Sunbeam starts domino chain reaction

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Bank of America Warns of Charge-Offs NEW YORK (Reuters) - A problem loan to troubled consumer products maker Sunbeam Corp. (NYSE:SOC - news) prompted Bank of America Corp. (NYSE:BAC - news), the parent of the biggest U.S. bank, to forecast that its charge-offs for bad loans are likely to more than double in the fourth quarter, analysts said on Wednesday.

Charge-offs are loans that U.S. banks treat as a loss. The Charlotte, N.C.-based banking company declined to name the borrower or the size of the loan.

But analysts say the Bank of America loan is worth $450 million to $500 million and was made to Sunbeam, whose best-known products include Mr. Coffee coffee-makers and First Alert smoke alarms. Sunbeam, which reported a third-quarter loss on Wednesday that exceeded Wall Street's estimates, also makes other small appliances and camping gear.

Bank of America, however, is not the only lender saddled with a problem loan to the company once run by Al Dunlap, or ''Chainsaw Al,'' who had built his reputation on resurrecting troubled companies by slashing costs and jobs.

First Union Corp. (NYSE:FTU - news) and Morgan Stanley Dean Witter & Co. (NYSE:MWD - news) also hold large pieces of the Sunbeam loan, estimated to be worth a total of $1.5 billion to $1.7 billion, analysts said.

``It's all the Sunbeam loan,'' said Lawrence Cohn, an analyst at Ryan, Beck & Co. ``I think it's $1.5 billion loan, with $450 million at Bank of America, $450 million at First Union and $450 million at Morgan Stanley ... That's my understanding. It was divided three ways.

``All three of these guys can afford it,'' Cohn said.

Earlier this week, First Union Corp. disclosed a $450 million problem loan, although it also declined to name the borrower. It said the loan's potential impact is not expected to exceed $100 million to $125 million in the fourth quarter.

Regarding the Sunbeam loan, Morgan Stanley declined to comment. A Sunbeam representative was not immediately available to comment.

STOCK HIT BY PROBLEM LOAN NEWS

The news of the problem loan sent Bank of America's stock down more than 8 percent on Wednesday. The stock fell $3-15/16, or 8.58 percent, to $41-15/16 in afternoon trading on the New York Stock Exchange.

Merrill Lynch cut its 2000 earnings forecasts on Bank of America to $5.00 a share from $5.15, and also reduced its 2001 EPS view to $5.65 from $5.70.

Goldman Sachs also lowered its fourth-quarter earnings outlook on Bank of America to $1.22 a share from $1.35 a share and cut its 2001 EPS view to $5.60 from $5.75 a share.

First Union's stock price also dropped on Wednesday although Morgan Stanley's rose after an initial fall, both in NYSE trading. First Union shares fell 3/8 to $27-1/16.

In contrast, Morgan Stanley's stock gained $2-11/16 to $70-9/16.

Merrill Lynch banking analyst Judah Kraushaar told investors in a report on Wednesday that Morgan Stanley officials told him the investment bank has already marked down its Sunbeam loan exposure.

BANK OF AMERICA TOLD SEC ABOUT PROBLEM LOAN

Bank of America, which disclosed the problem loan in a regulatory filing to the SEC on Tuesday, said fourth-quarter charge-offs likely would be more than double third-quarter levels.

The banking company also said it expects about $100 million in additional charge-offs in its consumer portfolio, mostly within the consumer finance segment, in the fourth quarter. These consumer charge-offs are one-time items and come as the bank complies with a regulatory policy on the treatment of delinquent consumer loans.

Bank of America's nonperforming assets, or loans with potential repayment problems, rose to $4.40 billion at the end of the third quarter from $3.04 billion a year earlier. But its provision for credit losses fell to $435 million from $450 million a year earlier. Its net charge-offs were $435 million in the third quarter, down from $460 million a year earlier.

Bank of America said it expects the increase in nonperforming loans in the fourth quarter to top the 13 percent growth rate of such loans in the third quarter.

The banking company said it expects its provision to protect against loan losses to at least equal net charge-offs in the fourth quarter.

WALL STREET ANXIOUS ABOUT BAD BANK LOANS

Wall Street is apprehensive that more than a few banks will be left holding more bad loans, as higher U.S. interest rates put pressure on the economy and cash-strapped borrowers. The Federal Reserve has raised U.S. interest rates six times since June 1999.

The Fed's policy-making body, the Federal Open Market Committee, decided at its meeting on Wednesday to leave rates unchanged. But the Fed warned of inflation risks ahead, citing the tight labor market and energy prices. It also mentioned a softening of demand, but said that was not enough yet to justify a move to a ``neutral'' stance on monetary policy.

Sunbeam, in addition to reporting a third-quarter loss on Wednesday that was much worse than Wall Street estimates, also said it expects the retail environment to be unfavorable in the fourth quarter.

``In our mind, Sunbeam is but one more example of credit erosion taking place currently on corporate credits,'' Kraushaar of Merrill Lynch wrote in a research report on Wednesday.

Personal Note: With the plethora of bad earning reports I'm not sure how much more evidence we need to indicate an upcoming recession. the bulls are as stubborn as; what else, but a bull, but eventually they will come to there senses and concede. The stock market is a poor place to weather the upcoming recession (unless your buying energy stocks or utilities and later on after the dollar dumps even gold stocks will come alive)

-- Guy Daley (guydaley@altvista.com), November 15, 2000


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