Sun, Jul 07, 2002 page11

• Enron, WorldCom shake confidence

  • BLOOMBERG
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  Enron Corp's bankruptcy shook the confidence of bankers in the first half, helping to cut syndicated lending by 14 percent. WorldCom Inc's disclosure of inflated profits may make banks more skittish in the second half.

  WorldCom was seeking US$5 billion from a syndicate of banks including JP Morgan Chase & Co and Citigroup Inc -- the US's biggest lenders -- when it reported accounting errors. The phone operator didn't get the loan. Enron had US$31.2 billion of debt when it filed for bankruptcy in December.

  "Banks are a lot more cautious following Enron's collapse," said Julian van Kan, head of European loan syndications at BNP Paribas SA, France's biggest bank.

  "Banks are demanding much greater transparency."

  The accounting debacles and a slowing economy also combined to cut demand for credit. Banks arranged US$727 billion worth of syndicated loans during the first half of this year, down from US$846 billion in the same period last year, Bloomberg data shows. The figure is 16 percent down from the first half of 2000.

  WorldCom could help make 2002 a record year for bankruptcies.

  Last year, 255 publicly traded US companies, led by Enron, put US$260 billion of assets under court protection, almost triple the record that stood for a decade. So far this year, 113 companies with US$149 billion in assets have filed, according to BankruptcyData.com.

  Bankers trying to weed out customers who may go bankrupt are insisting on greater disclosure and charging higher prices, borrowers said.

  "This is the toughest bank market I've seen in at least 10 years," said Matthew Hildreth, treasurer of Fleming Cos, the largest US grocery wholesaler. Fleming is paying more for a US$975 million credit it got earlier this month compared with a loan it got in 1997.

  Syndicated lenders -- banks that club together to extend credit -- have been ensnared by non-paying customers all around the world, not just in the US. In several cases, loans were extended just weeks or months before customers disclosed they would have difficulty making repayments.

  In the Netherlands, a group of banks including Citigroup and Bank of America lent KPNQwest NV 525 million euros (US$521 million) three months before the operator of Europe's largest fiber-optic network was declared insolvent.

  In Britain, Energis Plc alerted banks that it would breach conditions on a ?725 million (US$1.1 billion) loan the company agreed to three months previously. Bankers to the UK's largest carrier of Internet traffic spent the rest of the year trying to find a buyer for the company.

  Phone bills

  Bankers in Britain are still negotiating with Marconi Plc, a phone equipment maker which got a 3 billion-euro credit in May 2001, weeks before saying that revenue would fall rather than rise. Barclays Plc, Europe's most active syndicated lender, and other banks are trying to swap loans to Marconi for stock.

  "There's a deep sense of paranoia in the bank market and a lack of trust between borrowers and lenders," said Paul Cantwell, a partner at Accenture Ltd in New York who advises banks and companies.

  With financial markets hobbled by slow economic growth and slack accounting, lenders are focusing more on the quality of their customers, as opposed to quantity. Syndicated lenders earn fees from arranging financing, so the more loans they make, the higher their fees.

  "Lenders' priorities have now switched from earning fees to focusing on the credit quality of borrowers," David Basset, head of European loan sales and trading at Citigroup told a lenders' conference in June.

  Some companies have found that lenders are making new demands. Michelin & Cie, seeking to renew a US$700 million credit line, has been asked to accept terms permitting bankers to raise the price or even recall the loan if business deteriorates at Europe's biggest tiremaker. Previous loans to the Paris-based company didn't have such conditions.

  "When disasters are fresh in their mind, lenders negotiate much harder and focus much more on documentation," said David Morley, managing partner of global banking at Allen & Overy, a London-based law firm.

  Only the highest rated companies are finding it easy to borrow.

  General Electric Co raised US$20 billion from banks in the first half of the year. The biggest company by market value is one of just eight US companies with the highest credit rating from Moody's Investors Service.

  Top-rated customers are growing ever more scarce.

  Moody's and Standard & Poor's Corp cut ratings on twice as many investment-grade bonds as those they raised last year, and the trend is worsening. Downgrades outnumbered upgrades by almost three to one in the first half of 2002.

  Companies with falling ratings face higher costs, tougher terms and a dwindling pool of lenders.

  Costlier loans

  Bankers forced ABB Ltd, Europe's biggest electrical-engineering company, to renegotiate a US$3 billion loan in April after Moody's cut the Swiss company's rating. ABB is now paying four times the interest margin it was paying before. JP Morgan, Dresdner Bank AG and UBS AG still decided to leave ABB's pool of lenders. Interest margin is the spread over the London interbank offered rate that banks charge for loans.

  Lending volumes won't pick up until economic growth improves and companies start boosting revenue again, bankers said. Mergers and acquisitions, a big source of business for lenders, are also unlikely to pick up rapidly after falling to the lowest level in at least five years during the first half of this year.

  Banks are waiting for companies to "start building inventory, buying plants, building plants, putting money in technology or hiring people back," Bank of America Corp Chief Financial Officer James Hance said in an interview in June.
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