Loan pipeline seen building on M&A activity; Medco meeting set; Calpine firms

By Paul A. Harris

St. Louis, March 2 - Sources in the bank loan market told Prospect News on Tuesday that the new loan pipeline is building, with a spate of merger and acquisition financing being hammered out in banks in the U.S. as well as in Europe.

Meanwhile, among existing loan paper, a trader reported seeing very little activity during the session.

A Monday bank meeting is set for Medco Health Solutions' $800 million term loan A (Ba1/BBB), which is being talked at Libor plus 125 basis points.

JP Morgan and Citigroup are leading the deal for the Franklin Lakes, N.J.-based pharmacy benefit managing firm.

"I was annoyed when I saw it because it took us out of the price range," lamented one investor, having seen the pricing on Medco.

"It's coming out of the secured world and coming into pricing that's very corporate, and subject to a grid."

Also on Tuesday United Industries Corp. announced plans to obtain a $510 million senior credit facility (B+), with Bank of America and Citigroup in the lead.

The facility will be comprised of a $385 million term loan and a $125 million revolver, with proceeds to finance the acquisition of The Nu-Gro Corp., redeem United's outstanding preferred stock and the remainder of its outstanding 9 7/8% Series B subordinated notes due 2009.

The St. Louis-based manufacturer and marketer of consumer lawn and garden care products noted in the press release that it has also entered into an agreement with Oakwest Corp. Limited and certain other related shareholders who hold more than 26% of Nu-Gro's issued and outstanding common shares. Under the terms of this agreement, those shareholders have agreed to support and vote in favor of the acquisition.

Hostile takeover deals "in the weeds"

One market source told Prospect News on Tuesday that the leveraged loan market is geared up for an increase in merger and acquisition activity.

"I think everybody has at least one big hostile takeover working in the weeds someplace," said the source.

"In addition to what you see in the pipeline there are some big blockbuster deals being discussed. The days of hostile takeovers may come back."

When pressed for an explanation of why the present economy could support increased M&A activity, the source initially shrugged.

"I can't say why there was no M&A activity for the past six months, although I got asked that question once a week," the source said. "The economy is on the rebound. People can feel better about projections going out three or four years.

"I don't know if I buy any of that, but it's the kind of crap that people feed me.

"I don't know that the political uncertainty has really gone away that much. And low interest rates always help - but we had those for a long time and nobody did anything. You would have thought that people would have made a move on some of these companies back when the Dow Jones was at 8,000, not now when it's about 10,000. But they didn't.

"People on the trading desk are convinced that the Fed will raise rates in the next 90 days. That's going to be a slow process. And so you go from 1% Libor to 1 5/8%. That's not going to be the end of the world. Rates are still going to be reasonably low.

"Credit spreads are at historical lows but I don't think that's driving the M&A activity we are hearing about that much.

"We're seeing a lot of stuff going on in Europe. And I think that there is more to come, in terms of blockbuster deals - some strategic acquisitions as well as some opportunistic equity players coming into the market."

Calpine up on expected return to markets

In the secondary, a trader saw some gains in the existing paper of Calpine subsidiary Calpine Construction Finance Co. II, LLC (CCFC II), which postponed a planned $2.3 billion in loans and new bonds on Feb. 24, citing market conditions.

The CCFC II paper "continues to get a little stronger," according to the source who cited levels, late Tuesday, in "the low 97s."

"There seems to be a belief out there that they are going to come back and will be able to get a deal done," said the trader.

Mixed signals on Adelphia

Meanwhile activity in existing paper was light on Tuesday, according to a trader.

"It's still a bid-side market," the source said.

The trader mentioned seeing some firming in the loan paper of Adelphia.

"It got a little bit stronger. The guys are talking the price up a little bit, basically on the belief that some of the guys who bought it cheaper are walking away.

"More importantly there is more buy-side interest out there, based on the belief that they are going to put the Rigases away, and this thing is going to come out [of Chapter 11]."

Another source, however, said that malaise may be the fate that awaits some of the Adelphia lenders. The blame, this source added, can be laid at the feet of bondholders doing what bondholders typically do.

"The bondholders were belly-aching that the banks should be held complicit with the Rigases, because they were sending money out of Adelphia and into the pockets of the Rigases," said the source. "Therefore the banks ought to get equitable subordination, or something like that.

"That claim is seen as being a little on the specious side - classic reaching, by the bondholders.

"The plan that the banks would all get paid out of an escrow account while the litigation on that issue is outstanding really annoyed the non-agent lenders. They have organized a group - which seems to be getting bigger - of people who want to become a force in the Adelphia bankruptcy; they're people who seem to be saying, 'We shouldn't be treated like the lenders because we didn't do anything wrong.'

"It now appears that that group now represents over $3 billion. That would be a pretty big and a pretty interesting committee. And it might change the timing and the pace of everything.

"Last week the Adelphia bank loans dipped somewhat when that particular little wrinkle came out. I think everybody was hoping that the judge would shove that lawsuit aside, at the very least, for the non-agent lenders."

This source added that the contentious issues could conceivably prevent Adelphia from exiting Chapter 11 "for many months, perhaps even the end of the year.

"It's not the normal course of things because bondholders are always saying that the banks did something wrong, which should prevent the banks from getting interest, etc.

"The banks consistently win those arguments because they are usually reasonably careful.

"For a judge to leave all the banks in limbo, with an escrow account, as if the litigation had some credibility, is interesting."

Masonite closes

Meanwhile Masonite International Corp. said Tuesday that it closed on its acquisition of the residential entry door business of Stanley Works.

The Mississauga, Ont. building products company obtained a $200 million credit facility to help fund the $160 million cash acquisition price, made up of a $50 million incremental term B at Libor plus 200 basis points and a $150 million incremental term C at Libor plus 225 basis points. SunTrust was the lead bank.

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