Allegheny heads lower on liquidity concerns; Medco meeting well attended

By Sara Rosenberg

New York, June 24 - Allegheny Energy Inc.'s bank debt moved off anywhere from half a point to a point and a half depending on the tranche in response to the company's warning that it is talking to its bank lenders about additional liquidity and that earnings and cash flow will be below previous forecasts.

Meanwhile, in the primary, Medco Health Solutions Inc.'s bank meeting for a new $1.15 billion senior secured credit facility was well attended with substantially over 100 people at the meeting, according to a syndicate source.

Allegheny's first lien bank debt was quoted at 99½ bid, par ¼ offered, down a quarter of a point on Tuesday, while the second lien bank debt, which moved lower by a greater degree due to its security position, was quoted at 95¼ bid, 96½ offered, down 1½ points, according to a trader

After market hours on Monday, the Hagerstown, Md. energy company announced that its common equity ratio has fallen below the level required under certain key Securities and Exchange Commission authorizations. As a result, the company will be required to obtain further SEC authorizations to engage in financing and other activities that are critical to its near-term financial viability.

The change in the common equity ratio was attributed to many factors, including the recent determination that the value of certain trading positions should be reduced as of Dec. 31, 2002, write-downs with respect to a number of previously announced project cancellations and the company's financial performance in early 2003 has been substantially weaker than earlier projections.

Allegheny said it expects earnings and cash flow results will be "substantially below" its projections in February after it completed its bank refinancing.

Allegheny is already preparing applications for submission to the SEC requesting authorizations to engage in certain financings and other activities.

Furthermore, the company is in discussions with its senior bank lenders with respect to these regulatory issues, its performance in general, and the sources or availability of additional liquidity. Talks with lenders regarding issues concerning covenant compliance will also be pursued.

In an effort to respond to these developments the company continues to pursue a number of asset sales and financing alternatives. "There can be no assurance, however, that the company will be successful in these efforts or will achieve timely asset sales or financing to assure its ongoing liquidity. If the company were unable to secure its liquidity position through the steps it is currently pursuing, it would be required to review other alternatives, including the possibility of seeking protection under the bankruptcy laws," the news release concluded.

Meanwhile in the primary, Medco's credit facility consists of a $350 million five-year term loan A with an interest rate of Libor plus 200 basis points, a $250 million five-year revolver with an interest rate of Libor plus 200 basis points and a $550 million eight-year term loan B with an interest rate of Libor plus 225 basis points.

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

By the end of the launch date, Bank One, Wachovia, Fleet and Scotia Bank had all committed to the revolver and the term loan A.

As for the institutional tranche, it was already half subscribed by day's end, according to the syndicate source.

One concern that was raised by one market professional was the recently reported litigation problems that Medco is currently facing, which according to reports include allegations of providing misleading information to the government regarding contracts managing drug benefits for federal employees and pressuring doctors to use Merck & Co. medications.

Asked about this concern, the syndicate source responded: "The company addressed the litigation concerns at the meeting" but declined to go into further detail regarding what the company had said to put investors at ease.

Security will be substantially all assets, other than the company's pharmaceutical manufacturer accounts receivable, including a pledge of the capital stock of the company's subsidiaries.

Amortization on the term loan A will begin on Sept. 30, 2003 and the company will repay principal on a quarterly basis of 10% in the first year, 15% in the second year, 20% in the third year, 25% in the fourth year and 30% in the fifth year.

Amortization on the term loan B will also begin on Sept. 30, 2003 and principal will be repaid at a rate of 0.25% each quarter for the first seven years, with the remaining 93% due in equal quarterly installments during the final year.

Medco is obtaining this facility as part of its spin-off from Merck & Co. Inc. The spin-off is subject to a number of conditions, including the receipt of a favorable ruling from the U.S. Internal Revenue Service, the receipt of required regulatory approvals, final action by Merck to set the record date, distribution date, and distribution ratio for the spin-off, the effectiveness of the registration statement and payment by Medco Health to Merck of dividends aggregating $2 billion.

Proceeds from the term loans, combined with proceeds from a $500 million note offering and a $500 million accounts receivable financing facility, will be used to pay a portion of the cash dividend to Merck.

The revolver is expected to be undrawn at distribution and will be used for working capital and general corporate purposes.

Medco is a Franklin Lakes, N.J. pharmacy benefits management company.

Worldspan LP's term loan B was upsized by $25 million and pricing on the tranche as well as on the revolver was reverse flexed to Libor plus 375 basis points from price talk of Libor plus 450 to 500 basis points due to strong demand, according to a fund manager.

The extra funds transferred to the bank deal came from the company's bond offering, which was downsized to $280 million from $315 million. Furthermore, the company increased its capitalized lease deal by $10 million.

Currently, the facility consists of a $125 million term loan and a $50 million revolver, both with a term of four years.

"I heard there was like $400 million in orders in the book for the term loan. They figured they could upsize this. I would imagine their bonds weren't getting as good a reception," the fund manager said.

"I don't know if some people are going to rethink their decision," the fund manager said in regards to the flex down in pricing. "Especially with the lack of new issuance out there, I don't think a lot of people will be pulling out of this.

"And with the B1/BB- rating, 375 over isn't too bad given that we're in right now," the fund manager added.

Besides the lack of new issuance and the relatively decent yield, the company itself is being viewed positively by some based on its recent economic performance.

"During some of the worst possible market for the travel industry, these guys have performed relatively well. Margins have held up. Their revenues have not really decreased as much as you would expect. They're pretty critical to the travel industry with sites like Orbitz and Expedia. For the airlines it's pretty important to get it out there - they hit more potential buyers. And, the systems are used through traditional travel agents also. The trend is moving towards the Internet and they're really set up for that," the fund manager said.

As part of the deal structure, there is an option to commit $15 million, with $10 million going towards the term loan, which is being offered at 99, and $5 million going towards the revolver, which gives 150 basis points upfront. In return for committing to both tranches in this fashion, the investor gets 2% bond economics.

Lehman Brothers and Deutsche Bank are the lead banks on the deal, which is targeted to close by the end of the month.

Proceeds will be used to help fund the previously announced leveraged buyout of Worldspan from its three airline owners by Travel Transaction Processing Corp., a company formed by Citigroup Venture Capital Equity Partners LP and Teachers' Merchant Bank.

Worldspan is an Atlanta travel technology resource for travel suppliers, travel agencies, e-commerce sites and corporations.

Vivendi Universal Entertainment LLLP closed on its new $920 million five-year term loan (Ba2/BB+) priced at Libor plus 275 basis points. The margin was reduced to 275 bps over Libor from an initial pricing of 350 bps at the launch of the facility.

The facility was significantly oversubscribed with more than 80 investors participating in the loan, according to a company news release, which attributed the success of the transaction to investor confidence in Vivendi Universal Entertainment's management, assets and financial profile.

JPMorgan and Bank of America acted as joint bookrunners and lead arrangers with Barclays as syndication agent.

Proceeds will be used by the Paris media, entertainment and telecom company to refinance the outstanding portion of the $1.62 billion bridge loan put in place last year by Vivendi Universal Entertainment.

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