Peabody Energy and Dole Foods downsize loans for upsized bond offerings

By Sara Rosenberg

New York, March 17 - Peabody Energy and Dole Foods Co. Inc. both decreased their term loan B tranches after increasing the size of concurrent bond offerings.

Behind the recent trend of companies downsizing credit facilities in favor of upsizing bond offerings are market technicals.

Both the bank loan market and the high-yield bond market are currently enjoying good fundamentals but junk bonds have seen week after week of mutual fund cash inflows and a tightening of spreads while the bank market has not seen the inflows or the tightening, a market professional explained.

In support of this argument, a Bank of America Securities research report stated: "Market technicals appear to be at an interesting crossroad. On the one hand, the high yield bond market is swimming in cash, with large bond mutual fund inflows (two weeks at over $1 billion in the past three) as investors retreat from the equity markets.

"In times past, this might have translated into higher loan demand, as institutional term loans were repaid with bond proceeds and investors looked to reinvest cash. In today's market, however, this is not happening. While approximately 45% of YTD high yield bond issuance represents refinancings, only $291 million (1.5% of total YTD high yield bond issuance) has repaid institutional term loans. CLO issuance continues at a slow pace, while prime rate loan funds continue to bleed cash.

"The bottom line: loan supply is weakening, but demand is timid as well. Stay tuned and expect some volatility."

Peabody Energy reduced the size of its seven-year term loan B to $450 million from $600 million, as the company priced an upsized bond deal of $650 million 6 7/8% senior notes due 2013 Friday. The note offering had been planned at $500 million.

Furthermore, the bank syndicate went out to potential lenders with an addition to the credit facility's structure. According to a syndicate source, a pricing grid is being added to the term loan B, under which the interest on the institutional tranche would drop to Libor plus 225 basis points from the current rate of Libor plus 250 basis points if total leverage falls below 2.75 times. However, there is no step up in the interest rate should leverage move higher than the current number of 3.2 times, the syndicate source added.

The company's proposed credit facility also contains a $600 million five-year revolver with an interest rate of Libor plus 200 basis points.

Commitments for the credit facility were due on Monday and the loan is expected to close on Friday, the syndicate source said.

Lehman Brothers and Wachovia are syndication agents, Fleet is the administrative agent and Morgan Stanley documentation agent on the credit facility.

A portion of the proceeds from the new credit facility and the senior notes offering will be used to fund the repurchase of the existing 8 7/8% senior notes and 9 5/8% senior subordinated notes, which the St. Louis coal company is seeking to acquire through a tender offer commenced on Feb. 27.

Dole Foods reduced the size of its term loan B on Monday by $25 million to $575 million following the pricing of a $475 million bond offering, upsized from $450 million, according to a syndicate source.

Originally the financing package that is being used to help fund the buyout of Dole by DHM Acquisition Co., which is wholly owned by David H. Murdock, contained $75 million PIK notes at the holding company level. However, since there was so demand for the bond offering, the $75 million PIKs were removed and rolled into the cash pay notes, originally sized at $375 million. A further $25 million was taken from the bank deal, the syndicate source explained.

The term loan B matures in 5½ years and has an interest rate of Libor plus 375 basis points. A Bermuda based subsidiary of Dole is the borrower on this tranche. In addition to the B loan, there is a $250 million five-year term loan A with an interest rate of Libor plus 325 basis points has a U.S. subsidiary as borrower and a $300 million five-year revolver (in dollars and euros) with an interest rate of Libor plus 325 basis points.

Deutsche Bank, Scotia Capital and Bank of America are the lead banks on the loan.

Dole is a Westlake Village, Calif. producer and marketer of fresh fruit, vegetables and flowers.

As another example, AmeriPath Inc. reduced the size of its credit facility last week, again due to an increased bond offering. Specifically, the seven-year term loan B was reduced to $225 million from $290 million and pricing on the tranche was flexed up to Libor plus 450 basis points from Libor plus 400 basis points. The six-year revolver was reduced to $65 million from $75 million. Pricing on the revolver remained at Libor plus 350 basis points.

The company upsized its offering of 10-year senior subordinated notes to yield 10½% to $275 million from a planned amount of $210 million.

Credit Suisse First Boston and Deutsche Bank are the lead banks on the credit facility. Proceeds of the facility and notes will be used to help fund the leveraged buyout of AmeriPath by Welsh, Carson, Anderson & Stowe.

AmeriPath is a Riviera Beach, Fla. provider of cancer diagnostics, genomic, and related information services.

Meanwhile, Moore Corp. Ltd. closed on its $850 million credit facility (Ba2/BB+), consisting of a $500 million seven-year term loan B with an interest rate of Libor plus 275 basis points and a $350 million five-year revolver with an interest rate of Libor plus 250 basis points.

Deutsche Bank, Salomon Smith Barney and Morgan Stanley were the lead banks on the deal.

Proceeds from the credit facility, combined with proceeds from the issuance of $403 million of 7 7/8% senior notes due 2011, will be used to help fund the acquisition of Wallace Computer Services Inc. and refinance substantially all of the debt of Moore and Wallace. Currently, proceeds from both financing transactions have been deposited into separate escrow accounts pending completion of the Wallace acquisition, according to a news release.

Moore is a Mississauga, Ont. manager and distributor of print information.

Meanwhile distressed loan trading was somewhat muted Monday although activity was seen in Adelphia Communications Corp., Armstrong World Industries Inc. and Federal Mogul Corp.

Adelphia Communications continued to trudge a few points higher Monday after a judge granted the company more time to come up with a reorganization plan.

The old Century term loan debt was bid at 74/76 offered, up from 72 bid/74 offered on Friday. The term loan new debt was seen bid at 73/75 offered compared to 70 bid/72 offered Friday.

Adelphia was given until June 20 to submit its reorganization plan and until Aug. 21 to solicit votes from creditors. Both deadlines could be pushed back again if the company needs more time to reach a consensus with creditors.

Armstrong World's bank debt was quoted at 44 bid/46 offered, down a point from 45 bid/47 offered Friday. The Lancaster, Pa.-based manufacturer of floors, ceilings and cabinets filed its disclosure statement with the court Friday. The filings include exhibits that describe how asbestos personal injury claims will be handled by the asbestos personal injury trust.

Moving in the other direction, "there was some pressure on auto names today," said a distressed debt trader.

Federal Mogul's bank debt was seen bid at 71 and offered at 73, down from 73 bid/75 offered on Friday. Federal Mogul filed its reorganization plan with the U.S. Bankruptcy Court in Delaware in its Chapter 11 case on March 7, revealing, among other things, that the company will have in the region of $1.6 billion in term loans after its emergence from bankruptcy.

Following suit, Hayes-Lemmerz' bank debt was quoted at the "mid-50s", after at a closing price of 58 bid/60 offered Friday.

"There's a lot of cash floating around the marketplace," said one distressed debt trader. "But as far as activity goes, it's dried up. The last couple of weeks we haven't seen much because of the war talk."

(Carlise Newman contributed to this report.)

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