Credit Lines May Suffer at Merged Banks

Cost cutters in bank megamergers may encounter a snag when trying to combine billions of dollars in short-term obligations.

The snag could arise at NationsBank, the combination of NCNB Corp. and C&S/Sovran Corp., and at Chemical Banking Corp., the company to be formed by the merger of Manufacturers Hanover Trust Co. and Chemical Bank.

Reluctant Lenders?

Lenders to the individual companies may be reluctant to extend much larger credit lines to the single, merged institutions. As a result, the new banks may find themselves with less credit than they need.

The biggest problems emerge in short-term markets. Banks rely on short-term credit lines when they borrow in the federal funds and other markets to obtain the cash they need. When banks merge, they require credit lines equal to the sum of the parts.

Expanded credit lines are not always forthcoming, however.

Some banks and corporations have rules requiring them to limit their exposure to a single credit. Others may be reluctant to go to the trouble of analyzing the new institution to determine its creditworthiness.

A Credit-Line Mismatch

As a result, merging banks may often find they have only a small increase in credit lines, though they have a large increase in assets that need funding.

"I think the loss of funding is going to be the exception rather than the rule, but there will be some cases," said Sharon Haas, a vice president at the rating agency Thomson Bankwatch, an American Banker affiliate. "You'll have institutional [funds] providers aware that they are dealing with one institution instead of two, and they may not want to" extend as much total credit as in the past.

If credit lines do contract, bankers' options will be limited. Some will probably tap other markets, such as the London interbank deposit market, and they may offer to pay high rates to flush out lenders.

"They can get the money they need in Europe, but at a price," one banker said. They can also try to obtain term funding, locking in liquidity for longer periods. But usually, the longer the funding term, the higher the rate.

Bankers have not forgotten the difficulties Bank of New York Co. encountered while completing its acquisition of Irving Bank Corp.

Other banks shut down their lines of credit to Irving when that bank was officially absorbed but they did not increase their lines to Bank of New York by equivalent amounts - though Bank of New York needed more federal funds to support the Irving assets.

"People couldn't be bothered to review the new bank and increase lines," said one fed funds broker.

Bank of New York weathered the problem without a funding crisis and eventually adjusted its funding so it needed less in the way of fed funds.

But it had to scramble some days and, sometimes, offer high rates to get the fed funds it needed, market sources said.

A Bank of New York spokesman declined to comment.

Bankers Reticent

Most bankers at the merging institutions refused to discuss funding plans, saying it is too early to speculate on such questions. But one banker conceded, "We are aware of the Bank of New York-Iving difficulties." He declined to say what his bank was doing to avoid such problems, however.

Hanover and Chemical will likely face more problems with credit lines than will NCNB and C&S/Sovran, bankers said.

The New York-based banks are seen as weaker institutions now, so they already have limited credit lines.

Moreover, they rely more heavily on funds purchased in national markets, while NCNB and C&S/Sovran obtain a lot of their fed funds from correspondent banks.

Rating agencies, however, are expected to upgrade three of the four banking companies involved in the big mergers, provided the deals proceed smoothly and costs are cut.

Ratings Agency Endorsement

Thomson Bankwatch, the most closely watched rating agency in the fed funds market, has even told clients it thinks the mergers will help all four companies involved.

Higher ratings are a precursor of larger credit lines and lower funding costs. They also let banks diversify their funding sources.

For example, Chemical and Hanover have both reduced their reliance on commercial paper in the past year, recognizing that commercial paper buyers were worried about credit quality. Higher ratings would let the new Chemical tap that market more often.

But at least initially, the companies face major hurdles in combining their funding activities.

"A lot of these bridges have yet to be crossed," said a banker at one of the merging companies.

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