Some large syndicated loans to companies with faltering finances may force more U.S. banking companies to raise reserves.
Last week Wachovia Corp. in Winston-Salem, N.C., and Unionbancal in San Francisco announced they would post additional reserves to account for expected increases in nonperforming assets for the second quarter. Both attributed part of the increase to their exposures to syndicated loans.
Wachovia would not disclose more information about its $50 million participation, though analysts believe it to be part of a $1.5 billion loan. Union Bank said it had exposure to several sectors, including retail, forest products, health care, and energy.
Analysts said they expect that more banks will have to follow suit.
Among the biggest deals that could force banks to raise reserves is a $2.1 billion revolving credit to Safety-Kleen Corp., a Columbia, S.C., company that collects, recycles, and disposes of industrial waste. Safety-Kleen filed for Chapter 11 this month.
Bank of America Corp., one of the biggest providers of syndicated loans, was the syndication agent for the deal. Bank One Corp., through its predecessor First Chicago NBD Corp., was the managing agent.
A review by Credit Suisse First Boston indicated that at least nine U.S. banking companies, including Wachovia, had exposure to the Safety-Kleen loan. They include First Union Corp., Comerica Inc., FleetBoston Financial Corp., National City Corp., Star Bank Corp. (now Firstar Corp.), Imperial Bancorp, Pacific Century Financial Corp., and Webster Bank.
Credit Suisse's analysis did not specify each bank's stake in the loan, though it said Cleveland-based National City "probably" had around $15 million and Star Bank about $10 million. Analysts said Wachovia already recognized at least part of its participation in the loan as nonperforming in the first quarter.
A related credit to Laidlaw Inc. of Ontario has also raised questions. Laidlaw, which owns Greyhound bus lines, stopped making certain payments to its own bondholders this quarter.
It has a credit that was co-arranged by Toronto Dominion Bank, Scotia Bank, the former NationsBank, Wachovia, and Bank One of Chicago, according to analysts.
A syndicated loan to Stage Stores Inc. of Houston could also prove troublesome. Stage Stores, a department store chain, also filed for bankruptcy protection this month. Credit Suisse was the lead manager for the 1997 $200 million dollar loan. Union Bank is believed to have a piece of that loan, analysts said.
Allen W. Sanborn, president and chief executive officer of Robert Morris Associates, a Philadelphia trade association that examines credit and risk policies, said regulators have raised their scrutiny of leveraged loans since interest rates began rising last fall.
The heightened scrutiny may mean some companies will categorize loans as non-performing long before they would have in the past.
"Bankers have told us there are more challenges in these areas," Mr. Sanborn said. "The expectation is that regulators are taking a tougher stance" on the classification of certain loans as "nonperforming."
Some banks expressed confidence they would not have big problems in the foreseeable future. "We see no need to increase loss reserves," said Robert Strong, chief credit officer at Chase Manhattan Corp., which is the largest syndicated lender.
Mr. Strong made the remarks to investors Monday in conference call sponsored by Donaldson Lufkin & Jenrette.
Indeed, Mr. Sanborn and analysts who follow banking companies said there appears to be no immediate cause for alarm. David Berry, director of research at Keefe Bruyette & Woods, said, "Expect a moderate increase in problem assets, with the emphasis on moderate."
"If the economy slows, you have a lot of these issues cropping up," said Michael Mayo, an analyst at Credit Suisse. "The embedded risk is higher."