Sumitomo Bank, West LB and Fuji Bank lost out in a game of chicken last week with Nortel Networks, in a showdown that had three banks far down the relationship food chain looking to improve their lot. Nortel was left with only one option when the three used strong-arm tactics by blocking an amendment which required 100% approval to extend the line for a year, said bankers,
Nortel spokesman David Chamberlain declined to name the specific banks involved, but explained, "Nortel needed to extend the credit line as the facility was about to expire on April 10. Despite the full support of 24 banks representing approximately 95 percent of the total facility commitments, the parties were not able to reach a satisfactory agreement with the remaining 3 banks." This forced the company to draw down and secure the funds, even though it would have cost $10 million a quarter in interest.
The other twenty-four banks, led by Credit Suisse First Boston, J.P. Morgan and Citibank, were prepared to extend the line for the fallen angel on April 9, but the terms could not be ascertained. One said, the other banks had to know this was the only outcome--drawing down if no extension was achieved--and they really did not want to fund the line. "It was a game of chicken the banks could only lose, a real no-brainer," he added. After drawing down on the line, the banks caved and new terms were negotiated, remarked a banker.
But one banker commented the other banks should respect the internal credit position of the three. The stubborn stand put both the company and lenders--including the three banks in a tough position. But bankers said they understand why the banks did what they did. "They're not historical beneficiaries of the company, so why should they not try and force some concessions." Another said the banks were hoping to check out or at least get better terms on the credit. The relationship was dead and so maybe the other banks should be grateful they spoke up." Calls to officials at the three banks were not returned. Officials at the lead banks either declined comment or did not return calls.
Pricing on the 364-day line has been increased and the line has been reduced by $575 million to $1.175 billion. But it could not be determined whether these terms were part of the proposed ammendment. One banker suggested the hardball tactics of the lenders are merely emblematic of a market that is suffering from credit problems. It's also a function of the mis-pricing of the lines, he added. "The joke in the loan market is when you lend a guy a lot of money, you own him.. But when they draw down, the joke is on the bank." If the pricing increases it is rationalizing the market, he stated