Magazine article American Banker

Problem-Loan Spotlight Turns to Movie Theaters

Magazine article American Banker

Problem-Loan Spotlight Turns to Movie Theaters

Article excerpt

As second-quarter earnings were released this month, bank executives offered reassurances that their diversified loan portfolios were unlikely to be subject to the kind of single-sector blowup that the stricken health-care industry produced last year.

But several of the biggest U.S. banking companies are sitting on credits to an industry that is showing signs of massive strain, according to analysts. Movie theater operators, including well-known names like New York-based Loews Cineplex Entertainment Corp. and AMC Entertainment Inc., are under severe pressure after years of rapid expansion -- using leveraged bond and bank debt -- that failed to generate the expected returns.

Rosalind F. Looby, a regional banking analyst at Donaldson, Lufkin & Jenrette Inc., estimates that banks have about $5.1 billion in current loan commitments to the movie theater industry outstanding. While less than banks' exposure to health-care companies when they started to falter in 1998 after Congress passed changes to Medicare reimbursement laws, it's close enough for discomfort. Banks made a total of $7.8 billion in loans to health-care companies that year, according Portfolio Management Data, a unit of Standard & Poor's.

"If a lot of companies are involved in serious writeoffs, this could cause banks some headaches," said Ms. Looby.

Signs of weakness in the movie theater sector are hardly new. Analysts say they have been concerned with the industry for the last 18 months, as a wave of building across the country produced more movie screens than consumers can support. Patchy movie seasons, such as the recent Christmas openings, also hit attendance rates.

"You're pretty close to the bottom in leverage right now," said Bishop Cheen, an analyst at First Union Securities.

Which banks hold these loans? According to the movie theaters' initial filings with the Securities and Exchange Commission, the debt is spread amongst the biggest commercial lenders, including Bank of America Corp., Bankers Trust Co. (now owned by Deutsche Bank AG), Wachovia Bank, FleetBoston Financial Corp., and Canada's Bank of Nova Scotia.

Already one movie theater operator, United Artists Theatre Circuit Inc. of Englewood, Colo., has defaulted on its commitment - a $450 million facility led by Bank of America Corp.

Overexpansion has also hurt regional players, perhaps even more so because they don't have as much access to capital, said analysts. Dallas-based Silver Cinemas International Inc. filed for bankruptcy protection in May. Union Bank of California, a Bank of Tokyo-Mitsubishi affiliate that recently reported higher nonperforming assets, is among the banks that have lent to these companies.

Union Bank, with Bank of America as co-manager, led a $250 million credit facility to privately held Edwards Theatres Circuit Inc. of Newport Beach, Calif.

But the most revealing indication of the pressure on these companies is how their loans are trading in the secondary market. …

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