Bank of N.Y. Selling Off Bad HLT Loans

In an effort to clean up its balance sheet for future acquisitions, Bank of New York Co. is unloading hundreds of millions of dollars in troubled corporate loans.

The company in recent weeks has aggressively sold as much as $200 million in bad loans made to highly leveraged companies, according to traders of distressed loans. Additional loan sales are also expected, the traders said.

A Bank of New York spokesman on Friday confirmed that the company is selling bad assets to improve its financial condition, but he declined to provide details.

"We want to improve our asset quality ahead of others" to better position the bank for acquisitions, said Michael Pascale, a company spokesman.

Little Effect on Profits

The HLT loans were sold at a substantial discount, but are not expected to have a major effect on Bank of New York's profits. The company added a hefty $343 million provision to its reserves in the first quarter, and analysts say it has a sufficient cushion to withstand the discounted asset sales.

Bank of New York's reserves totaled $1.21 billion at the end of the second quarter, enough to cover 65% of its nonperforming assets.

"Reserve levels are adequate," said Livia Asher, banking analyst at Merrill Lynch. She said provisions in future quarters would ne similar to the $127 million the company added to its reserves in the second quarter.

Rather than work to restructure troubled corporate loans with the hope of being repaid the full principal down the road, an increasing number of banks are opting to sell them in the growing secondary market for distressed loans.

Mergers Add Pressure

The pressure for financial window dressing has mounted in recent weeks as the trend toward bank mergers and consolidations gains momentum.

NCNB Corp., for instance, actively sold distressed loans before it's announcement to merge with C&S/Sovran Corp., according to market sources.

"Banks are going to sell distressed debt to clean up their balance sheet in order to raise more equity capital and get greater confidence of regulators," said Kevin Meenan, principal at Meenan McDevitt & Co., a Harrison, N.Y., firm specializing in loan valuations.

Because of the growing market for troubled HLT paper, it is much easier to sell distressed corporate loans than real estate, according to trading experts.

"On the corporate side, there's capital available to purchase distressed corporate paper," said Mr. Meenan. "On the real estate side, the market is paralyzed."

A Change in Strategy?

Bank of New York's decision to unload its HLT loans may signal a shift in strategy among money-center banks with exposure to highly leveraged companies, traders say. Traditionally, the money-centers have resisted selling their problem commercial loans, because they often play major roles in restructuring them.

Also, many of the money-centers sold participations in their HLT loans to other lenders and therefore often feeling an obligation to hold on to the loans.

"For the first time, you're seeing the major domestic banks liquidate their positions," said John Urban, senior director at Continental Bank who trades distressed debt.

$86 Million Exposure

Among Bank of New York's asset sales was its $86 million exposure to bankrupt Interco Inc., one of the largest trades to date in the secondary HLT market. The loans were sold for about 70 cents on the dollar.

Among other credits that Bank of New York has sold are HLT loans to Federated Department Stores, Integrated Resources Inc., and Amdura Corp., trading sources said.

Roughly 11% of Bank of New York's $4.2 billion portfolio of HLT loans is nonperforming.

In afternoon trading, Bank of New York was up to 37.5 cents, to $30.87.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.