New deals pricing below 300 basis points have some investors worried

By Sara Rosenberg

New York, Feb. 28 - Following the launch of such deals as Constellation Brands Inc. and Moore Corp. this past week and looking ahead at Peabody Energy's deal set for the week of March 3, some market participants have been expressing concern over the new trend of pricing deals with an interest rate below Libor plus 300 basis points.

"The theme of the week is people are trying to draw down coupons. It makes me a little nervous," said one market participant. "Constellation - I like that deal but I don't like the coupon. Peabody - I like that deal but I don't like the coupon. Anything below 300, I'm a little nervous on. It may make sense for a portfolio but not for a trader."

According to the market participant, once these names hit the secondary bank loan market they may find support for a while, possibly breaking at par levels, but the enthusiasm may not last long leading to a potential drop in secondary levels.

Constellation Brands' $1.6 billion credit facility (Ba1) that launched Thursday consists of an $800 million 51/2-year term loan B with an interest rate of Libor plus 275 basis points, a $400 million five-year term loan A with an interest rate of Libor plus 225 basis points and a $400 million five-year revolver with an interest rate of Libor plus 225 basis points. There is no upfront fee for the institutional tranche. JPMorgan, Salomon Smith Barney and UBS Warburg are the lead banks on the deal.

Constellation is a Fairport, N.Y. producer and marketer of alcoholic beverages.

Moore Corp. launched its $850 million credit facility on Wednesday 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 are the lead banks on the deal.

Following the bank meeting, one fund manager admitted that although the deal is likely to get done based on people liking the company, the acquisition of Wallace Computer Services Inc. and the management team, he was not thrilled with the coupon on the institutional tranche and the lack of upfront fees, especially since the company operates in a market segment that is not doing all that great right now.

Moore is a Mississauga, Ont. manager and distributor of print information. With companies focusing on lowering expenditures in a currently uncertain economic environment, not a lot of money is going towards advertising and commercial printing, the fund manager had explained.

Peabody Energy's $1.2 billion credit facility, which is scheduled to launch on Tuesday, consists of a $600 million five-year revolver with an interest rate of Libor plus 200 basis points and a $600 million seven-year term loan B with an interest rate of Libor plus 250 basis points. Fleet is the administrative agent, Wachovia and Lehman Brothers are the syndication agents, and Morgan Stanley is the documentation agent on the St. Louis coal company's deal.

The loan is expected to be rated at Ba1/BB+, according to market sources.

"Things got done at 275 so now they're trying 250," the market participant said in regards to the upcoming Peabody deal. "We'll see how it plays out."

"You're talking about guys who have a history of paying off B loans," a trader said in support of what some others have been calling light pricing on the Peabody deal.

In follow-up news, Central Parking Corp.'s $350 million credit facility was expected to close by the end of the day on Friday, according to a company spokesman. The company anticipates putting out a release on Monday with further details on the transaction.

The facility, which underwent some scrutiny after news emerged that the company's chief financial officer resigned and that earnings guidance is not being provided for the second quarter or the balance of fiscal 2003, managed to get done after the collateral and covenant packages were reworked and the upfront fee was altered, according to market sources.

"Instead of stock security, there's tight asset security now," a market professional explained. "There's also a tighter covenant package. And they're giving 25 basis points upfront instead of par. Pricing stayed at Libor plus 325."

The loan consists of a $175 million five-year revolver with an interest rate of Libor plus 275 basis points and a $175 million seven-year term loan B with an interest rate of Libor plus 325 basis points.

As was previously reported by Prospect News, the deal was allocated and broke for trading on Thursday at par 3/8.

Bank of America is the lead bank on the Nashville parking facility operator's new credit facility.

International Transmission Co. closed on its new $440 million credit facility Friday in conjunction with the closing of the sale of the company to affiliates of Kohlberg Kravis Roberts & Co. and Trimaran Capital Partners LLC for approximately $610 million cash. CIBC was the lead bank on the deal and Union Bank of California and SocGen were co-syndication agents

The loan consists of a $240 million six-year term loan B with an interest rate of Libor plus 375 basis points at the holding company and a $185 million six-year term loan B with an interest rate of Libor plus 250 basis points and a $15 million three-year revolver with an interest rate of Libor plus 250 basis points at the operating company.

"We're pleased the sale has closed," said Anthony F. Earley Jr., DTE Energy chairman and chief executive officer, in a news release. "The sale of ITC is consistent with our corporate strategy and with FERC's policy to promote an independent transmission grid.

"The sale of ITC also demonstrates DTE Energy's continued commitment to restructuring the electric industry in Michigan and to further strengthen the company's balance sheet," Earley added.

International Transmission is the Detroit-based transmission business subsidiary of DTE Energy.

Meanwhile in the secondary, Sears, Roebuck and Co. was noticed by some leveraged loan players as the bank debt traded at around 94½ on Friday, down from 99.9 when it broke two weeks ago, according to a trader.

"The deal was not fully subscribed and not well sold," the trader said of the bank debt's southward movement. Also, playing a part in the drop was the downgrade of the corporate credit rating to BBB+ from A- on Friday by Standard & Poor's.

In conjunction with the downgrade, S&P assigned a BBB+ rating to the company's new $3.5 billion credit facility.

Sears is a Hoffman Estates, Ill. North American retailer.

Also Friday Citgo Petroleum Corp. closed on its new $200 million three-year term loan.

Citgo's term loan has an interest rate of Libor plus 500 basis points and a Libor floor of 3%, market sources previously told Prospect News. Credit Suisse First Boston is the lead bank on the deal.

Security is Citgo's 15.8% equity interest in Colonial Pipeline and Citgo's 6.8% equity interest in Explorer Pipeline.

The Tulsa, Okla. refining company said the new loan was one of three measures to improve its liquidity. It also sold $550 million of senior unsecured notes and obtained a $200 million accounts receivable facility.

"These transactions are significant steps toward strengthening Citgo's ongoing liquidity during a period when refining margins could be volatile and there are significant regulatory capital expenditures being forced on the industry," said president and chief executive officer Oswaldo Contreras in a news release. "In addition, in February 2003, Citgo received 100% of its contract crude oil volumes from Petroleos de Venezuela, SA and has received confirmation from PDVSA that it expects to deliver the full contract volume during March 2003."

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