Bank lenders that have helped to fuel finance companies' rapid growth are reexamining their commitment to the market in the wake of problems at Mercury Finance Co. and Jayhawk Acceptance Corp.
"The banking industry has been very focused on the returns, and this will be a reminder that we all need to keep the risk in perspective as well for transactions like this," said Bruce Ling, head of loan syndications at Credit Suisse First Boston.
Allegations of fraud at Mercury "raise the cautionary note that you have to keep the risk and return in balance," he added.
Salomon Brothers has been in the market recently with a $750 million syndicated loan for Mercury to support its planned acquisition of Fidelity Acceptance Corp. from Bank of Boston Corp. But on Thursday, BankBoston said it had terminated its agreement to sell Fidelity to Mercury because of recent events.
Salomon had been billing the loan as the first time an investment bank was providing interim financing for an investment-grade borrower. Mercury's financial adviser, Salomon, was also on tap to manage a planned bond issue to support the Fidelity acquisition.
Meanwhile, Jayhawk, a subprime auto lender, announced a one-time charge of $15.5 million on Thursday that will cause it to violate a covenant of a $65 million loan led by Fleet Financial Group.
"We took this charge as a purposeful action on our part to try to improve the quality of our future earnings," said Frederick Jackson, Jayhawk's chief financial officer, in a telephone interview. The only thing its announcement has in common with Mercury's is timing, he said.
Finance companies, especially subprime lenders that specialize in lending to borrowers with less than pristine credit, still will find capital market funding, bankers said. The booming sector has attracted major lenders, including Chase Manhattan Corp., J.P. Morgan & Co., First Chicago NBD Corp., NationsBank Corp, Banc One Corp., and BankAmerica Corp.
These banks are expected to continue to finance the rapidly consolidating industry. But they now will be on the lookout for a possible shakeout of poor performers in a business that has not passed through a major credit cycle downturn since beginning an expansion two years ago.
"This will hurt the whole sector," said Carter Rise, managing director and head of the financial services group at Prudential Securities Inc. "It seems to have taken some of the wind out of the auto finance sector's sails because Mercury was seen as one of the leading companies in the industry." Mr. Rise's firm has many clients in the finance company sector.
Asset-backed securitizations, a major source of liquidity for the finance industry, should continue unaffected, Mr. Rise added.