Wells Wins Fight with Examiners Over an HLT
SAN FRANCISCO - The Office of the Comptroller of the Currency has overturned a decision by its examiners requiring Wells Fargo & Co. to write off all of a $85 million loan to a bankrupt drugstore chain, sources said Friday.
The ruling may be a sign that the agency is prepared to take an easier stance on loans to highly leveraged companies, a popular credit in the late 1980s when banks rushed to finance corporate buyouts.
Loan Now Called |Doubtful'
The Comptroller's ruling allows Wells to reclassify its loan for the 1986 leveraged buyout of Revco D.S. Inc. as "doubtful," instead of writing it off entirely. Revco is current on interest payments, but its loan has been deemed nonperforming because the Ohio company has filed for bankruptcy.
Sources said Wells was notified of the regulator's decision in a letter late last month. Spokesmen for Wells and the Comptroller's office declined to comment.
Well's writeoff of the Revco loan was the largest single component in the company's $183 million in total chargeoffs in the second quarter, leading to a 94% decline in second-quarter earnings to $14 million.
Reversal of the preliminary Revco classification presumably allows Wells to recover the entire writedown. However, since the loan remains nonperforming, an unspecified portion of the amount recovered will have to be set aside in its loss reserve.
Furor over Shared Credit Exam
A federal crackdown on loans to highly leveraged companies became evident earlier this year as preliminary results of the Shared National Credit Regulatory Examination began to surface. The exam is an interagency audit of credits over $20 million shared among banks, with many of the credits falling into the category of highly leveraged transactions, or HLTs.
Results of the shared credit exam must be approved by the senior supervisory officials of the Federal Reserve System and the Federal Deposit Insurance Corporation, as well as the Comptroller's office.
While a number of banks were forced to make large provisions and write off parts of their HLT portfolios, Well's case attracted the most attention. Examiners required the San Francisco-based company to charge off about $105 million in HLT loans and put approximately 200 million loans on nonperforming status.
Wells' $3.5 billion HLT portfolio consists of about 106 senior loans and a small number of subordinated loans.
Wells Protested to the Top
As reported, Wells vehemently protested the findings of the Comptroller's exam, arguing that some of the charged-off credits were current on interest payments and retained substantial value on the secondary market.
Wells chairman and chief executive Carl E. Reichardt and president Paul Hazen flew to Washington in late June to take the company's case to officials of the Comptroller's office.
In those discussions, Revco was the single most important bone of contention. Comptroller's officials were said to have defended the original Revco classification. But they noted that a final decision would not be made until official notices of the shared credit exam were mailed in August.
Leniency on Revco "is a very encouraging sign for the industry because the original classification was a bad precedent," said Thomas K. Brown, analyst with Donaldson, Lufkin & Jenrette Securities Corp.
In the Revco loan, Wells was lead bank lender, providing more than $102 million to finance the company's 1986 Revco buyout.
No information was available on the classification of Wells' other large LBO credits.