Citibank Syndicating $225 Million Credit to Travelers Corp.

Citibank is syndicating a $225 million financing for Travelers Corp. that will allow the bank to reduce its exposure to the large insurer, bankers with knowledge of the deal said.

By bringing in a syndicate, the Citicorp unit would reduce its exposure to the insurance industry. Citibank is now the sole agent on the existing bankers acceptance facility that will mature in October.

"They're paring down their exposure," said one lender.

Bank Raises Rates

At the same time, Citibank is charging higher rates than the last time it raised funds about a year ago, bankers familiar with the deal said. The syndicate members are said to include Credit Suisse and a number of other foreign banks. Citicorp officials involved with the deal did not return calls.

Because of credit fears and an overall increase in loan pricing, the Hartford, Conn., insurer is paying a higher price for this facility than it did for a $275 million backup credit line arranged last year.

Bankers said the backup agreement carried a slim 5-basis-point commitment fee per annum, while the new facility carries a commitment fee of 20 basis points.

A Way to Fatten Margins

That's good for banks, which are hard pressed for ways to fatten margins. "Pricing was fantastically better," said a banker who reviewed the transaction. Citibank, for example, will be able to reduce loan exposure to Travelers while boosting fee income.

William White, treasurer of Travelers, said the bankers acceptance line was "an economically attractive financing vehicle" compared with a straight revolving credit line. He declined comment on the specific pricing.

It's no wonder that rates are rising for insurance lending.

Banks -- and Citibank in particular -- are learning the hard way that there are acute risks in insurance lending. Citibank is reeling from its huge exposure on a $275 million bank line for defunct First Capital Holdings Corp.

And a syndicate led by Chase Manhattan Bank has a $235 million loan outstanding to Monarch Capital Corp., the main subsidiary of which was seized by Massachusetts regulators last week.

Because insurance law does not allow loans to be made at the subsidiary level, banks extend credit to holding companies, which can be stripped of their assets and leave banks holding an empty shell.

For Travelers, the $225 million financing can be used as statutory surplus for its subsidiaries without counting as debt on the parent's books, according to bankers with knowledge of the transaction.

With rising losses, waves of credit rating downgrades, and two recent busted loans in the insurance industry, Travelers wants to ensure that its subsidiaries are well capitalized without adding debt to its balance sheet, according to bankers familiar with the deal.

That is one reason why the company is raising the money in the form of a bankers acceptance facility. It is an off-balance-sheet item according to generally accepted accounting principles, and does not show up on consolidated financials, Mr. White confirmed.

The Hartford-based insurer is sensitive to adding debt to its balance sheet. It was downgraded to A-plus from AA-minus last October by the major rating agencies after setting aside $650 million in loan-loss reserves, resulting in a $178 million loss for 1990.

While Travelers is still among the highest-quality names in the insurance industry, it is nevertheless heavily exposed to battered real estate markets, especially in the Northeast.

Travelers is well capitalized but is working to preserve and build its capital and surplus base, analysts said. They said Travelers has been conserving capital through asset sales and cost cutting.

"Its primary goal is to build and conserve capital," said Alice Cornish, an analyst at Northington Partners, a research firm in Avon, Conn. "They've said preserving capital is a top priority."

Nevertheless, a recent study by Duff & Phelps Inc. showed that Travelers had the highest exposure to troubled real estate of all life insurance companies. Troubled real estate was 111% of surplus capital, compared with 58% for the second largest exposure.

In a separate study by Principal Financial Group, Travelers was found to have the highest mortgage delinquency rate of leading life insurers. As of Dec. 31, 15.54% of its mortgages were delinquent.

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