International Steel's upcoming deal catches attention on question of market reaction to steel industry

By Sara Rosenberg

New York, April 8 - Wednesday's launch of International Steel Group's $1 billion senior credit facility (Ba2/BB+) is drawing attention, primarily because of the reputation that industry carries, according to a market professional.

"It should be interesting. It's a little bit of a dicey industry," the professional added. This hesitancy to invest in the steel industry was addressed by the syndicate by giving the various tranches "LBO pricing" despite the high ratings, a source close to the deal previously told Prospect News

However, so far the $300 million three-year revolver has already sparked some interest in potential investors. Last week the syndicate went out to investors with this tranche and the result was oversubscription. One factor said to have drawn people to the revolver is the strict borrowing base contained in the agreement.

Besides the revolver, the facility consists of a $300 million two-year term loan A and a $400 million four-year term loan B. Price talk on the tranches is Libor plus 275 to 300 basis points on the revolver, in the area of Libor plus 325 basis points on the term loan A and in the area of Libor plus 350 basis points on the term loan B.

UBS Warburg, Goldman Sachs and CIT are the lead banks on the deal that will be used by the Cleveland steel company to help fund the acquisition of certain Bethlehem Steel Corp. assets and for working capital.

The other large deal anticipated to launch Wednesday is Allied Waste Industries Inc.'s $3 billion credit facility (Ba3/BB/BB) consisting of a $1.5 billion five-year revolver and a $1.5 billion seven-year term loan B. Price talk on the revolver is Libor plus 300 basis points and price talk on the term loan is Libor plus 350 basis points.

JPMorgan and Citibank are the lead banks on the deal with Credit Suisse First Boston, Deutsche and UBS Warburg participating as well.

The company has already received commitments for the entire $1.5 billion revolver. And the term loan B is expected to syndicate successfully since the company currently has a large lender group.

A few deals that have been in the primary for a little while now are said to be struggling, including Key Automotive, Knowledge Learning Corp. and Walter Industries Inc., a market participant told Prospect News on Tuesday.

"I haven't heard much in the way of color on them it just doesn't sound like they're being well received by the market," the source said. "A lot of credits in the market are there because they need to be. These companies are from that vintage. They're story credits and people need to work through the story.

"Now we're starting to see some more conventional issuers in the market," the source continued. "Credit profiles are improving. Average spreads are starting to come in."

Key Automotive is in the market with a $350 million credit facility for acquisitions consisting of a $90 million revolver with an interest rate of Libor plus 400 basis points, a $210 million term loan B with an interest rate of Libor plus 450 basis points and a $50 million term loan C with an interest rate of Libor plus 1,000 basis points. Citibank and Merrill Lynch are the lead banks.

Knowledge Learning is in the market with a $260 million credit facility (Ba3/B+) consisting of a $235 million seven-year term B with an interest rate of Libor plus 375 basis points and a $25 million five-year revolver. BNP Paribas is the lead bank on the San Rafael, Calif. provider of childcare services' deal that will be used to help fund the acquisition of Aramark Educational Resources from Aramark Corp.

Walter Industries is in the market with a $500 million credit facility (Ba2/BB) consisting of a $250 million five-year revolver with an interest rate of Libor plus 275 basis points and a $250 million seven-year term loan B with an interest rate of Libor plus 400 basis points. Bank of America is the lead bank and SunTrust is the co-bookrunner on the Tampa, Fla. diversified company's deal, which will be used to pay off the old facility and for general corporate purposes.

On the flip side though, CMS Energy Corp.'s $850 million credit facility, secured by common stock, that launched last Thursday was snatched up pretty quickly, according to a market professional. "They had a book lined up ahead of time. They knew a group of potential investors upfront. It was well oversubscribed," the professional said.

The loan consists of a $441 million one-year revolver for CMS Enterprises with an interest rate of Libor plus 550 basis points, a $234 million one-year revolver for CMS Energy with an interest rate of Libor plus 550 basis points and a $175 million 11/2-year term loan for CMS Energy with an interest rate of Libor plus 700 basis points. There is a 2% Libor floor on the tranches.

"It's basically bridge financing until they can do a capital markets transaction," the professional added.

Citibank, NA, Merrill Lynch Bank USA and Deutsche Bank Trust Co. Americas are the lead banks on the deal.

CMS Energy is a Dearborn, Mich. energy company.

In the secondary, Tesoro Petroleum Corp.'s $200 million term loan B (Ba3/BB+), upsized from $150 million following pricing of a downsized bond offering, allocated late in the day on Monday and broke for trading with a par ¾ bid, 101 offer, where it basically remained throughout market hours on Tuesday, according to a syndicate source.

The term loan is due in 2008 and price talk on the term loan was 25 basis points wide of the swap equivalent of the bonds, according to a syndicate source. The $375 million 8% senior secured notes due April 15, 2008 priced at 98.994 to yield 8¼%. Following the pricing of the bonds, the term loan's pricing was set at Libor plus 550 basis points, the syndicate source said.

Call protection on the term loan is non-callable in the first year, callable at 103 in the second year, callable at 101 in the third year and callable at par thereafter. The bonds are callable on April 15, 2006 at 104 and callable at par on April 15, 2007 and thereafter.

Asked why the bank and bond pricing were linked, the syndicate source responded: "The term loan and the bonds are completely pari passu." He then went on to explain that the bank debt was priced slightly higher because, "the loan has more issuer-friendly call protection than the bonds so that's offset a little bit more in the margin."

The term loan is expected to close and fund on April 17.

Goldman Sachs is the sole lead on the term loan.

Later this month, Tesoro is expected to launch a $650 million asset-based senior secured revolver (Ba3/BB+) due 2006 with a $400 million sub-limit for letters of credit and secured by inventory, accounts receivable, cash and certain other assets. Bank One is the bookrunner on the deal and Goldman Sachs is the syndication agent.

The new revolver, term loan and notes will be used to completely refinance the company's existing credit facility.

Tesoro is a San Antonio, Tex. refiner and marketer of petroleum products.

Nextel Communications Inc.'s term loan B and C were slightly off on Tuesday, with a 97¾ bid, 98¼ offer, according to a trader, who explained that there is nothing in particular pushing the paper down.

On Monday, the Reston, Va. wireless company's B and C loans have traded at 98 3/8.

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