In a big step toward shedding its troubled commercial real estate, First Chicago Corp. said Thursday that it is selling $1 billion in problem loans to GE Capital Corp., a subsidiary of General Electric Co.
The deal represents about half the $2.1 billion commercial loan portfolio set aside by First National Bank of Chicago last fall for quick sale.
Under the agreement, GE Capital will pay about $500 million for an array of real estate assets originally valued at $1 billion, before First Chicago marked them down to about half of book value.
The sales, which will occur mostly by March 31 and are expected to be completed by June 30, aren’t expected to have much impact on the earnings of First Chicago, which is the city’s largest bank holding company.
However, the quick follow-through on the painful plan, which contributed to a $365.1 million loss in last year’s third quarter, is expected to help win over First Chicago critics and Wall Street analysts.
The banking company, long hampered both in business and prestige by the problem real estate, announced the disposal plan in September. Before the action, First Chicago’s total real estate portfolio was valued at $4.3 billion. First Chicago is the the nation’s 13th-largest bank holding company, with $49.3 billion in assets.
“This is great,” said Robert Rosholt, First Chicago’s senior vice president and chief financial officer, commenting on the deal.
“We had two parameters when we announced the program last September-price and pace. We priced obviously reflecting current real estate value. And the pace we thought it would take was about 2 1/2 years. Here we are in February after we announced the program in September and we are essentially 60 percent done at the prices we placed on them. That is good news.”
Asked if the quick sale indicated the properties were underpriced, he said, “No. We think we priced them essentially at the current value.”
Some $190 million in loans, about 10 percent of the portfolio set aside in September, was sold in 1992, noted Rosholt.
“The process continues,” he said. “We have been continuously working with possible buyers. We have been working with individual investors and those looking at smaller bulk sales simultaneously with talking with GE (Capital).”
He would not predict when the troubled loan portfolio might be totally sold.
“We’re quite encouraged relative to the 2 1/2-year time line,” he said. “We’re going to continue to be aggressive.”
Rosholt decribed the pool of loans as representative of “diversified products, hotels and offices, and geographic areas.”
Not all the individual properties to be purchased have been identified, which is typical in a bulk buy such as this, according to a GE Capital spokesman.
The announcement impressed securities analysts.
“I’ve been very pleased it would go so fast,” said Kenneth Puglisi, senior analyst for Chicago Corp. Although the sale will have little effect on First Chicago’s earnings, he said, “the market seemed to like it.”
First Chicago stock closed at $43.75 a share, up $1.62, on the New York Stock Exchange.
“Not bowled over, but pleased,” said David Berry, director of research for Keefe Bruyette & Woods Inc., of the deal.
“First Chicago was pre-eminent in the Midwest” before it ran afoul of the real estate problems, he noted. Ridding itself of the troubled loans “makes it easier for them to participate” in the consolidation of banks expected in this competitive region, he said.
The deal had been rumored for several weeks after a report appeared in the American Banker, a trade publication.
The subject of the cover story in the current issue of Business Week, GE Capital is one of the biggest and most active players in buying trouble real estate assets. The General Electric subsidiary boasts $92 billion in assets from businesses including specialized insurance, consumer services and middle-market financing.
It is one of the nation’s biggest buyers of assets from the Resolution Trust Corp., the government agency disposing of insolvent savings and loan associations.
