Has Westinghouse Credit Become A Debit?Michael Schroeder
Westinghouse Electric Corp., whose massive power plants and electronic systems define a cyclical business, has for some time counted on a trump card. The Pittsburgh-based conglomerate's finance arm, Westinghouse Credit Corp., would help it ride out economic downturns.
But Westinghouse Credit is now producing some very unpleasant surprises--a nightmarish list of bad real estate and corporate loans that forced its parent to take a $975 million pretax write-off for 1990's last quarter. That slashed by 73% the record $1 billion profits for the year that the conglomerate would have booked. On Feb. 27, Westinghouse Electric Chief Executive Paul E. Lego promptly put $3.2 billion of Westinghouse Credit's problem loans and properties on the block and froze most new lending (table).
SOFT MARKET. The bad news from Westinghouse Credit, though, may not be over. Lego, in fact, has told subordinates that if the finance subsidiary isn't back on track in about three years, he will get out of that business. "That's crystal clear," says one of the executives.
Among analysts' biggest worries about Westinghouse Credit's future is a group of loan commitments it can't control: $3.1 billion in credit to companies, most with less-than-sterling ratings. Borrowers can tap these at any time. If the recession persists, weaker borrowers may make heavy use of these lines. Westinghouse argues that the borrowers are sound.
Westinghouse Credit's liquidation plan--for almost one-third of its $10 billion in assets--may also be problematic. The company will be selling into a recession and a soft real estate market, which surely means steep discounts. "There will be more write-offs," says Chester V. A. Murray, deputy research director at Moody's Investors Service Inc. Westinghouse Electric, which said it would inject $525 million in capital into its wayward subsidiary, concedes in recent Securities & Exchange Commission documents that more may be needed.
The problems couldn't have come at a worse time. Most of Westinghouse Electric's businesses--including nuclear plants, refrigeration units, and broadcasting--are losing steam for the first time in five years. Analysts estimate Westinghouse's 1991 earnings will be 20% below last year's results before the write-offs. That stands in vivid contrast to its larger rival, GE Capital Corp., the finance arm of General Electric Co. Despite similar loan troubles, GE Capital is racking up solid gains.
Elevated to the top spot just nine months ago, Lego, who declined to be interviewed, hopes to turn around Westinghouse Credit. According to company executives, it now will only make loans that are secured by borrowers' assets. But whether these loans will reinvigorate the finance unit is an open question. They are low-margin and face stiff competition from banks. Westinghouse Credit also aims to boost leasing out airplanes, railcars, and ships--its one healthy segment--by 42%, to $2 billion in leases by 1994. Yet leasing's prospects are limited, given the slow growth expected in the transportation industry.
'TOO AGGRESSIVE.' The finance unit, say company sources, also plans to reemphasize two markets in which it drastically scaled back operations a few years ago. One is lending to midsize companies to finance equipment purchases, which Westinghouse figures to build into a $1.5 billion portfolio in three years. The other is inventory loans, with a portfolio goal of $1 billion. These businesses, however, are highly competitive and cyclical.
The decline of Westinghouse Credit is a personal embarrassment for Lego, who as late as October was reassuring jittery Wall Street analysts that the unit could cruise through the gathering recession without taking a hit. Wrong. Bad credits cascaded in, capped by Hills Department Stores Inc., which filed for Chapter 11 on Feb. 4, leaving Westinghouse holding $61 million in unsecured loans. Moving swiftly to contain the reverses, a chastened Lego announced the dismal financial results and the asset sales after a special board meeting in New York. Says Noel Delaney, an analyst at Smith Barney, Harris Upham & Co.: "Lego grabbed a wild raging bull by the horns."
Huge losses were the last thing Westinghouse executives expected of the finance unit. Formed in 1961 to finance the sales of stoves and refrigerators, Westinghouse Credit was treated as a stepchild by the parent's engineer-dominated management until 1986. Then the parent decided to remake Westinghouse Credit into a reliable cash producer to offset the cyclicality of the company's other operations. It pulled Westinghouse Credit out of thin-margin consumer lending and focused on risky, high-return real estate and investment banking.
Until last year, the gamble seemed to be paying off: Westinghouse Credit showed an average annual net income growth of 16% and asset growth of 20%. Unfortunately, says Michael Bunyaner, an analyst at Oppenheimer & Co., "they were too aggressive in the last few years."
PRESSURE COOKER. The biggest problems are in commercial real estate. Almost a third of that $3.4 billion portfolio, much of it in comatose Sunbelt markets, is being sold or refinanced. Westinghouse Credit had vainly hoped to steer clear of problems by directing much of its business to a trusted cadre of two dozen major developers. But they weren't immune from the devastation wrought by vast overbuilding and the recession. Westinghouse Credit is trying to sell or refinance its $290 million half-interest in nearly two dozen apartment projects built by Tonti Properties Inc. in New Orleans, which has been doing business with the finance arm since 1967. The projects account for nearly 6,000 units in the soft markets of Dallas, Denver, New Orleans, and Phoenix. To keep up occupancy rates, CEO Robert T. Tonti Sr. had to lower rents an average 10% below carrying costs.
When the building boom fizzled in early 1989, Westinghouse Credit thought it could find salvation in corporate buyout lending, targeting medium-size companies. These loans increased by an average of 60% in each of the past three years, to $4.2 billion.
"We were under tremendous pressure to grow," says a former Westinghouse Credit executive. Some 48% of its leveraged buyout portfolio is unsecured. Moody's calls this a much riskier mix than those of such peers as GATX Capital and Heller Financial.
The LBO portfolio is already starting to show some wear and tear. Lego told analysts on Feb. 27 that he was alarmed by a slew of defaulted loans. SEC documents show that companies owing Westinghouse Credit $122 million have filed for Chapter 11 this year through early March. That nearly matches the bankruptcy defaults of $132 million for all of 1990. Chillingly, the Hills Department Stores filing came within two weeks of bankruptcy petitions by two major Texas-based companies: Tracor Inc., a defense contractor that owed Westinghouse $32 million, and Insilco Corp., a diversified high-tech manufacturer owing $8 million.
Westinghouse Credit has come far, from financing appliances to underwriting LBOs. The question for Westinghouse Electric now is: Will Lego's shock treatment work on the finance unit, or will he have to pull the plug?
WESTINGHOUSE CREDIT'S WOES
COMMERCIAL REAL ESTATE A third of the $3.4 billion portfolio put on the block. Half of $1 billion in bad assets are in Florida, Louisiana, and Texas. No new loans being made
RESIDENTIAL REAL ESTATE Half of $540 million in loans up for sale, most for housing developments that company financed. Selling completed developments in California, Florida, and Georgia. Making no new loans
CORPORATE FINANCE A quarter of the $4.2 billion portfolio put on the block. Junk-bond and equity portfolio of $653 million for sale. Bankruptcies expected to boost loan defaults further. Making no new loans unless secured
LEASING The only healthy Westinghouse Credit business. Portfolio of $1.4 billion includes leases for aircraft, railcars, ships, and electricity cogeneration plants. Plans to expand it 43% by 1994