Underwriters offload £750 million Alliance Boots mezzanine debt; Cablevision up on deleveraging news

By Paul A. Harris

St. Louis, Sept. 13 - Against the backdrop of the Rosh Hashanah holidays, which significantly thinned the ranks of capital markets participants, the Thursday session was a quiet one in the bank loan market, sources said.

At the close, a trader who focuses on both leveraged loans and high yield bonds said that everything felt better.

This source, who said that the leverage loan tracking LCDX index went out at 95.45 bid, up 0.50 on the day, made note of significant improvement in the term loan of Cablevision Systems Corp., which, along with its junk bonds, got a bounce on news that the company is seeking to lower post-LBO leverage.

Elsewhere, for the second time this week, market watchers were reporting that underwriters had succeeded in offloading a significant piece of the $300 billion-plus risk overhang which has resulted from unsyndicated loans and unplaced junk left from the mid-summer credit markets sell off.

This time it was a £750 million of piece of the mezzanine debt hung up in the Alliance Boots Plc LBO financing.

Risk removal

Deutsche Bank, JP Morgan and UniCredit placed approximately £750 million of Alliance Boots mezzanine debt at an original issue discount of 95.00, with a coupon of Libor plus 650 basis points.

Sources told Prospect News that although the mezzanine and second-lien debt had been talked in July at an OID of 95.00, the coupon was initially 400 to 425 basis points. Hence the new price represents a 225 basis points increase in interest expense on the loan.

And it still leaves approximately £1.0 billion of second-lien and mezzanine debt backing the £11.1 billion LBO led by Kohlberg Kravis Roberts & Co. on the balance sheets of the underwriters, according to sources.

In August £9.0 billion of Alliance Boots debt financing was withdrawn due to market conditions.

Alliance Boots is the biggest LBO deal ever done in Europe.

Earlier in the week Citigroup, Lehman Brothers and Merrill Lynch placed approximately $1 billion of the hung bridge loan backing the LBO of Allison Transmission at 96.00, leaving approximately $2 billion of the postponed $3.1 billion term loan on the underwriters' balance sheets.

Investors in the Allison Transmission deal were granted 60 days of downside trading price protection should the underwriters elect to sell any of the remainder at a discount deeper than 96.00 during that period.

The way forward

One banker, parsing the news that hung debt backing both the Alliance Boots and Allison Transmission LBOs has been placed at discounts no greater than five points, declared that with respect to the $300 billion-plus that remains on the balance sheets of the investment banks, transactions such as these are "the way forward.

"People are going to be unloading chunks here and there, the banks said.

"That's the way the whole pipeline is going to have to clear out," the banker said.

Meanwhile a trader who focuses on bank loans and junk bonds said that news about movement in the huge "risk overhang" problem was obviously positive.

Both of these sources contended that the risk overhang, itself, was perhaps not the most important barrier to a regeneration of the leveraged loan primary market.

However neither one was sanguine about the prospects of the primary in the near to intermediate future.

"There are some small deals clearing in the bank market," the banker asserted, adding that if a company came to the capital markets with a deal sized closer to "a couple of hundred million, as opposed to a couple of billion," it could clear, provided that the company demonstrated enough flexibility with respect to pricing.

"A lot of the deals in the pipeline don't have enough pricing in them," the banker asserted, estimating that given present market conditions Libor plus 400 or 450 might be enough to get a bank deal done.

This source conceded, however, that with the CLO bid having more or less evaporated, demand for new loan paper will have to surface somewhere.

However the trader said that right now investors' focus, appropriately, is on the secondary market.

"The primary market, for the most part, is too highly leveraged," the trader contended.

"Guys keep tweaking the price, but unless they take off three-times leverage it's hard to get excited about the price."

Liking Cablevision's possible lower leverage

Elsewhere Thursday in the leveraged markets, investors appear to have opened their wallets when they heard that Cablevision was looking for ways to lower its post-LBO leverage.

The company disclosed that conditions in the credit markets have prompted it seek to cut the leverage on the deal that Cablevision hopes to close before the end of the year.

"If current unsettled conditions in the credit markets persist, the interest costs and transaction fees of the debt may be significantly higher than Cablevision's current borrowing costs and higher than the costs related to such debt that were anticipated at the time the merger agreement was entered into," the company stated in a proxy filing, on Thursday.

As a result, the Dolan Family Continuing Investors are considering steps to reduce Cablevision's post-closing leverage, including selling assets, entering into strategic partnerships, reducing operating expenses and/or discontinuing some businesses which do not currently generate positive cash flow.

Trailing the announcement, Cablevision's term loan rose between ¼ and ½ point to close at 97¼ bid, 97¾ offered, according to a trader, who said that the there is an expectation that the loan will be taken out at par.

Meanwhile another trader saw Cablevision's 7 5/8% notes due 2011 closing at 98½ bid, 99½ offered, up a point on the day but unchanged from a week ago.

Merrill Lynch, Bear Stearns and Banc of America Securities have committed to financing the merger in which Dolan Family Group is purchasing all outstanding shares of Cablevision that it does not already own for $36.26 each in cash.

A bank loan trader commented that Thursday's statement from Cablevision prompts the market to think that the Dolan family is serious about deleveraging, increasing the chances that the Dolans can get financing.

Autos gain

Elsewhere in Thursday's quiet bank loan market, the trader said, the automotive sector moved higher on news that Citigroup initiated coverage of General Motors Corp., and placed a "buy" rating on the stock - this, in spite of the news that the United Auto Workers Executive Board selected GM as the union's strike target in current national contract negotiations.

The source said that the Chrysler Financial term loan was at 98 5/8 bid at Thursday's close, up close to a point from Wednesday afternoon.

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