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Junk Bond Losses Leading to Lower Earnings for American Express

April 03, 2001|Bloomberg News

American Express Co. provided more evidence Monday that blue-chip stocks aren't immune from the profit warnings that have jolted Wall Street this year.

The financial services giant said it expects to report lower first-quarter earnings because of widening losses from junk bond holdings. The company said it expects to write off $185 million in junk bonds held by its American Express Financial Advisors unit, which contributed 37% to net income last year, said Chief Financial Officer Gary Crittenden.

He said the bond losses stemmed from bankruptcies of asbestos-related companies and troubles among bond issuers in the health-care, theater and steel sectors.

First-quarter earnings for the fourth-largest U.S. issuer of credit and charge cards will decline about 18% from the 48 cents a share reported in the same period last year, the company said. Analysts had expected profit to increase to 51 cents, according to a First Call/Thomson Financial survey.

American Express said it will report results April 23.

The company's shares (ticker symbol: AXP) closed at $39.71, down $1.59, in New York Stock Exchange trading Monday, after falling as low as $37.95.

The firm took $49 million in pretax losses on high-yield securities in the fourth quarter and had expected further write-offs in the first quarter.

Slowing growth at the financial advisors unit, which buys bonds with the insurance premiums it collects from customers, prompted American Express to freeze the salaries of its top 12 fund management executives and pare raises for its 13,000 salaried workers this year.

American Express estimated its junk bond and other high-yield holdings at $3.5 billion at quarter's end, or about 11% of its total portfolio. It expects total losses in 2001 to be "substantially lower" than in the first quarter.

The company did not disclose the bonds in which it incurred losses.

Overall, junk bonds have provided positive returns so far this year, thanks to a drop in interest rates beginning in January. But many individual bonds have blown up amid the slowing economy.

The number of junk bond defaults has risen to the highest level since 1991, according to Moody's Investors Service.

For instance, Owens Corning Inc. (OWC), faced with asbestos claims, was among a string of companies that began last year with investment-grade ratings and ended it under bankruptcy protection.

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Junk Woes

American Express shares slid Monday after the company said it expects to write off $185 million in junk bond losses.

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American Express, weekly closes and latest on NYSE

Monday: $39.71, down $1.59

Source: Bloomberg News

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