It's Almost Over for Finova
Why the anxiety? Moody's Investors Service, the credit-rating agency, expects Finova to file for bankruptcy any day now in order to restructure or eliminate the estimated $11 billion in debt it owes to banks, bondholders and other creditors. If that were to occur, it would be one of the biggest debt restructurings ever. And the fallout could spell trouble for the banking industry, since nearly $4.7 billion of the debt is in the form of bank loans. That isn't nearly enough to cause problems for the banking system all by itself, but it underscores the nasty problems lenders are faced with these days.
It's difficult to determine which banks are on the hook. Multimillion-dollar commercial loans like the ones made to Finova are often "syndicated," meaning several banks buy a portion of the loan in order to spread the risk of a default. But experts say the banks that originated these massive loans are the ones most likely to carry the highest percentage of Finova's bank debt in their portfolios. Assuming that's true, the list of suspects is a Who's Who of the nation's biggest banks: Wells Fargo (WFC), Bank of America (BAC), Bank One (ONE), First Union (FTU), Citigroup's (C) Citibank, J.P. Morgan Chase (JPM) and FleetBoston Financial's (FBF) Fleet Bank, according to industry analysts and Loan Pricing Corp., a research firm.
Creditors usually get paid something when their customers go bankrupt, but sometimes it's just pennies on the dollar. And when banks are the ones left holding the bag, they usually write off the uncollected portion of the loan — an event that results in a charge against earnings. For instance, Wells Fargo recently classified a $122 million commercial loan — believed by some to belong to Finova — as a bad, or nonperforming, loan. (Wells Fargo, which declined to comment on the situation, hasn't yet taken a charge on the loan.) Needless to say, the more bad debts a bank has in its portfolio, the more hits it'll have to take against earnings.
Perhaps the most alarming aspect of the Finova situation is how fast things careened out of control. In the first nine months of last year, the dollar value of its bad loans rose nearly 140%, to $421 million. (Finova has yet to report financial results for its last fiscal quarter.) The list of losers includes a $117 million loan to Sunterra (STERQ), a bankrupt time-share resort company; a $31.7 million loan to an unnamed wireless-messaging company; and loans to the now-defunct airline Tower Air.
Finova went to sleep in Wall Street's penthouse and woke up in its doghouse. In the early years after it went public in 1992, the company wowed analysts with its fast growth and dependable earnings results. The firm's assets — loans under management — grew from just over $2 billion in 1992 to $14 billion in 2000, as it became an important lender to midsize businesses.
But all the goodwill Finova had built up on the Street began unraveling after the company made a series of stunning announcements last March. With little warning, it announced it was writing off a $70 million loan to an unnamed computer distributor and was taking a big charge against earnings. It also announced the hasty and unexpected retirement of longtime Chief Executive Samuel Eichenfield.
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The analysts were surprised, to put it mildly. A formerly fawning Robertson Stephens analyst responded by saying, "a loss of this magnitude must force investors to question the company's overall credit quality." A year ago, more than a dozen analysts followed the company; now there's just one.
The company's stock, meanwhile, has taken a year-long pounding, falling from around $32 on March 24, 2000 to just $1.14 on Feb. 14. Shareholders are hopping mad. A class-action suit filed in federal court in Arizona alleges that Finova's management concealed the $70 million bad loan as long as possible, and identifies the defaulting borrower as Supercom, a privately owned California computer company. (Finova has never publicly named the borrower.) Meanwhile, value investors and workout artists are squabbling over the remains. There's now a complex battle underway for control of Finova that involves General Electric's (GE) GE Capital, Goldman Sachs (GS) and Warren Buffett, among others.
While there's no reason to believe there's a minefield of Finovas out there, the truth is no one really knows how bad the credit-quality issues are at the nation's banks. Ruchi Madan, a banking analyst at Salomon Smith Barney, estimates that some $51 billion in problematic loans sits in the portfolios of the nation's big banks. Of course, not all those loans will fall into the nonperforming category. And some banks — like Bank of America — have more problems than others. Like most banking analysts, Madan predicts the bad-loan problem is a manageable one now that the Federal Reserve is cutting interest rates.
But that prediction relies on a couple of assumptions — that the economy won't slip into recession despite the Fed's actions, and that there aren't a lot of other Finovas out there getting ready to blow up in their lenders' faces. It's probably a safe bet — but the suddenness with which Finova crumbled shows it's far from a sure one
