SAN FRANCISCO — BankAmerica, the parent of troubled Bank of America, is looking into plans to shore up its balance sheet by selling off up to $4 billion of non-performing loans, bank and Wall Street sources said Monday.
Under separate proposals presented by the investment banking firms of First Boston Corp. and Drexel Burnham Lambert Inc., newly created investment companies would buy the loans from the bank at a deep discount, financing the purchases through issuance of high-yield "junk" bonds. To enhance prospects that the loans would be repaid, the newly created companies would employ loan-workout specialists recruited from outside BankAmerica.
The proposed transactions would reduce BankAmerica's funding requirements and free bank management to concentrate on cutting costs and other measures needed to restore financial health to the ailing company. BankAmerica has posted a net loss of $600 million so far this year despite major non-recurring gains on the sale of its Los Angeles headquarters tower and other holdings.
Forced Into Writeoffs
But they also present a major disadvantage. For BankAmerica--already starved for capital--would be forced to write off the difference between the face value of the loans and whatever it receives for them.
At least part of the writeoff could be absorbed by BankAmerica's loan-loss reserve, which on Sept. 30 stood at $2.17 billion. However, since funds set aside in the reserve are considered primary capital by federal regulators, BankAmerica would have to raise new funds to remain above the mandated 6% capital-to-assets ratio.
Wall Street sources, without providing details, said the transactions would be structured to provide BankAmerica with infusions of capital.
"B of A would be able to raise capital at much more advantageous terms if it could get a lot of problem loans off its books," said Lawrence Cohn, senior banking analyst for Merrill Lynch in New York.
But, he asked: "Would the market really believe BankAmerica was a clean bank" after selling off its problem loans? Some on Wall Street fear that the bank's loan-monitoring system is in such bad shape that bank officials themselves aren't aware of the full extent of BankAmerica's loan woes.
Not the First Time
This isn't the first time that investment bankers have proposed schemes to "securitize" a bank's problem loans. "The same approach was offered to Continental Illinois, but nothing ever came of it," Cohn said.
A bank spokesman declined to comment on the proposed transactions, saying: "We will comment if there is something substantive to report."
Separately, it was learned Monday that BankAmerica--which already has sold off its headquarters tower in San Francisco, in addition to the Los Angeles facility--has placed another major property on the market.
This time, the bank wants to sell its eight-story, 600,000-square-foot operations center at the corner of Van Ness Avenue and Market Street here. The ground-floor space occupied by a B of A branch would be retained by leasing, but 1,600 employees servicing automated teller machines and credit card customers would be moved to a bank-owned data center next door.
A spokesman said the bank has retained Damner Pike & Co., a San Francisco real estate firm. While the asking price wasn't disclosed, one analyst said the bank hopes to book a fourth-quarter profit of $70 million on the sale.