Precision floats OID; Harrah's dips with downgrade; GM, Ford take a hit; CLOs target good quality names

By Sara Rosenberg

New York, Nov. 18 - On the new deal front Tuesday, Precision Drilling Trust came out with an original issue discount on its in market term loan B now that the commitment deadline is fast approaching.

Meanwhile, in the secondary market, Harrah's Entertainment Inc. softened in trading as the company's ratings were lowered, and autos appeared to be the underperformers of the day, evidenced by the more sizeable drop in General Motors Corp. and Ford Motor Co. than in the rest of the general cash market.

Also in trading, there was a good amount of activity in high quality names, such as Fresenius Medical Care AG & Co. KGaA, Fresenius Kabi and DaVita Inc., with some suggesting that the volume was a result of a flight to quality from CLOs.

Precision releases OID

Precision Drilling Trust announced on Tuesday that its $400 million 53/4-year term loan B is being officially talked with an original issue discount in the 86 area, according to a market source.

This is the first time discount guidance has been available. At the Nov. 4 launch, it was revealed that the spread on the term loan B is talked at Libor plus 500 bps and that there is a 3.25% Libor floor, but the discount was described as still to be determined.

Tickets for the term loan B have started to come in as the commitment deadline is this Friday, the source added.

Precision Drilling's $1.2 billion senior secured credit facility (Ba1/BBB-) also includes a $400 million five-year revolver and a $400 million five-year term loan A, with both of these tranches talked at Libor plus 400 bps.

The pro rata was essentially done prior to the retail syndication bank meeting as a result of an early round of syndication to senior managing agents.

RBC Capital Markets and Deutsche Bank are the joint lead arrangers and bookrunners on the deal, with RBC the administrative agent and left lead, Deutsche the syndication agent, and HSBC and TD Securities the co-documentation agents.

More Precision Drilling facility terms

In late September, the company filed an F-4 with the Securities and Exchange Commission that outlined not only the structure of the deal, but amortization and covenants, as well as some other details.

According to the filing, amortization on the term loan A is 5% in year one, 10% in years two and three, and 15% in year four, with the balance payable at maturity, and amortization on the term loan B is 1% per year, with the balance payable at maturity.

Financial covenants include a minimum interest coverage ratio of 3.0 to 1.0, a minimum fixed-charge coverage ratio of 1.05 to 1.0 in 2009 and 1.10 to 1.0 thereafter, and a maximum total leverage ratio of 3.0 to 1.0.

The filing also said that the facility has a $150 million accordion feature, a portion of the term loan A and the revolver will be available for borrowings in Canadian dollars, and that up to $100 million of the revolver plus any additional amounts necessary to finance any original issue discount on the term loans may be borrowed on the closing date to finance the acquisition and refinance debt.

Precision Drilling loan funding acquisition

Proceeds from the Precision Drilling credit facility will be used to help fund the acquisition of Grey Wolf Inc. for $9.02 in cash or 0.4225 Precision trust units, subject to proration. The maximum amount of cash to be paid will be about $1.12 billion, and the maximum number of trust units to be issued will be about 42 million.

Other financing for the acquisition will come from$400 of senior unsecured notes, which is backed by a commitment for a $400 million 12-month unsecured bridge loan. The bridge loan will be reduced by the amount of Grey Wolf's convertible securities that are not converted or redeemed at close.

Pro forma for the transaction, senior leverage is 1.2 times and total leverage is 1.7 times. Equity will represent about 65% of the pro forma capital structure. On a pro forma basis for the 12 months ended June 30, combined revenue was $1.8 billion.

Completion of the acquisition is subject to Grey Wolf shareholder and customary regulatory approvals. The transaction is not subject to approval by Precision unitholders or financing.

In September, the Federal Trade Commission granted early termination of the Hart-Scott-Rodino waiting period in the proposed merger and the Grey Wolf special meeting of shareholders is scheduled for Dec. 9.

Precision is a Calgary, Alberta-based provider of high performance energy services to the oil and gas industry. Grey Wolf is a Houston-based provider of turnkey and contract oil and gas land drilling services.

Harrah's drops with rating cut

Moving to the secondary, Harrah's term loan B debt traded lower during market hours as Standard & Poor's downgraded the company's ratings on the heels of its offer to exchange existing notes for new notes, according to traders.

