Primary offerings receive high interest; secondary paper with lower spreads trading at higher prices

By Sara Rosenberg

New York, April 12 - High demand and low supply is creating an atmosphere in which new loans are achieving high levels of success and secondary paper is trading at strange levels. According to market participants, syndicates are closing accounts to further commitments on credit facilities soon after the bank meeting. And, secondary loan paper that's less likely to be refinanced is trading higher than paper with greater spreads.

National Dairy Holdings, a milk producing company in Texas, held a bank meeting on Thursday, which according to a syndicate source went very well. Wachovia is the sole lead arranger and administrative agent for the deal.

According to the syndicate, the offering was "multiply oversubscribed". Due to the positive investor reception, the syndicate stopped accepting commitments at 5 p.m. ET on Friday.

The new credit facility consists of three tranches, the syndicate source said. The $125 million revolver matures in six years, has an interest rate of Libor plus 225 basis points and a commitment fee of 50 basis points. The $125 million term A matures in six years and has an interest rate of Libor plus 225 basis points. The $175 million term B matures in seven years and has an interest rate of Libor plus 275 basis points.

According to a fund manager, commitments for Associated Materials Inc., a Dallas, Tex. manufacturer of exterior residential building products, paper will probably stop being accepted on either Monday or Tuesday. The company's $165 million credit facility (Ba3/B+) is via UBS Warburg and Credit Suisse First Boston.

The loan consists of a $125 million seven-year term loan with an interest rate of Libor plus 375 basis points and a $40 million five-year revolver with an interest rate of Libor plus 300 basis points. The loan is part of a leveraged buy out by Harvest Partners Inc.

"The syndicate has been discouraging some people from placing orders because allocations would be too small," the fund manager said.

Looking ahead, Titan Corp., a San Diego, Calif. technology company, is scheduled to hold a bank meeting on April 17 for its $450 million senior secured credit facility. Wachovia is sole bookrunner and lead arranger for the transaction.

The loan consists of a $350 million seven-year term B tranche with an interest rate of Libor plus 325 basis points and a $100 million six-year revolver with an interest rate of Libor plus 225 basis points, according to a syndicate source. The unused fee ranges from 50 to 100 basis points depending on amounts drawn. If less than 30% of the revolver is used, the company has to pay a commitment fee of 100 basis points, the syndicate source said.

Substantially all of the company's assets are being used to secure the loan, excluding SureBeam, the syndicate source said. The loan is principally a refinancing of the previous loan. Moody's Investors Service rates the loan Ba3 and Standard and Poor's rates the loan BB-.

RailAmerica Inc., a Boca Raton, Fla. short line and regional railroad operator, is scheduled to hold a bank meeting on April 17 for its new $475 million credit facility. UBS Warburg and Morgan Stanley are joint lead-arrangers for the deal. The credit facility is expected to close sometime in May.

The loan consists of a $100 million six-year revolver with an interest rate of Libor plus 200 basis points and a $375 million seven-year term B tranche with an interest rate of Libor plus 275 basis points, a syndicate source said. There is a commitment fee of 50 basis points on the revolver.

All company assets will be used to secure the loan. Proceeds will be used to refinance existing debt. According to the syndicate source, the company's current ratings are expected to be affirmed since it is a refinancing. Moody's Investors Service rates the existing debt Ba3 and Standard and Poor's rates the debt BB-.

Both RailAmerica and Titan are expected to be huge successes, a fund manager said. "RailAmerica hasn't held its bank meeting yet and I've heard that it's already blown out," she added.

Since both deals are for the purpose of refinancing existing credit facilities, investors are already familiar with the companies, the management teams and the credits. Investors are desperate for paper and because they're comfortable with these names the loans will receive a lot of interest, the fund manager explained.

The lack of supply is affecting secondary market activity as well. According to a market professional, in some cases loans with lower spreads, meaning Libor plus 250 basis points or less, have been trading at higher prices than loans with higher spreads. The reason behind this anomaly is that if a company has lower spreads on its loan, it is less likely that the loan will be refinanced in the near future.

"For example," the professional explained, "I paid 101.5 for Church & Dwight (a division of Arm & Hammer) today. The spread (on the loan) is Libor plus 250. But, we'll be able to hold that paper long enough to earn the premium."

In other news, word has it that Reader's Digest will be bringing a new senior secured credit facility to market in the near future via JPMorgan Chase and Goldman Sachs. Talk has been circulating that a bank meeting will be held on April 23, however, the deal is currently in flux, so nothing has been finalized as of yet. The new loan is expected to consist of a $600 million term B tranche and a $250 million term A tranche. The company is anticipated to keep its existing revolver. Proceeds would be used towards the acquisition of Reiman Publications. Moody's Investors Service rates the proposed loan Baa3, while Standard and Poor's is seen rating it in line with the BB+ corporate credit rating. The company was not immediately available to confirm this information.

"We're very hungry for assets so the underwriters will probably try to access the [speculative grade] market," a financial professional said. "Since it's a crossover credit, the underwriters will probably keep the pricing open to see how it's received."

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