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First Union Plunges on Rumor Sunbeam Loan Went Bad

Shares of First Union (FTU) got crushed Tuesday afternoon on fears that a bad loan will soak the bank's bottom line.

Down the Mountain
First Union's rumor-fed slide

The talk among traders and some hedge fund managers was that First Union is set to take a big charge for a loan to troubled consumer product maker Sunbeam (SOC). Also hurting First Union shares was the bankruptcy filing of a First Union loan customer, bed-and-bath furnishings maker Pillowtex (PTX - Get Report). First Union was mostly flat before dropping at midafternoon on heavy volume. The stock ended up dropping $2.63, or 8.7%, to $27.44.

On Monday, First Union's quarterly report with the Securities and Exchange Commission included the following comment in a discussion of credit quality:

    In addition, in late October of this year, the financial condition of a single large borrower deteriorated significantly. As of the date of this filing, it is not possible to estimate the loss content of this credit. We will continue our review of the credit, and it is possible that it may be classified as nonperforming in the fourth quarter of 2000.

First Union declined to comment on the identity of the borrower, citing policy. Speculation abounds that the loan is to Sunbeam, for which First Union is known to be a major debt underwriter. Along with Bank of America (BAC - Get Report) and Morgan Stanley Dean Witter (MWD), First Union lent a total of $1.7 billion to Sunbeam in March 1998. Sunbeam's public-relations firm said no one at the company was available to comment.

Sunbeam shares traded at 81 cents Tuesday, slightly off their 1998 high just above $50. Bank of America slipped $1.56, or 3.3%, to $45.88.

Sunbeam plunges after Dunlap debacle

First Union, Bank of America and Morgan Stanley made the $1.7 billion loan to Sunbeam in March 1998, just a couple months before the company unexpectedly announced poor operating results. Sunbeam, under the leadership of Al Dunlap, who later left, was then accused of accounting irregularities, and has since posted steep losses. As in all so-called syndicated loans, the three financial institutions had planned to reduce their exposure to the Sunbeam credit by distributing chunks of it to other lenders. However, Sunbeam's subsequent troubles made it extremely difficult to pass off this loan, and all three banks are thought to still have significant exposure to the loan on their books.

Sunbeam lost $140 million in the fist six months of this year, vs. $108 million in the year-ago period. The Boca Raton, Fla.-based company had $2.4 billion of debt on its balance sheet at the end of June, the most recent figures available.

Bank of America declined to comment, citing a policy of not commenting on client relationships. Morgan Stanley also wouldn't comment, saying it doesn't comment on its holdings.

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