LCDX eases but cash gain as market moves counter to stocks; Simmons offers big concessions for relief

By Paul A. Harris

St. Louis, Oct. 22 - The LCDX 10 index eased slightly on Wednesday, according to a bank loan syndicate source, who saw it just after the close at 85¾ bid, 86.15 offered.

That was down from 86 bid, 86.4 offered at the New York open, according to an analyst who, at mid-morning, saw the loan market trading back and forth following Tuesday's big rally in which the overall bid was probably up 4 points.

Wednesday was a "pretty mixed bag," a trader said following the close, adding that loans were up 1 to 2 points.

"Autos and airlines performed pretty well, while energy was unchanged," said the trader.

Simmons amendment

Mattress-maker Simmons Company offered its lenders 400 basis points of coupon and a 100 bps consent fee for relief from its total leverage and interest coverage covenants, according to market sources.

Goldman Sachs & Co. launched the amendment deal on Tuesday, according to one source, who added that signatures aren't due for at least a week.

Pricing on the revolver and the term loan would increase to Libor plus 600 bps.

In addition Simmons is offering to put in place a 3¼% Libor floor.

Other concessions include a prohibition from paying cash interest on the holding company portions of Simmons' debt, which must be paid in-kind; the super holding company tranche features a 75 bps PIK step-up provision which will therefore increase pricing to 600 bps from 525 bps.

Simmons also introduced a pricing grid on the revolver and term loan, with two step-ups and two step-downs.

The company is seeking six quarters of covenant relief.

Simmons announced that it has notified its senior lenders that it does not expect to be in compliance with the maximum leverage ratio covenant set forth in the senior credit facility as of Sept. 27, 2008. The senior credit facility provides for a $75 million revolver and a $465 million tranche D term loan facility.

The company completely drew down the revolver following the end of the second quarter of 2008, according to a market source.

Operating leverage, including the revolver drawdown, is estimated at 5.3 times, which is above the 4.5 times covenant threshold, said that source, adding that next year the covenant steps down to 4.0 times.

A banker watching the deal noted the size of the concessions.

"This is significantly more, in terms of coupon and fee, than a lot of other amendments that we have seen," the banker said.

However the ratios Simmons is asking for, in terms of covenant increases, are considerably larger than normal.

"They're a mattress company with a lot of exposure to the housing market, so they have to be hurting pretty bad," the banker said.

An 'up day'

The bank loan market still had a strong tone on Wednesday, a trader said, but added that the session did not see the kind of upward moves that the previous three sessions had seen.

"It was an up day for bank debt," the trader said.

"Levels are firm and holding while the equity markets are selling off."

Rite Aid Corp.'s old term loan was a couple of points better on the day, according to a different trader who spotted the paper at 70 bid, 73 offered.

However TXU Corp., "a bellwether name," was down ¾ point across all three tranches, the trader said, giving levels of 77¾ bid, 78 offered.

Another market source had cash names a point or so lower, on low volume, at the end of the mid-week session.

Some of the bellwether names were down a little, the source added, noting that the loan paper of Michaels Stores Inc. was down a point while that of Harrah's Entertainment Inc. was flat to down a point.

The HCA Inc. loan was also down a little, the source said, adding that overall Wednesday was not a very busy day in the secondary market.

Reality check for JDA

A bank loan analyst who covers software said that JDA Software Group Inc.'s restructuring and price talk hike on its deal, announced Tuesday, are merely a reflection of present market circumstances.

The Scottsdale, Ariz.-based company made revisions to its $450 million five-year senior secured credit facility.

The $425 million Libor plus 575 basis points term loan has been replaced with a $250 million Libor plus 600 bps first-out term loan priced at 95 and callable at 101, and a $175 million Libor plus 950 bps first-loss term loan priced at 95, callable after one year at 103, with the call premium declining ratably.

Libor floors remain to be determined.

The company had been in the market with a $425 million term loan talked at Libor plus 575 bps at 97, with a 3¼% Libor floor, callable at 101.

The $25 million revolver remained unchanged, according to the analyst.

Credit Suisse and Wachovia are the joint lead arrangers and joint bookrunners on the deal, with Credit Suisse the agent and Wachovia the syndication agent. Wells Fargo Foothill is also part of the syndicate.

Proceeds will be used to help fund the roughly $346 million cash acquisition of i2 Technologies Inc., to repay i2's convertible debt, to refinance JDA's existing debt and revolver, and to provide for the combined companies' ongoing working capital and general corporate needs.

"They've re-cut the deal and ratcheted up the yield extremely high," the analyst commented on Wednesday.

"It's the usual bells and whistles that you put in there to make people happy," the source added, asserting that the call premiums don't mean anything because the bank is not planning to refinance in the next year or two.

"It's just protection in case the market is better next year, so the company can't get out of them.

"They still have the cash-flow sweep, so they can sweep at par."

Dramatic move for a dramatic market

The analyst agreed that the JDA restructuring and pricing revision were dramatic.

"But it's a dramatic market right now," the source said.

"When they came out with this deal basically the whole credit market shut down and the stock market dropped 1,000 points."

The analyst termed JDA "a good story," but added that the target, i2 Technologies, provides supply chain management software with end markets in autos and technology, with consulting services businesses comprising 30% of its pro forma companies.

"Consulting services companies don't tend to perform well during a recession," the analyst said.

"It's a big risk for JDA to be taking. There is an established investor base in this name but people aren't thrilled with them buying a company that could just go sideways, and probably down in this economy.

"So JDA's original deal, at 575, just doesn't cut it in this market. That's not the kind of risk people are willing to take.

"The increased spread is there really to just entice anyone who is willing to do it."

Prospect News asked if the re-tranching, specifically the breakout of the $175 million Libor plus 950 bps first-loss tranche, targets a specific class of investors.

"I don't see a lot of hedge funds playing right now," the analyst replied.

"But the target audience could be bond investors, who have been coming into the leveraged loan market because they need the yield."

Technicals a 'moving target'

The timing for the JDA deal could hardly be worse, the analyst reiterated.

"Market technicals are a moving target," the source said.

"Yesterday the bank loan market was up four points. Today it's down a point or two.

"It's really hard to get a bead on where pricing should be, and lock in on it."

The analyst added that presently it is difficult to determine whether bank loans are trading on market technicals or on economic fundamentals.

"It's very hard to make that assessment, and it's keeping a lot of people on the sidelines," the analyst said.

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