Warner Music upsizes B loan, reverse flexes by 25 basis points on strong institutional reception

By Sara Rosenberg and Paul A. Harris

New York, March 29 - Warner Music Group's term loan B underwent a number of changes on Monday including an increase in size to $1.2 billion from $1 billion and a decrease in pricing to Libor plus 275 basis points from Libor plus 300 basis points on strong investor demand, according to sources.

Furthermore, the seven-year term loan now contains a stepdown to Libor plus 250 basis points depending on leverage.

"They had over $2 billion in the book," a market source added.

To counterbalance the increased bank deal, the company opted to decrease its U.S. bond deal to $465 million from $615 million and an equity contribution to $1.05 billion from $1.1 billion. The bond offering also has a £100 million tranche. There was a roadshow for the notes in Europe late last week, and the U.S. roadshow kicked off last Tuesday. Pricing on the bonds is expected to take place on Thursday or Friday.

As early as two days after launching, the term loan was also reported as being oversubscribed with some speculating that investors were drawn to the opportunity for diversification in their portfolios and the company's good asset base.

The now $1.45 billion credit facility (B1/B+) also contains a $250 million six-year revolver priced with an interest rate of Libor plus 275 basis points. This tranche was left unchanged from its initial structure.

Bank of America, Deutsche Bank, Lehman Brothers and Merrill Lynch are the lead banks on the deal.

Proceeds will be used to support the already completed acquisition of Warner Music by an investor group led by Thomas H. Lee Partners, Edgar Bronfman Jr.'s Lexa Partners, Bain Capital and Providence Equity Partners. Under the acquisition agreement, the investor group bought the New York City-based music company from Time Warner Inc. for about $2.6 billion in cash.

Sealy upsized

Sealy Corp.'s credit facility (B2/B+) was upsized to $785 million from $685 million through the addition of a $100 million unsecured floating-rate loan following a downsizing of the proposed bond offering by the same amount, according to a market source.

The unsecured floating-rate loan is priced with an interest rate of Libor plus 450 basis points, according to an informed source.

The facility also contains a $560 million eight-year term loan B priced with an interest rate of Libor plus 275 basis points with a stepdown to Libor plus 250 basis points under certain conditions, and a $125 million six-year revolver with an interest rate of Libor plus 250 basis points.

JPMorgan and Goldman Sachs are the lead banks on the deal.

Proceeds from the loan, combined with proceeds from the proposed bond offering and equity, will be used to help fund Kohlberg Kravis Roberts & Co.'s (KKR) approximately $1.5 billion acquisition of Sealy. Substantially all of the Trinity, N.C., bedding manufacturer's existing debt will be refinanced in the transaction.

Under the acquisition agreement, KKR and Sealy management will acquire about 92% of Sealy, with existing shareholders retaining the remaining 8% interest. Sealy is being acquired from a private investment group that includes Bain Capital, Charlesbank Capital Partners, JPMorgan Partners, CIBC Argosy Merchant Fund and BancBoston Capital.

Hollywood Entertainment at par

Hollywood Entertainment Corp.'s bank debt moved down toward par on news that the company will be bought by an affiliate of Leonard Green & Partners LP, which translates into a repayment of the existing bank debt, according to a trader.

"There's no call protection," the trader said. "It was 101 to a half. Now it's lower in the ballpark of par."

Under the terms of the merger agreement, Hollywood's shareholders will receive $14.00 per share in cash. The company entered into the merger agreement following the unanimous recommendation by a special committee comprised of the independent directors of the company's board of directors.

Closing of the merger, which is anticipated to take place in the third calendar quarter of 2004, is subject to various terms and conditions including shareholder approval, receipt of antitrust clearance and the completion of financing.

The company has received fully committed debt financing from UBS AG and the equity financing necessary for the transaction has been fully committed by Leonard Green & Partners LP through Green Equity Investors IV LP.

In reaction to the merger announcement, Standard & Poor's placed Hollywood Entertainment's ratings on CreditWatch with negative implications including the B+ corporate credit rating.

"The CreditWatch listing reflects the possibility that ratings could be lowered based on a potential deterioration in Hollywood's credit profile post merger," said S&P credit analyst Diane Shand, in the rating release. "Standard & Poor's will monitor the developments of the proposed offer.

"The current ratings reflect the company's participation in the highly competitive and mature home entertainment industry, its dependence on its own domestic video business and decisions made by movie studios, and the long-term threat associated with new technologies for delivering home video. These risks are partially mitigated by the company's good position in the video rental industry and the positive effects of revenue-sharing agreements with movie studios and consumers shifting to DVDs from VHS."

Hollywood Entertainment is a Wilsonville, Ore., video store chain.

Amscan around 101

Amscan Holding Inc.'s bank debt is probably quoted around 101 in the secondary being that the deal will be taken out as part of the company's recapitalization at the 101 call protection price that was stipulated in the company's credit agreement in December 2002, according to a trader.

However, the bank debt is one that never really trades so it never really gets quoted, the trader said, adding that prior to the announcement he probably would have labeled the paper at 101 bid, 102 offered.

On Monday, Amscan announced that it would be acquired by AAH Acquisition Corp., a newly-formed corporation affiliated Berkshire Partners and Weston Presidio, from GS Capital Partners II LP, and certain other funds managed by or affiliated with Goldman Sachs & Co., which currently own about 71% of Amscan. The total value of the transaction, including equity and debt, is approximately $540 million.

Goldman Sachs Credit Partners LP has provided the company with a commitment for a senior debt facility and a bridge financing facility as part of the recapitalization.

Amscan is an Elmsford, N.Y., decorative party goods company.

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