The term loan B-2 was quoted by one trader at 64 bid, 66 offered, down from Monday's closing levels of 67 bid, 68 offered.

A second trader said that all of the company's term loan B tranches were quoted at 65 bid, 67 offered, down about 1¼ points on the day - which was pretty much in line with how the rest of the market reacted in trading.

On Tuesday afternoon, S&P announced that it lowered its corporate credit rating on Harrah's to CC from B and the secured loan to B+ from BB-, with all ratings remaining on CreditWatch with negative implications.

Harrah's downgraded because of exchange offer

S&P said that it lowered Harrah's ratings because of the company's offer to exchange up to $2.1 billion of proposed new second-lien senior secured notes for some or all of its outstanding senior unsecured and subordinated notes.

In some cases, an exchange for the new notes would represent a substantial discount to the par amount of the outstanding issue.

The exchange offer also allows holders of notes maturing in 2010 and 2011 to participate in a modified Dutch auction process for total cash payment by the company of up to $325 million.

The rating agency explained that the exchanges are being viewed as being tantamount to default given the distressed financial condition of the company and concerns around its ability to service its current capital structure over the intermediate term absent this exchange offer.

"Upon consummation of the transaction, we would lower the notes ratings to D and the corporate credit rating to SD [for selective default]," said Ben Bubeck, S&P credit analyst, in the rating release. "As soon as is practical thereafter, we will reassess Harrah's capital structure and assign new ratings based on the amount of notes successfully tendered."

Expected new ratings for Harrah's

S&P also said that the preliminary expectation, if the exchange offer succeeds, is that Harrah's corporate credit rating will end up at B-, still one notch lower than it was prior to the Tuesday downgrade.

The B- rating would acknowledge that the post-exchange capital structure, combined with management's efforts to cut costs and pull back on capital spending, allows the company greater capacity to weather the current downturn over at least the next several quarters, S&P explained.

It is currently expected that the rating on Harrah's credit facility would remain at B+, where it was lowered to on Tuesday, following completion of the exchange.

Harrah's is a Las Vegas-based provider of branded casino entertainment.

General Motors, Ford plummet

General Motors and Ford both saw their term loans take a noticeable downturn during the trading session, more so than the overall cash market, according to a trader.

General Motors, a Detroit-based automaker, saw its term loan fall three points to 39½ bid, 42½ offered, the trader said.

Ford, a Dearborn, Mich.-based automaker, saw its term loan fall 2¾ points to 38 bid, 41 offered, the trader continued.

"A lot of technicals. People unwinding trades. Autos were the big underperforming sector of the day but that doesn't come as a big surprise," the trader remarked.

Cash, LCDX continue to weaken

Meanwhile, cash in general was down about one to two points yet again and LCDX 10 fell to 82.20 bid, 82.70 offered from 83.45 bid, 83.95 offered, the trader told Prospect News.

Stocks, on the other hand, were better, with Nasdaq closing up 1.22 points, or 0.08%, Dow Jones Industrial Average closing up 151.17 points, or 1.83%, S&P 500 closing up 8.37 points, or 0.98%, and NYSE closing up 42.30 points, or 0.80%.

High quality attracts attention

Good quality names seemed to be very busy in trading on Tuesday, such as Fresenius Medical, Fresenius Kabi and DaVita, as CLOs appeared to be putting in a good bid for that type of paper, according to a trader.

The trader explained that the CLOs have to balance out ratings and with all the downgrades that have been taking place recently, moving to quality names looks like the current preferred course of action.

The trader went on to say that some of the high quality paper may be down despite the increased interest, but that's just in sympathy with the rest of the market.

"Sweet spot of finding where guys care. Nothing credit specific," the trader continued.

Fresenius Medical, a Bad Homburg, Germany-based provider of products and services for individuals undergoing dialysis, saw its term loan quoted at 84½ bid, 85½ offered, up from previous levels of 84 bid, 85 offered, the trader remarked.

Fresenius Kabi, a Bad Homburg, Germany-based infusion therapy and clinical nutrition company, saw its term loan quoted at 92 bid, 93 offered, up from Monday's levels of 91 bid, 92 offered.

And, DaVita, an El Segundo, Calif., operator of dialysis centers, saw its term loan trading around 86, down about a point on the day, the trader added.

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