Refco plummets; loan market choppy on headline noise; HCA plans new loans for stock buyback

By Paul A. Harris

St. Louis, Oct. 13 - News on Refco Inc.'s term loan dominated the market during Thursday's session as the paper plummeted 30-odd points before getting a little bit of a bounce.

Elsewhere HCA, Inc. announced it would obtain a $1 billion short-term loan and possibly a $2.425 billion credit facility to help fund a $2.5 billion stock buyback.

And sources said Thursday that the leveraged loan market, which seldom factors in the headline noise that can dramatically impact securities below it on the capital structure, may presently be feeling the chop.

One bank loan investor told Prospect News Thursday morning that whereas the stock market and the junk bond market can be seen to jitterbug to negative news headlines, bank loans tend to remain insulated.

Fears of higher interest rates don't matter, the investor said, because bank loans come with a floating rate.

Concerns about hurricanes, skyrocketing energy prices and potential defaults are basically just noise, the source added.

"We're starting to see capital structures in this market that are a little weird because it is hard to put a big slug of junk debt in there," the source conceded, adding that there appears to be a continuing migration of unsecured junk to into senior secured and second-lien bank debt.

But the bank market is roaring, the source added.

However later in the day a trader who had watched Refco paper in free fall throughout the session said that the Refco news, combined with the negative forces at play upon the U.S. economy, appeared to be spilling over somewhat into the loan market.

Refco routed

As sources recount, every time you turned around on Thursday there seemed to be more bad news about Refco.

The market got down to business knowing that the company's CEO, Phillip Bennett, had been placed on indefinite leave trailing accusations of fraud, relating to $430 million in unpaid debts dating to 1998 which bring into question the numbers that the massive future brokerage has reported during the past three years.

Later the company imposed a moratorium on withdrawals citing insufficient liquidity at subsidiary Refco Capital Markets.

The moratorium on withdrawals prompted Standard & Poor's to lower Refco's subordinated debt rating to CCC from B-. In doing so S&P raised the specter of regulators standing between the company and Refco's creditors.

"These guys are toast," one trader said late Thursday morning, and added that paper which had been trading in a 101 context before the news on Bennett and had hovered in the low 90s late Wednesday, had descended to 86.00 bid, 88.00 offered by lunch time.

Another trader, mid-afternoon, remarked that the company's term loan was trading off the distressed desk, and spotted the company's term loan B at 57 bid, 60 offered.

"People are pulling business," the trader said.

"The same people who are financing these guys are also giving them the business."

Meanwhile a leveraged loan investor remarked that regulators "can more or less take the business away, and then you don't have any collateral as a lender.

"I was surprised yesterday when the loan was falling through the 90s," the source added,

"Lenders clearly wanted to get out, which is something you have not seen in the bank loan market in the past few years."

The buy-sider said that the price plunge in Refco paper at first seemed to be an over-reaction.

"The guy [Bennett] paid back the money. They have real customers and do real business.

"You had to wonder 'Why is everybody acting like this could just disappear?'

"I guess we found out today, with the unregulated business having insufficient capital to continue."

The investor summarized that in circumstances of "systematic fraud," the company "becomes a black box, so that nobody has a justification to hold it."

A market source, meanwhile, said that at the lows the Refco term loan had traded down by as much as 30 points on the day.

Spillover

Specifying that Refco remained the market's focus throughout the Thursday session that was thinned, in terms of trading volume, by the Yom Kippur holiday, traders did see the negative sentiment spilling over somewhat.

"It has put a negative bias on the entire market," one said, but quickly added that there are other stories out there.

Two traders saw the upsized Affinion Group $860 million seven-year term loan B trade lower.

One spotted it 98.25 bid, 99.50 offered, and said that the paper had no support.

Another said Affinion was lower and spotted it at 98.875 bid, 99.25 offered.

Affinion's term loan B has been steadily slipping since it broke for trading on Thursday of last week at round the par ¼ bid, par ½ offered context, proceeded to trade down on Friday to the 99 5/8 bid, par area and declining ever since.

The weak performance has been blamed on technicals - the loan was increased during syndication to $860 million from $760 million after the company decided to drastically reduce its bond offering.

