Some of the US' biggest banks are being challenged for serving in dual roles as lenders and advisers to troubled companies.
The situation gives rise to conflicts, say the companies' creditors, adding that it is the inevitable result of banks' increasingly diverse roles, particularly in the two years since legislation eliminated the separation between investment banking and commercial lending businesses.
"Since the repeal of the Glass-Steagall Act, this has been an issue," said David Friedman, a partner with Kasowitz Benson Torres & Friedman, who frequently represents the bondholders of companies in distress.
Creditors of weak companies worry that banks may want to encourage quick asset sales so that their loans will be repaid in a hurry. The best hope for other groups -- including creditors, stockholders and employees -- may instead be a slower restructuring process that keeps the company intact for as long as possible.
In response to the perceived conflict, creditors are challenging the banks' roles or pressing them to cut their fees.
Potential conflicts have arisen at commercial banks that have been expanding into investment banking, such as Citigroup, J.P. Morgan and Bank of America, and at investment banking firms looking to boost their role as lenders, such as Morgan Stanley.
The issue has recently surfaced in the restructuring of Adelphia Communications, the cable company struggling to stave off a bankruptcy filing. But the banks' multiple roles have also been a source of controversy in the restructurings of Enron; NTL, a British cable company, and ITC DeltaCom, a small telecommunications company.
Friedman, who was hired last week to represent Adelphia's bondholders, said he plans to study whether Citigroup and Bank of America, lenders to Adelphia, have a conflict of interest because they also act as advisers to the cable company.
"Our firm has already put the company on notice that retaining senior lenders as advisers in connection with asset sales is a big mistake," Friedman said. The two banks have also been underwriters of Adelphia's bonds.
Adelphia hired Salomon Smith Barney, the investment banking division of Citigroup, as well as Bank of America Securities and Credit Suisse First Boston last April to help the company reduce debt, potentially by selling assets.
What worries Friedman and the bondholders he represents is that Citigroup and Bank of America could rush the sale of Adelphia assets.
Duncan King, a spokesman for Citigroup, said he could not comment about specific client relationships but spoke more generally about the bank's role as an adviser. "Potential conflicts have always been inherent in our business," he said. "Our obligation is to manage them appropriately, which is essential if we are to maintain our reputation for providing quality advice."
Tara Burke, a spokeswoman for Bank of America, declined to comment about the bank's relationship with Adelphia. A spokesman for Adelphia, Brian Browdie, also declined to comment.
Bankers say it often makes sense for them to advise lending clients on other matters, since they already know the companies well. In restructurings, "There are Chinese walls" between the lending departments and investment banking divisions, said one banker who has worked on such deals.
Some creditors of the Enron Corp have argued that the multi-faceted roles of J.P. Morgan and Citigroup should prevent the banks from serving on a committee representing the company's creditors in bankruptcy court. The two banks arranged billions in loans and other financings for Enron, and represented the company last fall in its ultimately failed negotiations to be acquired by Dynegy.
"When you sit on a creditors' committee, you are supposed to be a fiduciary for all creditors," said Lowell Peterson, a lawyer representing Enron employees. "It's difficult to have these banks wearing more than one hat."
Citigroup resigned from the creditors' committee last month, although J.P. Morgan remains a member. A spokeswoman for Citigroup referred to a recent decision by Arthur J. Gonzalez, the bankruptcy court judge, as he dismissed a motion to disqualify the law firm representing the creditors.
"It is important to state that there is no evidence before this Court that J.P. Morgan, Citibank, any other member of the Committee or this counsel has ever taken any action in this case inconsistent with any of their fiduciary obligations," Gonzalez said.
Bondholders say their protests about the role of J.P. Morgan and Morgan Stanley in the restructuring of NTL led to the fees paid the banks being reduced to US$6 million each, from US$15 million each. In April, NTL agreed to relinquish control to its bondholders after filing for bankruptcy.
Earlier this year, NTL hired J.P. Morgan and Morgan Stanley, along with Credit Suisse First Boston, to advise it on negotiations with bondholders. The bondholders say the company hired the first two banks simply because they are lenders to NTL, and asked the company to reduce the fees paid to these banks.
The bondholders declined to speak for attribution, citing their continuing work with the banks. But a recent bankruptcy court filing indicates that the fees were modified.
A spokesman for NTL, Tim Payne, declined to comment on the company's relationship with the two banks. A spokeswoman for Morgan Stanley, Judy Hitchen, also declined to comment.
Castellani, the J.P. Morgan spokesman, said the bank's dual relationship with NTL did not pose a conflict. J.P. Morgan lent to a subsidiary of NTL based in Britain, he said, while the debt being restructured was issued by a holding company based in the US.
Morgan Stanley was recently hired as an adviser to ITC DeltaCom, a West Point, Georgia, telecommunications company, which announced last month that it would seek to restructure the terms of US$350 million in bonds, said an executive close to the talks.
Morgan Stanley has a long relationship with ITC, handling both stock and bond offerings for the company as well as lending it money, according to SEC filings. A spokesman for ITC, Moss Crosby, said the company had hired bankers but would not confirm which firm had been retained.
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