Lyondell sets launch for $2.6 billion deal; Berry up on break; pipeline to year-end seen at $105 billion

By Paul A. Harris

St. Louis, Sept. 5 - As players took their posts post-Labor Day, a pipeline that one syndicate official reckoned to be $105 billion - all to be priced in the run-up to 2007 - started to materialize.

The biggest chunk on Tuesday came from Houston-based Lyondell Chemical Co., which will launch its $2.575 facility on Thursday.

Meanwhile sources marked the broad market an eighth of a point higher.

Berry Plastics Corp.'s $675 million seven-year term loan B, priced at Libor plus 175 basis points, traded as high as 100.125 on the bid side.

"It was a pretty quiet day," one trader commented shortly after the Tuesday close.

The source added that the market felt a little stronger coming out of the holidays, with loan paper trading an eighth better, "and a little more solid on the follow."

Lyondell to launch $2.575 billion

A forward calendar that is expected to be massive began to take shape shortly after the Tuesday open.

The market learned that Lyondell Chemical will launch a $2.575 billion credit facility at a bank meeting on Thursday morning.

The facility, comprised of a $1.775 billion seven-year term loan talked at Libor plus 200 basis points and an $800 million five-year revolver, is being arranged by JP Morgan.

The company also announced on Tuesday that it plans to sell $1.775 billion of senior unsecured notes.

One official on a syndicate desk told Prospect News that the overall leveraged loan pipeline of deals expected to price by the end of the year is $105 billion.

"A fair amount of that is going to be refinancing, but nonetheless it's still a huge number," the official remarked.

When Prospect News asked the source whether there is demand sufficient to clear such a volume of paper the source responded in the affirmative, citing interest from insurance funds and "overlap from traditionally pro rata lenders."

Consider the context

This syndicate source conceded that such astronomical issuance projections might seem sufficient to get you laughed right out of the bank. However, the source contended, a close examination of the present forward calendar makes $105 billion seem a relatively sober estimate, and mentioned just two of those deals in the pipeline.

The first was the Kinder Morgan Inc.'s $8.6 billion credit facility, backing the Houston-based energy infrastructure provider's public-to-private buyout by management and equity investors, via Goldman Sachs, Citigroup, Deutsche Bank, Wachovia and Merrill Lynch.

The second was Univision Communications Inc.'s $8.25 billion credit facility via Deutsche Bank, Credit Suisse, Bank of America, Wachovia, RBS Securities and Lehman Brothers, to help fund the LBO by Madison Dearborn Partners, Providence Equity Partners, Texas Pacific Group, Thomas H. Lee Partners and Saban Capital Group.

Those two deals represent more than 15% of that $105 billion projected total issuance for the remainder of 2006.

Possibility of pushback

On Tuesday sources recounted that the mid-July period, which also saw huge primary market, generated a certain amount of "investor pushback."

The sell-side source reckoned that altogether some borrowers paid up to the tune of 25 basis points to 50 basis points, and sometimes more.

Meanwhile, a buy-side source said that tight pricings, coupled with some limit-testing of investors' tolerances regarding bank covenants, set up a "buyer's strike."

"Covenants change as the credit cycle lengthens," the investor reasoned, adding that as the market becomes more "frothy" bank covenants become fewer and less stringent.

"There was a pushback when the primary market became huge a couple of months ago," the source added.

"Then, as the market sold off a little, you also saw covenants being added and tightened.

"Now there are fewer covenant-light deals, and more covenants per deal."

The syndicate official, however, contended that in the wake of the mid-summer sell-off - which saw prices in the secondary drop by as much as a point to a point-and-a-half - prices have rebounded.

"The secondary has improved and the pipeline has done nothing but grow," the official asserted.

On one point, however, there was no disagreement between the buy-side official and the syndicate source: demand for bank loan paper remains high.

Whether or not the huge pipeline allows investors to regain the upper hand they held in the mid-summer period, and thus force interest rates wider, neither source seemed to doubt that the market could clear the new paper headed its way.

