Calpine Generating's $1.3 billion first lien term loan flexes up to Libor plus 475 basis points

By Sara Rosenberg

New York, Feb. 20 - Calpine Generating Co. LLC (previously Calpine Construction Finance Co. II LLC) increased pricing on its $1.3 billion non-recourse first priority secured institutional term loan (B+) on Friday by 50 basis points with the expectation being that this latest level will be where the deal gets done.

"They probably have the books filled at this level," a market source said explaining that, in general, before a deal is flexed up the syndicate usually knows where pricing needs to be for investors to commit because otherwise a pricing game can ensue.

The first lien term loan is now priced with an interest rate of Libor plus 475 basis points compared to original pricing of Libor plus 425 basis points.

The tranche also contains a 1.5% Libor floor, 50 basis points original issue discount, non-call of two years and two years of call premiums.

Also on Friday, price talk emerged on Calpine's non-recourse second priority secured bonds (B-), with the $525 million floating-rate tranche talked at Libor plus 725 basis points, 1.5% Libor floor, 50 basis points original issue discount and seven-year non-call, and the $525 million fixed-rate tranche talked at a coupon of 11 7/8% priced at a discount to yield 11¼%, according to a market source. Pricing on the bonds is expected to take place Tuesday.

Deutsche Bank is the left lead bank on the transaction.

Proceeds from the term loans, combined with proceeds from the notes, will be used to refinance amounts outstanding under the $2.5 billion CCFC II credit facility that matures in November. Currently there is about $2.3 billion in outstanding debt under the CCFC II facility including letters of credit.

The CCFC II revolver traded around in the bank loan market on Friday, with levels improving slightly throughout the day. The paper traded as low as 98, moved up to trade at 98 1/8 and then moved even higher to trade at 983/4, according to a trader. By late afternoon, the paper was being quoted at 98¾ bid, 99¼ offered.

Calpine's proposed credit facility also contains a new $200 million three-year revolver that will be used to complete power generation facilities that are still under construction.

The term loans and revolver will be secured, through a combination of stock pledges and direct asset liens, by Calpine Generating's power generating facilities and related assets. None of the debt will be guaranteed by Calpine Corp.

Calpine Generating is a wholly owned subsidiary of Calpine Corp., a San Jose, Calif.-based power company.

Dresser sees demand

Dresser Inc.'s proposed $100 million six-year senior unsecured term loan, which is priced with an interest rate of Libor plus 350 basis points, has been seeing "robust demand" from potential investors since launching this past Wednesday, according to a market source.

"[It's] getting a lot of inquiry. It seems like there's a lot of investor appetite for it. Got a lot of demand," the source said.

Furthermore, the $260 million senior secured term loan C, which is essentially the existing term loan B getting repriced with an interest rate of Libor plus 250 basis points compared to current pricing of Libor plus 375 basis points, is expected to get done without a hitch.

"It has to get 51% of revolving lender consent. So far it's in pretty good shape. I don't anticipate [them] having any issues on the amendment," the source added.

Commitments on both term loans are due on Wednesday, and the deal is expected to close and fund either on Friday or March 1.

Proceeds from the term loans, combined with an optional prepayment of $25 million from existing cash, will be used to refinance and repay in full approximately $382 million of outstanding term loan B debt.

The company's existing $100 million revolver will be staying in place as is.

Morgan Stanley and Credit Suisse First Boston are the lead banks on the deal.

Dresser is a Dallas designer, manufacturer and marketer of equipment for the energy industry.

Builders FirstSource

Builders FirstSource's $150 million six-year first lien term loan is oversubscribed, according to market sources. By comparison though, as of Thursday morning the $165 million 61/2-year second lien term loan was not yet fully subscribed, a fund manager said. The syndicate was unreachable prior to press time to determine whether things have changed on that front over the past day.

The first lien term loan is priced with an interest rate of Libor plus 300 basis points, and the second lien term loan is priced with an interest rate of Libor plus 600 basis points.

Builders FirstSource is just one of many companies to recently come to market with a second lien tranche as part of a larger credit facility, with the majority of these attempts at this type of financing so far proving successful.

"It's a function of many things. Default rates are low. People are a bit more comfortable. In a meltdown scenario you'll probably be okay. Leverage multiples are pretty reasonable. [There's] pretty good credit risk," a market professional said regarding the increasing appearance of second lien tranches.

"It started as rescue financings early last year. It kind of came slowly but surely into the corporate market. When markets get hot people are willing to do more aggressive things. There's a lot of hedge fund money out there. Interesting thing is that kind of everyone is buying them - CLO's, high-yield guys. CLO's and investors in general are just looking for yield. Generally, prepayment terms are better than high-yield terms.

"The difference in spread between first and second lien are coming in. It used to be around 300 basis points, now it's like 250, maybe 275. If you go into a negative credit cycle the risk premium will widen," the professional continued.

When asked why companies would bother with second lien bank debt when looking at it from an interest expense point of view, the professional responded: "People are doing full senior leverage multiples. Investors aren't buying at four times senior leverage. They do as much as they can in the first lien and then lever up with a second lien."

Builders FirstSource's $405 million senior secured credit facility (B+) also contains a $90 million five-year revolver with an interest rate of Libor plus 275 basis points.

Proceeds will be used to support JLL Partners' recapitalization of the company.

UBS is acting as sole lead arranger and administrative agent, and Bear Stearns is acting as co-arranger and syndication agent.

Builder FirstSource is a Dallas supplier of building products to professional, large-scale homebuilders.

Kinetic gets consents

Kinetic Concepts' amendment of its credit facility to reprice its $477.6 million term loan B "received well above the required number of consents" from the lending group by Thursday's due date, according to a market source.

The institutional tranche will carry an interest rate of Libor plus 225 basis points as opposed to existing pricing of Libor plus 275 basis points.

However, this lower spread does not go into effect until the company completes its previously announced initial public offering of its common stock, according to the source.

The assumed initial public offering price is $28 per share, making total proceeds from the IPO about $89.5 million after deducting underwriting discounts and commissions and estimated offering expenses, according to an S-1/A filed with the Securities and Exchange Commission on Feb. 11.

Kinetic Concepts estimated it will pay down $44.75 million of debt under its senior credit agreement with proceeds from the IPO. The company also plans to apply at least $25.75 million of the offering proceeds to the repurchase of a portion of our 7 3/8% senior subordinated notes due 2013 at a price equal to 107.375%.

Any remaining net proceeds will be used for general corporate purposes, including working capital, research and development, sales and marketing efforts and acquisitions and other strategic investments.

Morgan Stanley is the lead bank on the repricing.

Kinetic Concepts is a San Antonio, Texas, medical device company.

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