The Pantry expected to fill up fast on strength, support of existing lending group

By Sara Rosenberg

New York, Feb. 18 - The Pantry Inc.'s newly launched $415 million senior credit facility (B1/B+) is expected to "be oversubscribed pretty quickly," according to a fund manager, based on the anticipation that existing lenders will recommit to the deal.

"It's a pretty big bank group as it is. I think they started with the existing bank group. I would imagine that everyone that's in the existing bank group will re-up their commitments. It's a pretty decent performing credit headed into an improving economy. Their numbers have been improving and the recently completed Golden Gallon acquisition just added to that," the fund manager explained.

The proposed credit facility, which was launched via a bank meeting on Wednesday afternoon, consists of a $70 million six-year revolver with an interest rate of Libor plus 275 basis points and a $345 million seven-year term loan with an interest rate of Libor plus 300 basis points.

Previously, the company anticipated the deal to be sized at $440 million consisting of a $370 million term loan B and a $70 million revolver. By comparison, a syndicate document anticipated the deal size at $385 million with sizes of tranches, pricing and timing still to be determined.

The discrepancy was a result of the fluidness surrounding the final size of the company's bond offering, sources previously explained.

But now that the company priced an upsized $250 million offering of 10-year senior subordinated notes this past Friday, the credit facility was able to launch with a somewhat definitive structure. The bond deal was originally anticipated to be sized at $225 million.

Wachovia and Credit Suisse First Boston are the joint lead arrangers on the deal.

Proceeds from the credit facility will be used to refinance the company's existing senior credit facility. The refinanced credit facility is expected to provide the company with increased financial flexibility and lower interest rates, according to a company news release.

In fact, the company's existing deal has a first lien term loan carrying an interest rate of Libor plus 425 basis points with a 1.75% Libor floor and a second lien term loan carrying an interest rate of Libor plus 650 basis points with a 1.5% Libor floor, according to the fund manager, so this new transaction will result in significantly lower spreads and the removal of Libor floor protection.

The Pantry is a Sanford, N.C., convenience store chain.

El Paso off on adjustment

El Paso Corp.'s bank debt was off about a quarter of a point on news that it reduced its year-end 2003 proved natural gas and oil reserve estimates by 1.824 trillion cubic feet equivalent to 2.635 trillion cubic feet and that it expects to take a fourth quarter pre-tax ceiling test charge of about $1 billion.

The paper was quoted at 98¾ bid, 99½ offered on the Street by late afternoon, according to a trader.

In reaction to the news Standard & Poor's downgraded El Paso's corporate credit rating to B- from B to reflect the larger-than-expected write-down of the company's oil and natural gas reserves.

"The large revision to El Paso's proved reserves, amounting to more than 40% of the company's reserve base, and the resulting ceiling-test write-down of about $1 billion is greater than what had been factored into the ratings," said S&P credit analyst Todd Shipman, in a rating release. "While there is no immediate cash flow effect related to this action, it does suggest that future production and likely cash flow will be weakened in 2005 and beyond. The negative outlook will continue until further progress on the company's long-range plan is accomplished."

Moody's Investors Service placed the company's ratings under review for possible downgrade, including the bank debt rating of B3.

"This revision is material and raises concerns about the direction of future production, which has been in decline for some time, and the degree of asset and cash flow coverage that those reserves provide to EP's creditors," Moody's said.

"Over the next few months, Moody's will assess not only El Paso's financial and other reports that the company will file with the SEC, but also a number of other factors, including, but not limited to: 1) the prospects for future production growth and cash flows that El Paso's E&P subsidiaries could provide to the holding company and its affiliates; 2) the results of El Paso's internal review of its E&P business; 3) the outcome of the third-party legal review of the causes of this substantial downward revision in reserves; and 4) any strategic transactions that may be contemplated among El Paso affiliates or with third parties in light of the company's diminished reserve value," Moody's added.

Medco slightly higher

Despite the seemingly bad news that Medco Health Solutions Inc. lost a relatively large contract, the company's bank debt was seen higher by about an eighth of a point on Wednesday with the paper bid at 101 3/8 and offered at 101 7/8, according to a trader.

"Negative news so I don't know why it's up," the trader said. "I saw it there this morning and it hasn't changed so it could be a stale market."

Medco announced late Tuesday that BlueCross BlueShield Association will be transitioning its pharmacy benefit management mail service program for the Federal Employees Program to an alternate provider beginning Jan. 1, 2005.

"Medco Health was acknowledged last year in a report by the U.S. General Accounting Office with helping to provide significant savings, choice and access to millions of federal employees," said David Snow, chairman, president and chief executive officer, in a company news release. "Given their historically high member satisfaction rate, and our ability in 2002 to contain drug trend well below the national average, we are disappointed by the decision. However, we are focused on providing excellent service through the duration of our agreement, and we are committed to ensuring a smooth transition of the program at year-end."

The Franklin Lakes, N.J., pharmacy benefits manager now expects its fiscal 2004 diluted earnings per share to be in the range of $1.64 to $1.75 on a GAAP basis, revised from previous guidance of $1.75 to $1.86, as a result of increased amortization expense on intangible assets resulting from the loss of the account.

In response to the news, S&P released a statement saying that Medco's ratings and outlook would not be affected.

"While the revenues associated with the contract are large, they represent a relatively small amount of the leading pharmacy benefit manager's total revenues. Accordingly, Standard & Poor's does not believe that it will meaningfully affect cash flows, which are in excess of ongoing needs, and which afford the company the flexibility to repay debt and strengthen its capital structure," the rating agency explained.

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