Renfro bank meeting

Elsewhere in the primary market Renfro Corp. will hold a bank meeting on Friday to launch its proposed $205 million credit facility, which consists of a $145 million term loan B, of which $35 million will be put in place for delayed draw.

Bear Stearns will lead the term loan.

The company will also put in place a $60 million asset-backed revolver to be led by Wachovia.

Proceeds will be used to help fund Kelso & Co.'s leveraged buyout of the Mt. Airy, N.C., underwear maker.

Berry Plastics trades

Bank loan traders had only one name on Tuesday when Prospect News inquired about trading activity.

Berry Plastics $675 million seven-year term B, part of its overall $875 million credit facility, priced at Libor plus 175 basis points.

Credit Suisse, Deutsche Bank, Citigroup and JP Morgan led the LBO financing.

Two traders spotted the paper at 100 bid, 100.25 offered on the break.

Shortly later another saw the Berry Plastics term loan at 100.125 bid, 100.375 offered.

This source added that the broad market was slightly firmer, "maybe up an eighth on certain names."

Another source, mentioning that market activity seemed pretty good on the session, saw the Berry Plastics paper "a little above par on the bid-side," and 100.25 offered.

Meanwhile, well after the Tuesday close a syndicate official said that the Berry Plastics term loan was "slightly above par."

Bank loans versus junk

One of the abiding stories in the leveraged markets beginning in late 2005 and running through much of 2006 to date has been the tendency among issuers to favor the bank loan market over the high-yield bond market.

In some cases prospective bond issuers have pulled or downsized their high-yield note offerings, electing to raise capital instead in the leveraged loan market.

Among the reasons that sources have cited is increased demand among investors for bank loan paper creating more favorable terms for borrowers in the loan market than in the junk market.

As the first post-Labor Day capital markets session unwound Prospect News contacted two sources - one at an investment bank, the other a buy-sider, and both tuned into junk bonds as well as bank loans - to see if this reported flight to the loan market from the junk market remains in play.

The buy-sider reasoned that borrowers may once again be looking more closely at raising capital in the junk market.

"When you have a flat yield curve, as a borrower you ought to be terming out debt," the buy-sider said.

"The junk market doesn't seem like a bad place. It's almost strange that so much financing came in the loan market because the returns in the high yield market have been okay. The economy looks okay. The default outlook is okay. The Fed is theoretically done raising rates, and that's okay.

"Those factors suggest that the high-yield market should be just fine."

The buy-sider said that the high-yield market has been underappreciated by borrowers during much of 2006.

However that may be changing, the source added, citing knowledge of "between six and eight large, billion-dollar plus junk bond deals expected to come in the fall, all of them LBO financings.

"I don't see why the high yield market should be particularly reluctant to take down that paper," the source said.

Meanwhile a sell-sider who, during the mid-summer sell-off in the leveraged loan market, said that borrowers had begun taking a closer look a the junk market, said Tuesday that at present the balance between leveraged loans and high-yield bonds is now more even, primarily because of a larger high yield pipeline.

This source anticipates that during the run-up to the end of the year the junk market will see between $30 billion and $35 billion of issuance, which would easily take 2006 over the $100 billion issuance threshold.

If the junk market tops $100 billion of issuance for 2006, as is roundly projected to happen, it will only be the fifth time that it will have done so since 1992.

Hanesbrands spin off complete

Meanwhile Hanesbrands Inc. said it completed its spin off from Sara Lee Corp.

Funding for the transaction included a $2.6 billion senior secured credit facility via Merrill Lynch and Morgan Stanley.

The structure of the new loan is a $500 million five-year revolver (Ba2/BB-) at Libor plus 175 bps, a $250 million six-year term loan A (Ba2/BB-) at Libor plus 175 bps, a $1.4 billion seven-year term loan B (Ba2/BB-) at Libor plus 225 bps and $450 million 71/2-year second-lien term loan (Ba3/B-) at Libor plus 375 bps.

Proceeds were used to pay a dividend to Sara Lee.

Hanesbrands is a Winston-Salem, N.C., apparel company.

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