Bank One taking risk with UAL financing

Bank One Corp.'s deal to finance a big chunk of UAL Corp.'s bankruptcy reorganization plan represents a departure for the bank, which has spent much of the last two years dumping risks instead of seeking new ones.

At least one credit analyst who follows Bank One raised questions about the move in a report this week, wondering whether the two companies' close business ties will ultimately compromise Bank One's credit quality.

Bank One is the lender behind UAL's popular Mileage Plus credit card, which lets consumers earn frequent-flier miles on United Airlines for credit card purchases. The two companies also share an advertising agency, with both companies using the tag line "More Chicago" in local ads.

"We view [Bank One's] extensive relationship with United as a risk factor that could lead to more credit losses," analyst Kathy Shanley warned in a report for independent credit analysis firm Gimme Credit.

The bank is the lead financier on a $1.2 billion debtor-in-possession credit facility, providing $300 million along with J.P. Morgan Chase & Co., Citigroup Inc. and CIT Group Inc. to keep the airline flying during the bankruptcy process.

In addition, Bank One is extending a separate $300 million to the airline in a loan backed in part by revenue generated from the Mileage Plus credit card.

Bank One is United's partner on that card, so it is in effect securitizing its own loan to the airline, Shanley noted.

Meanwhile, competitor GE Capital, with nearly $2 billion in secured loans outstanding to UAL, did not compete seriously for the debtor financing, leaving the door open to the Bank One team, sources said.

"It is telling that the most experienced lender on aircraft leases in the world, GE, decided to take a pass on this one," said John Stark, founder of Water Tower Capital in Chicago, a distressed-debt adviser.

"I think it relates to their view of [UAL's] asset values. The planes and other collateral may not be worth close to what they are valued at" today, he said.

Debtor-in-possession financing is considered a relatively safe area of financing because lenders move near the front of the line to be paid off in the event of a liquidation.

In taking charge of the financing, Bank One decided to write off $45 million in the fourth quarter in bad corporate loans and resign as trustee on several UAL bond issues.

"It's not a high-risk business, and they still have a business relationship to consider," said Tanya Azarchs, a credit analyst with Standard & Poor's who follows Bank One debt.

The big question, said Shanley, is whether the bank is taking on unnecessary risk in an effort to prop up earnings in its credit card unit, which finally turned a profit in the last couple of quarters.

"Even though DIP loans are well-secured, Bank One's decision to take a leadership role in the United restructuring seems out of sync with efforts to improve credit quality," Shanley wrote.

Meeting with analysts last week, Bank One Chief Executive Jamie Dimon warned that mass defections from the Mileage Plus credit card would be enough to lower profits from the entire card portfolio, even though United represents just 10 percent of credit card receivables, which stand at roughly $69 billion.

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