Columbia Gas Tapped Credit Line As Its Bankruptcy Filing Loomed
Just days before announcing a potential $1 billion loss and possible bankruptcy filing, Columbia Gas System Inc. drew down at least $100 million from its $1.25 billion revolving credit line.
The last-minute drawdown, in June, is one reason why bankers would not agree last week to lend an additional $50 million to $75 million that the company needed to stave off bankruptcy, banking sources said.
Bank loans outstanding to Columbia Gas, which now total $500 million, are expected to be placed on nonperforming status by members of the bank syndicate led by Morgan Guaranty Trust Co. A spokesman at the J.P. Morgan & Co. unit confirmed Friday that its exposure was placed on nonaccrual status.
Other banks in the deal include units of Bankers Trust New York Corp., Bankmont Financial Corp., Mellon Bank, and Bank of New York Co.
Grinding to a Halt
The banks stopped lending immediately after the natural gas company based in Wilmington, Del., announced on June 19 that its "take or pay" gas contracts would have to be renegotiated, abrogating its $1.25 billion revolving bank commitments.
Lenders used a covenant in the loan agreements allowing banks to stop funding a loan if there is a "material adverse change" in the borrower's financial condition.
But expecting its lenders to cancel the loan, Columbia decided to draw the lines, apparently without advance warning of this impending news, sources in the bank group said.
Background of Displeasure
Some banks were reportedly miffed that the company drew on the line, which might have had an effect on the talks, bankers and analysts said. The exact amount of the drawdown could not be determined.
"There were significant drawdowns a couple of days before," said John Bilardello, banking analyst at Standard & Poor's Corp. "And the banks were surprised" by the subsequent announcement, he said.
Columbia Gas declared bankruptcy last Wednesday after failing to reach agreements with its bank lenders, saying that the company "ran out of time and money."
It is arranging up to $400 million in debtor-in-possession financing with banks led by Manufacturers Hanover Trust Co., a member of the original lending group. On Friday, Manufacturers Hanover announced that it will extend $95 million, the first portion of the bankruptcy loan.
Morgan is optimistic that the lending group will recoup its investment. In a statement Thursday, Morgan said that "the bankruptcy process will take a long time but, in the end, we do not expect the banks to lose any money."
Scant Progress to Report
Ill will was not the only factor that caused the lending syndicate to deny the Columbia Gas request for additional funds. Banks also wanted evidence that the company was making progress toward relaxing its burdensome gas contracts with producers and suppliers.
Experts question Columbia's wisdom in boldly tapping lenders without coming clean on its financial condition.
"The company thought the banks were just going to write a check," said one source familiar with the talks.
Mr. Bilardello believes banks took a hard line despite the risk they faced because their loans were subordinated to public senior debt.
"I think relations-wise, it's a bad situation," he said. "Banks had a significant incentive to keep this out of bankruptcy," given the amount of loans outstanding.
While there was reportedly some agreement on negotiating a new loan, the group could not receive 100% consensus from the syndicate, which was required. That left the company out of cash and forced to file for bankruptcy, sources said.
"There's still a lot of support from the bank group," said one knowledgeable source. "The banks tried in good faith."
William McLaughlin, a spokesman for Columbia Gas, declined comment on the drawdown of additional funds. He said Columbia was pleased with the banks' efforts, but that the company ran out of time given its resources.