barclays Bank PLC.
Filings with the Securities and Exchange Commission show weakening credit portfolios at banking companies across the country, including Amsouth Bancorp, Bank of America Corp., Fleet Financial Group, Wachovia Corp., and Firstar Corp.
Though recent loan default rates are not readily available, corporate bond defaults -- which Portfolio Management's Mr. Keisman considers a good indication of the credit environment -- have more than doubled in the last two years, to 2.08% of all outstanding bonds from 0.86% in August 1996.
"I think there is some change in the loan market, but it's yield- and investor-driven," said Rob Mustard, head of loan syndications at Bank of Nova Scotia in New York. "Yields are going up for opportunistic reasons."
Like many market observers, Mr. Mustard said he is not sure whether the recent rash of defaults and bankruptcies are the result of poorly structured loans or unusual circumstances. He said, however, that many companies are finding it difficult to grow in a deflationary environment.
"One thing I can say for sure," he said. "Our workout guys are a lot busier than they were last year."
