Problems at Teck Cominco Bring Trouble for Banks

When banks lend money, borrowers are supposed to repay the loan on time with interest. No problem. But if they fail to meet the terms of the agreement and the loans become impaired, banks face loan losses. This remains a major risk in the banking business and will likely continue to be for some time given the large number of problems arising from weak credit markets.

One example of how banks can find themselves in troubled waters is Teck Cominco Ltd.'s (TCK) $14-billion acquisition of Fording Canadian Coal Trust (FDG). Since the deal closed on October 30, Teck shares have lost nearly half of their value.

In addition to commodity prices that continue to weaken, Teck has a short-term $5.8-billion bridge loan it used to finance the Fording takeover that needs to be paid off. It also has a $4-billion term loan. On Tuesday, Teck said it is not considering an equity offering. However, it has confirmed that it is in talks to sell its gold assets.

If Teck does run into a problem, CIBC (BCM) and Bank of Montreal (BMO) will likely see the biggest impact, according to Ian de Verteuil, an analyst with BMO Capital Markets. He said difficulties could develop as early as March 2009 if commodity prices continue to deteriorate, making it one of the fastest “underwriting to default” experiences in the history of banking.

Along with several global banks, all of Canada’s Big Six banks had a piece of the action, with original exposures at $959-billion for Royal Bank (RY), CIBC and BMO, $401 for Bank of Nova Scotia (BNS) and Toronto-Dominion Bank (TD), and $75-million for National Bank [NA-PM.TO]. While underwriters may have reduced their positions through direct loan sales or bought protection via credit default swaps, Mr. de Verteuil thinks it is unlikely that much of the gross exposure has been reduced given the current environment.

Comments

[Vox Rationalis:]

The real problem here is not commodity prices, but risk aversion. Teck would be profitable enough to service its 4-year note for $4B and a 10-year debt instrument for $5B, even with coal and copper at lower levels. The problem is more one of credit availability and risk tolerance. If that's not cleared up before next October (when the bridge loan is due), we're all in a lot of trouble.

2008 Nov 13 02:57 PM

[toomuchgas:]

Asset sales make sense but they should wait until the middle of next year when prices should have recovered

2008 Nov 13 05:52 PM

[FNS:]

"$959-billion for Royal Bank"??

This kind of typo is really helpfull - NOT!

2008 Nov 21 08:15 AM

[User 306738:]

Why for heaven's sake do companies feel compelled to continually buy other companies. In most cases it has not been helpful for their financial health. BAC with Countrywide and Merrill, Dow with Rohm and Hass(overpaid), Wachovia and Golden West(way overpaid) Tech Cominco and Fording, FreeportMac and on and on.....I do not understand. Someone explain to me the sense of it, please.

2008 Nov 25 03:02 PM