NationsBank Faces Decision Over $1B of Barnett Loans

NationsBank Corp.'s merger agreement with Barnett Banks Inc. could undo one of last year's more eye-opening credit card deals.

NationsBank would end up owning $1 billion of loans that Jacksonville, Fla.-based Barnett has agreed to let Household Credit Services Inc. manage on its behalf.

An aggressive card issuer intent on controlling its own destiny, NationsBank would likely move to bring those Barnett accounts in Florida and Georgia under its wing. Analysts said they have heard from Barnett and NationsBank officials of a clause in the contract with Household that covers the possibility of a merger and a renegotiation of terms.

NationsBank, owner of a $9 billion card portfolio that ranks 12th among bank card issuers, would not have recourse on $725 million more of Barnett accounts that were fully turned over to the Household International subsidiary.

A novel aspect of the Household deal was the separation of "core" from "noncore" accounts. Barnett kept ownership of core customers, and Household took the rest.

Barnett made these decisions after its overall chargeoff rate hit 6.4% in the second quarter of 1996, well above the industrywide 5%.

Household is the sixth-largest MasterCard and Visa issuer, with $17 billion of outstandings.

Jerry D. Craft, president of Program Management Corp., Atlanta, said NationsBank "would look to manage its own portfolio of $1 billion that Household manages. NationsBank is likely to say, 'We'd like to own it and manage it ourselves.'"

"There was a covenant" in the Barnett-Household agreement "for this eventuality," said Carole Berger, managing director, Salomon Brothers Inc. "Any regional bank would be silly not to cover the eventuality of its getting bought."

Sanford C. Bernstein & Co. analyst Moshe A. Orenbuch said Barnett and NationsBank "will explore contractual options" to bring the portfolio fully into NationsBank.

Richard X. Bove, senior vice president, Raymond James & Associates, St. Petersburg, Fla., said Barnett has other partnerships-such as a card processing deal with First Data Corp. and HomeSide and a joint mortgages venture with BankBoston Corp.-that NationsBank is likely to "take under advisement."

The Charlotte, N.C.-based superregional "will contact each company to see how to change or improve" its arrangement, Mr. Bove said.

Neither NationsBank nor Barnett would comment on the contract with Household. Company representatives said it is too early to tell the outcome.

"If NationsBank wants to come to us to discuss the contract, they have the opportunity," said Craig Stream, vice president of investor relations for Household. "We would listen to what they have to say."

"Household will fight to keep those customers," said Michael Auriemma of Auriemma Consulting Group, Westbury, N.Y. "I think NationsBank won't want Household anywhere near it after spending $15 billion" for Barnett.

Robert Hammer, chairman and chief executive officer of R.K. Hammer Investment Bankers, Thousand Oaks, Calif., said Barnett's $1 billion of receivables would be moved into NationsBank's control "as soon as legally and practically possible."

He added that NationsBank "is bent on growing overall, and credit cards are a key part of their profitability."

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