Affinion is a Norwalk, Conn., direct marketer of membership clubs and insurance products.

Given that Affinion truncated its junk bond deal in favor of the friendlier environs of the leveraged loan market, Prospect News asked this trader whether other recent deals that had seen a similar exodus from junk to the loan market were also coming under pressure.

The answer was "No."

The trader said that The Neiman Marcus Group Inc.'s term loan provides at least one exception.

The company downsized its junk to $1.2 billion from $2.175 billion, and upsized the loan proportionally.

"It's still trading above par," the trader said.

"Affinion is its own story."

However, the trader added, the junk-to-loan trail can accommodate only so much traffic before something starts to give.

"Institutional investors will draw the line in the bank market when the leverage is too high or the market gets a little choppier," the trader asserted

"And the bank market is getting a little choppier."

Also its own story is the recently priced loan of power generator LSP-Kendall Energy LLC, which was also off on Thursday.

One trader had it straddling par at 99.875 bid, 100.125 offered.

A buy-side source pointed out that last week the company flexed pricing on its eight-year term loan by 75 basis points to Libor plus 200 from Libor plus 275, and added that in doing so the company "didn't understand their lender base, so they ended up with more flippers than they expected."

Delphi noise

Elsewhere an investor said that the news on bankrupt Delphi Corp., which is also wreaking havoc in the junk market, does not seem to be having a direct effect on the loan market.

"Delphi loans are staying above par," the investor said, adding that "everybody believes they are getting paid back."

However, the source added, the "follow-on" effects might be interesting.

"Last night S&P said that 20% of second lien loans are in the automotive sector," the investor said. "That's the only sector that is large in second liens. Everything else is well diversified.

"It's an open question whether there are going to be negative follow-on effect on other auto parts suppliers, especially if Delphi workers go on strike in December."

Later in the afternoon a trader, hearing this color, allowed that it may not be that far fetched.

The trader commented that earlier in the week some of General Motors Corp.'s revolver paper had traded around 89, and said that the market was seeing "a little bit on the paper of auto parts-maker Metaldyne Corp., which the trader marked down, at 99.00 bid.

HCA funds $2.5 billion stock buy-back

As to new business heard headed toward the market on Thursday HCA Inc. said it has obtained a commitment for a $1 billion short-term loan and a $2.425 billion facility as part of its planned tender offer for up to $2.5 billion of common stock.

To fund the buyback, HCA will use $500 million of cash on hand and $1 billion of borrowings under its existing revolving credit facility.

The $1 billion short-term facility is from JPMorgan and Merrill Lynch as joint lead arrangers and joint bookrunners. JPMorgan Chase Bank, NA will be administrative agent and Merrill Lynch Capital Corp. will be syndication agent (see related story in this issue). The $2.425 billion will only be used if the company is unable to amend its existing facility.

NextMedia bank meeting Tuesday

Elsewhere Denver-based billboard company NextMedia Operating Inc. will hold a bank meeting Tuesday for its $390 million credit facility via Goldman Sachs and GE Capital.

The facility is comprised of a $240 million term loan B (B2/B) talked at Libor plus 225 basis points, in addition to a $50 million revolver and a $100 million second-lien loan.

Proceeds will be used to fund the tender for $200 million of the company's 10¾% senior subordinated notes due 2011, to refinance a revolver and fund the purchase of undisclosed assets.

Ball closes on loan

Finally on Thursday Ball Corp. said it closed on its new multi-currency senior secured credit facility (Ba1/BB+/BB+).

The financing includes a $715 million multi-currency revolver at Libor plus 87.5 basis points, a $35 million Canadian revolver at Libor plus 87.5 basis points, an £85 million term loan A at Libor plus 87.5 basis points, a €350 million term loan B at Libor plus 87.5 basis points, and a C$175 million term loan C at Libor plus 87.5 basis points.

Deutsche Bank Securities Inc. and JPMorgan Securities Inc. were leads.

The Broomfield, Colo., supplier of metal and plastic packaging products, primarily for the beverage and food industries, used proceeds to refinance its existing senior secured credit facility.

The company added that the new loan will extend its debt maturities at lower interest rate spreads and provide additional borrowing capacity and more flexibility for future growth.

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