Communications & Power oversubscribed on launch date as investors pounce on new deal

By Sara Rosenberg

New York, Jan. 7 - Communications & Power Industries Inc.'s credit facility, which launched into the market via a bank meeting on Wednesday, was oversubscribed by multiple times by the end of the day.

Many reasons were given for the deal's ability to draw overwhelming investor attention including the company's overall positive performance and simple business to understand. However, one other thing that may be playing in the company's favor is the lack of new deals to hit the market so far this week.

"The bank meeting was very well attended for a small deal," a market source said. "Commitments have been flowing in pretty steadily all day.

"It's a very stable company," the source continued. "There's a nice balance between military and medical and U.S. and International. You've got a lot of visibility into their revenue stream. It's showing great growth. [The company] generates free cash flow. It's a product that's pretty easy to understand. Senior leverage is reasonable at like 1.7 times. Cypress is putting in a good amount of equity. It's a small deal, and everybody is raring to go."

"Attendance was great," a second source said. "My guess is it went fine since it's the only one that formally launched in the market this week."

Communications & Power's $130 million credit facility consists of a $90 million 61/2-year term loan B with price talk of Libor plus 350 basis points and a $40 million six-year revolver with price talk of Libor plus 300 basis points.

UBS Securities and Bear Stearns are the joint lead arrangers on the deal with UBS listed on the left. Wachovia is the documentation agent.

Proceeds will be used to help support the company's acquisition by The Cypress Group from Leonard Green & Partners LP and other investors.

The company also will be coming to market with a $125 million high-yield bond offering (B-) to help fund the leveraged buyout.

On Wednesday, Standard & Poor's assigned a B+ rating to the credit facility and a recovery rating of 2, indicating a substantial (more than 80%) recovery of principal in the event of default.

"The ratings reflect CPI's highly leveraged capital structure after its acquisition by the Cypress Group and modest scope of operations, offset somewhat by leading positions in niche markets. CPI is to be acquired by the Cypress Group for a total consideration of $315 million (including fees), which is to be financed by a $90 million term loan, $125 million subordinated notes, and $100 million of sponsor and management equity. Leverage will be high, with debt to capital over 70% and debt to EBITDA of around 4.4x," S&P said.

"The most likely default scenario for CPI is an inability to refinance, which could happen if poor operating performance or an unprofitable expansion into new markets results in a very weak financial profile at the maturity of its credit facility. Under this scenario, the distressed enterprise value, determined as a multiple of EBITDA, is not expected to be sufficient to cover a fully drawn facility, although more than 80% of principal is likely to be recovered," S&P added.

Communications & Power is a Palo Alto, Calif., developer, manufacturer and distributor of components for systems used to generate, amplify and transmit high-power/high-frequency microwave and radio frequency signals.

Secondary strong but activity slows

The secondary bank loan market remained strong on Wednesday, however, there was somewhat of a settling down as many names remained relatively unchanged on the day and trading activity tapered off compared to Monday and Tuesday's robust market.

"Yesterday was a lot stronger," a trader said. "There was a lot more noise in the morning and then it really quieted off in the afternoon."

When asked about Reliant Resources Inc. and Nextel Communications Inc. - both reported as being very active in Tuesday's market - the trader said that there was essentially no movement in levels with Reliant still quoted around the 98, 99 area and Nextel's term loan A still quoted around the 99 area.

Charter Communications Inc.'s revolver did trade slightly higher during market hours although levels remained in the same neighborhood as Tuesday's levels, according to the trader.

"It traded in the context of the 95 handle. It was quoted in the same context but it traded a little higher," the trader added.

Charter is a St. Louis-based cable company.

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