(Bloomberg) -- Blockbuster Inc., whose shares have plummeted 95 percent since 2004, has made money just once since 1997, and auditors doubt it can pay its bills. Still, JPMorgan Chase & Co. isn’t giving up on the movie-rental chain.
The second-largest U.S. bank by assets extended the Dallas- based company’s line of credit, due to expire in August, while cutting it 29 percent and raising the interest rate.
Citigroup Inc. and Bank of America Corp. are also amending revolving loans to zombie borrowers on the brink of default and others with debt ratings that are among the worst. Lenders are betting the economy will improve enough to keep companies from adding to the $1.4 trillion of writedowns and losses by the world’s largest financial institutions since the start of 2007.
“Banks are still very restricted on capital,” said Neal Schweitzer, senior vice president of corporate finance at Moody’s Investors Service in New York. “This is a way to address the maturity and the upcoming refinancing crunch.”
The Federal Reserve’s stress test showed on May 7 that 10 of the 19 largest U.S. lenders need to raise $74.6 billion in capital to withstand a prolonged recession.
About $100 billion of publicly rated high-yield, high-risk or leveraged loans are due to expire by 2011, with $3.58 billion set to mature by the end of this year, according to Moody’s. This type of credit is rated below investment grade, or less than Baa3 by Moody’s and BBB- by Standard & Poor’s.
“You will see a trend toward extending those revolvers for a year or two to buy time until the market stabilizes,” said Douglas Antonacci, head of new issue loan sales at JPMorgan in New York. The bank was among the nine deemed by the government assessment not to need additional funds.
‘Amend and Extend’
At least 12 non-investment grade U.S. companies have revised their lines of credit in the past two weeks, Moody’s estimated. In a revolving line, money can be borrowed again once it’s repaid.
Eastman Kodak Co., the photography company in Rochester, New York, and Nebraska Book Co., the Lincoln, Nebraska-based owner of 270 college bookstores, are among those that have made modifications this year. Kodak and Nebraska Book’s parent, NBC Acquisition Corp., are both on Moody’s B3Negative list, formerly called the Bottom Rung report, which records the lowest-rated non-financial speculative-grade U.S. companies.
“We are doing a lot of amend and extend,” said Glenn Stewart, head of Americas loan syndication and sales at Bank of America, the biggest U.S. bank by assets. The Charlotte, North Carolina-based lender needs $33.9 billion in capital, according to the government evaluation of how it would fare under “more adverse” conditions than most economists anticipate.
Fleeing Investors
Leveraged loans were one of the hottest parts of the debt market, with about $689 billion issued in 2007, up from about $200 billion in 1996, according to Moody’s. The market peaked as hedge funds and collateralized loan obligation firms began buying the debt from banks and trading it amongst themselves. A CLO is a portfolio of loans sliced into varying degrees of risk.
The money helped finance major purchases during the leveraged buyout boom, including the acquisition of Nashville, Tennessee-based hospital operator HCA Inc. for $33 billion.
After the subprime mortgage market collapsed in the second half of 2007, most investors fled to safer assets. Prices that averaged about 100 cents on the dollar fell to a record low of 59.20 cents in December 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 Index.
The speculative-grade default rate reached 7 percent at the end of the first quarter, up from 4.1 percent at the end of 2008 and 1.5 percent in March of last year, Moody’s said.
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