Skilled Healthcare holds meeting, Allied Security schedules; market firm ahead of Fed meeting

By Paul A. Harris

St. Louis, June 28 - News of a pair of bank meetings surfaced during Monday's session, as the market wended its way toward the Wednesday event horizon when the Federal Reserve is widely expected to hike short-term interest rates for the first time in four years.

Meanwhile traders told Prospect News on Monday that the aftermarket was quiet as the grave, or nearly so. The only paper on the move continued to be that of Leap Wireless, Inc., which continued to strengthen on technicals.

"The market is pretty firm," a buy-side source told Prospect News on Monday.

"Libor has risen a lot in the last few weeks. The Fed is obviously about to raise interest rates so the focus of the world is on rising rates, with bank loans being a natural choice to defend against that.

"I imagine that the market will continue to be strong. And there is nothing anybody can do about it.

"This is not a market where you buy low and sell high. It just doesn't work that way."

The buy-sider also expressed the expectation that merger and acquisition activity will continue to pick up, with the improving economy.

"All of the LBO people seem to be doing a lot of deals," the investor added, "which leads you to believe that the new deal flow will be pretty good."

Skilled Healthcare holds meeting

Skilled Healthcare Group Inc. held a bank meeting Monday for a $225 million credit facility that is being led by Credit Suisse First Boston and Goldman Sachs & Co.

The facility will be comprised of a $140 million six-year first lien term loan priced at Libor plus 300 basis points and an $85 million seven-year second lien term loan priced at Libor plus 750 basis points.

The Foothill Ranch, Calif.-based post-acute care services company will use the proceeds to refinance existing debt.

Allied Security meeting Tuesday

Meanwhile Allied Security, Inc. will hold a bank meeting Tuesday for its $250 million credit facility via Bear Stearns & Co.

A market source told Prospect News that the King of Prussia, Pa.-based private security company, is expected to bring a fairly standard acquisition structure - a small revolver and a larger term loan B.

The company is also in the market with $175 million of seven-year senior subordinated notes, with Bear Stearns running the books on the bond deal.

Proceeds will be used to fund the acquisition of Barton Protective Services.

dj Orthopedics repricing

Meanwhile on Monday, dj Orthopedics, Inc. was heard to be seeking to reprice an outstanding $98 million of term loan borrowings. The Wachovia Securities-run transaction is expected to be completed by the end of this week.

Based upon present market conditions the company is seeking a 50 basis points reduction in the coupon, to Libor plus 225 basis points from Libor plus 275 basis points.

dj Orthopedics is a Vista, Calif.-based global orthopedic sports medicine company.

Leap Wireless continues to firm

The only issue traders reported as showing meaningful movement Monday was that of Leap Wireless, which was also seen to strengthen on Friday in "erratic" trading.

The San Diego-based telecommunications operator's paper, which had been quoted at 123.5 bid, 124.5 offered at Friday's close, was seen "trading on top of the 124 context," on Monday.

"It's just up on technicals, in my opinion," a trader commented. "It has been kind of volatile over the past couple of days.

"If there is any news driving it, it's old news on Metro PCS's IPO."

Rockwood Specialties a blowout

Meanwhile on Monday, two other traders, both of whom remarked that little if any aftermarket activity had transpired during the session, remarked that the $1.05 billion term loan B piece of the Rockwood Specialties Group Inc. $1.85 billion facility (B1/B+) is a blowout.

The $1.05 billion term B has $1.6 billion of commitments, according to both sources.

Credit Suisse First Boston, UBS and Goldman are joint lead arrangers and joint bookrunners.

The seven-year term loan B is priced at Libor plus 275 basis points, while the $250 million six-year revolver is priced at Libor plus 250 basis points, with a 50 basis points commitment fee. Meanwhile the $250 million six-year term loan A is priced at Libor plus 250 basis points and the $300 million eight-year term loan C at Libor plus 300 basis points.

The Princeton, N.J., specialty chemicals company is using the proceeds to fund the acquisition of four chemical businesses from Germany based Dynamit Nobel.

IDS loans raise questions

The above-quoted investor also took time on Monday to chat about a spate of income deposit securities deals that have recently been sidelined, "waiting for the IRS to rule on the tax implications."

The buy-sider appeared to be put off by these hybrid securities, which contain both equity and debt, and in some cases also come along with new bank debt.

But at the same time the investor admitted being intrigued.

"I think that it's terribly interesting that some of these IDS deals have bank loans as part of the structure, considering that IDSs are supposed to pay out all of the free cash flow to the holders of the IDS units, which means the banks don't amortize.

"I don't know how the bank market is going to take that. Maybe in this technically hot market they will be fine with it. But my first instinct is 'Yuck!'"

When Prospect News mentioned that the IDS deals seemed to be engendering notably low credit ratings, the investor replied: "The rating agencies seem to hate the structure.

"Anything that takes all of the free cash flow and shoves it out the door without making the company better or paying down debt strikes the rating agencies as 'icky.'

"They may be overplaying that a little," the buy-sider added.

"I think that IDS is not a bad concept. There are a lot of companies that are not really going to go anywhere in life. Take Coinmach, which is also out there with a potential IDS deal: coin-operated laundries in apartment buildings. It's never going to grow but it's very steady.

"It may be the case that a business needs to either grow or die, in which case the trouble with IDS deals is that the companies are basically saying that they won't grow and that they're sticking with the status quo. And that could be a problem."

The investor said that one factor that seems common to most junk bond deals, "a stock story that works," seems to be missing among the companies offering IDSs.

"Inherently in an IDS the stock story doesn't work," the investor said.

"At this stage I don't see how any of these deals can happen if you don't know whether 30% of what you're putting out there is going to be a tax deduction for the company," the buy-sider added.

"We are all waiting for an IRS ruling and then there will probably be a flood of these deals."

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