Some analysts are taking a closer look at credit quality - specifically in health-care lending - after four major banks were forced to restructure their loan to the ailing Genesis Health Ventures Inc. in Kenneth Square, Pa.
Units of Mellon Financial Corp., Citigroup Inc., Bank of America Corp., and First Union Corp. have an estimated $50 million apiece of credit exposure as the lead lenders in a syndicated loan to Genesis.
Analysts said the package consisted of a $600 million term loan, with $400 million to $450 million still outstanding, and a $650 million revolving credit.
Genesis said last Tuesday that it missed a $3.8 million interest payment for its senior credit agreement. The company said a lack of financing available to the long-term-care market and the continuing effect of reduced Medicare payments had made it difficult to meet the debt payment schedule.
A spokesman for Mellon said the Pittsburgh banking company does not comment on its client relationships. Citibank, Bank of America, and First Union did not return phone calls.
Lending to health-care companies - particularly those that deal with long-term or acute care - has proven rocky for many banks. Many health-care companies' revenues have been hurt because they are covering part of the bill for treatments that Medicare payments do not reimburse.
Bankers said in a recent survey by Phoenix Management Services Inc. that health-care companies are "unattractive" as loan customers.
Indeed, Huntington Bancshares, Hibernia Corp., and Amsouth have had well-documented troubles with health-care loans. And SunTrust Banks Inc. wrote down most of its exposures to health-care companies in the fourth quarter, putting the rest into nonperforming status. All but Huntington are southeastern companies, which tend to be big lenders in the health-care sector.
Analysts say they do not expect Mellon's exposure to the Genesis credit to affect its earnings. They also cited the continued strong economy and Mellon's credit quality - among the strongest in the top 50 banking companies.
According to Keefe, Bruyette & Woods Inc., net chargeoffs per average loan at Mellon were 0.16% in 1999, compared with 0.21% in 1998 and 0.72% in1997. Nonperforming assets to loans were at 0.53% in 1999 - up slightly from 0.44% in 1998 and down from 0.62% in 1997.
"Mellon has had a 20-year relationship" with Genesis, said Eric Rothmann, an analyst at First Security Van Kasper. "In the past year we have seen similar exposures, and the banks have been able to digest them in quick order. There is no smoking gun under this."
James Ellman, a buyside analyst at Merrill Asset Management, agreed, saying the Genesis exposure is merely a blip on Mellon's radar screen of good credit.
Still, questions about credit quality continue to crop up. Mellon's stock dipped slightly last Wednesday once it was discovered that it was a lender to Genesis. Analysts said many investors believe banks' credit quality has peaked.
"This does not appear to be life-threatening," said Michael Mayo of Credit Suisse First Boston. "Banks are having modest losses even in this economy. But what happens if this economy were to slow even modestly?"