FINOVA PREFERS BERKADIA FOR BAILOUT

By Donna Mitchell

Financial services firm The Finova Group, once out of favor as a possible buy-out target, appears ready to end a rivalry for its control after saying last month that it prefers an $8.1 billion bailout offer proposed by Berkadia LLC over one from GE Capital.

At stake is the survival of Finova, Scottsdale, Ariz., which depends heavily on its ability to restructure some $11.4 billion of outstanding debt. That’s where GE Capital, the financial services arm of General Electric, and Berkadia LLC come into play. The two entities each have different restructuring plans to offer Finova. Up until June, they were engaged in an all-out contest to win control of the company. GE Capital teamed up with Goldman Sachs Group for its $7.25 billion bid, while Berkadia is a joint venture between Warren Buffet’s Berkshire Hathaway of Omaha, Neb., and Leucadia National Corp., a New York City-based financial services company.

Like many other financial services companies, The Finova Group raises money for its lending operations by issuing debt. Through its main subsidiary Finova Capital, the company had actively provided shopping center financing for the past four years, funding such projects as the Sunnyvale (Calif.) Town Center regional mall and the super-regional Lincoln Mall in Matteson, Ill.

? Before Finova filed for bankruptcy protection in March of this year, Berkadia proposed a $6 billion debt-restructuring plan, according to Finova’s annual report for 2000. According to recent Reuters reports, that offer was modified in late May to include a new interest rate of 225 basis points over the London Interbank Offered Rate.?

Under Berkadia’s previous offer, the minimum annual rate would have been 9%, with an annual 25 basis point facility fee. That loan would be used, with cash on hand, to pay Finova’s unsecured creditors about $7.35 billion.

Berkadia and Finova submitted that proposal to U.S. Bankruptcy Court in Wilmington, Del., in late May. Not to be outdone, GE Capital filed an objection, offering as much as $7.25 billion in financing, also enhanced from a previous offer of $7 billion. Also, GE Capital dropped a requirement that it conduct a stringent review of Finova’s books in exchange for the bailout. It backed up the proposal with a letter to Finova’s unsecured creditors, saying its plan offered increased liquidity, or more readily available cash.

Finova officials would not comment about the situation. Officials at Berkadia and GE Capital could not be reached for comment.

When Finova filed for bankruptcy protection under Chapter 11, it gave the company the chance to restructure its debt. It is still unclear exactly when the firm’s problems started, but sources point to a series of missteps during 2000 that did a lot of damage. Most of Finova’s business was financed by issuing commercial paper, or short-term corporate debt. It also borrowed funds in the form of publicly traded debt securities with staggered maturities. But by May 2000, it was unable to renew its bank lines to previous levels, due to creditors’ concerns about its business operations.

Finova recruited Credit Suisse First Boston in May 2000 to explore selling the company. But as the year progressed, the situation worsened. A slowing U.S. economy caused some of its borrowers to become delinquent in repaying loans. Coupled with the weakening economy, those delinquencies put the firm into a tailspin.

“Credit quality concerns resulted in rating downgrades,’’ Rui Pereira, an analyst at Fitch, New York City, told SCT. “The cost of capital was higher than that of some of their competitors, which constrained their ability to generate additional profitable business.’’ It is still unclear what Finova’s ultimate fate would be if either company won control. But at the very least, “the competition between GE Capital and Berkadia would result in a better transaction as far as Finova is concerned,’’ Pereira said.

Source: Salomon Smith Barney The Retail REIT Index was designed by Salomon Smith Barney for Shopping Centers Today. The index is based on total returns (including dividends) starting at a base of 100 on December 31, 1995. For the period ending May 31, the regional mall index is at 192.50, up 4.6%; the strip center index (including power, neighborhood and community centers) is at 179.15, up 3.0%; and the factory outlet index is at 123.00, down 0.28%. The index is updated monthly.