Rite Aid's $2 billion loan has some unenthused due to large size, B1 rating and low price talk

By Sara Rosenberg

New York, April 21 - The largest deal that is expected to hit the market this week, Rite Aid Corp.'s $2 billion credit facility (B1), may encounter some investor hesitancy during the syndication process because of its large size, fairly low rating and the aggressive price talk that is floating around the marketplace, according to market sources.

The loan is anticipated to consist of an $850 million revolver with price talk in the area of Libor plus 350 basis points and a $1.15 billion term loan with price talk of Libor plus 375 basis points, sources said, adding that details have not firmed up completely as of yet. Both tranches are due in April 2008.

"It's going to be an interesting deal to watch," one market professional told Prospect News. "It doesn't seem like it's going to fly out of the box."

"That's a big B loan for a B1," a second professional remarked in explanation of why there may some investor hesitancy towards the deal. "That may be the largest term B at B1 that's ever been attempted.

"The other argument is that most of the single B's come around 400 over," he continued. "It doesn't surprise me that they're trying to come in on the low end. You know how this works. They price at 375 and then feel the market out and if need be flex up to 400 or 425.

"Given the size, the rating and the pricing it doesn't surprise me that people aren't getting all worked up over the deal," the professional concluded.

A bank meeting for the deal is expected to take place on Wednesday. Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. are joint lead arrangers on the deal.

Prior to the launch, the syndicate has been pulling in some core relationship investors, sources previously said.

Proceeds will be used to repay the company's existing $1.37 billion senior secured credit facility due March 2005 and its $107 million synthetic lease due March 2005 and to replace the existing $500 million revolver, which is undrawn.

The Camp Hill, Pa. retail drugstore chain's loan is expected to close by the end of May.

As for the secondary, Calpine Corp's bank debt was quoted at the 94½ to 95 level on Monday, slightly higher from Thursday's level of 94, according to a trader. The paper has recently been performing relatively well on market technicals - the bid has been creeping up to meet the offer - and on the improved tone in the energy sector in general due to many companies' successful completion of bank debt refinancings.

"I think most paper changing hands are from trading desks and funds," the trader said. "Not from existing lenders." He explained that it is smaller chunks of the paper are trading.

Calpine is a San Jose, Calif. independent power operator.

Charter Communications Inc.'s term loan B was slightly lower on Monday with a 90 1/8 bid, 91¾ offer, according to a trader. The loan, which was pushed higher after the company accepted Paul Allen's proposal for a $300 million credit facility, was quoted around 90½ on Thursday.

"It's back with a 9 handle, which is pretty amazing," the trader said. "I think it will stay in the low 90's. I don't see it moving much higher than that.

"I think CLOs funding up helped move it up. It's very hard to trade on fundamentals. You have to trade on technicals," the trader said, adding that Charter will probably have a tough time with covenant compliance in the future.

Bids on Mirant Corp's bank debt were said to be "creeping up" on Monday, according to a trader, with the bid being quoted in the 78, 79 range. Previously, indications on the bank paper were around 72, 73.

"With no offer out there the bid had been creeping up," the trader said. "I think there are like four or five funds looking at this right now."

Possibly also influencing the bid was the emergence of news on Monday that the company obtained a waiver from its lenders regarding potential events of default in order to allow the company to focus on refinancing its debt.

The Atlanta energy company is presently working on refinancing its debt with the nearest due borrowings being the $1.125 billion credit facility maturing in mid-July.

In follow-up news, Walter Industries Inc. closed on its new $500 million credit facility (Ba2/BB), consisting of a $245 million senior secured revolver due April 17, 2008 and a $255 million senior secured term loan due April 17, 2010 with an interest rate of Libor plus 425 basis points. Banc of America Securities, LLC and SunTrust Capital Markets acted as co-lead arrangers on the deal.

Security for the new loan is the stock of the company's subsidiaries and certain assets, excluding real property.

The new facility replaces the Tampa, Fla. diversified company's existing $475 million bank financing, which was scheduled to mature on Oct. 15, 2003, and will be used to refinance the outstanding bank debt and for working capital and general corporate purposes.

"We are very pleased to complete this facility at our desired level of credit availability and appreciate the efforts put forth by our arrangers and lenders in very difficult market conditions," said Don DeFosset, chairman and chief executive officer, in a news release. "While the new debt costs are higher than our existing facility, we have extended our maturities substantially, reduced our amortization requirements and replenished our ample liquidity so we can continue to focus on our strategic initiatives."

Tesoro Petroleum Corp. closed on its $850 million credit facility (Ba3/ /BB-) as part of its refinancing plan, which also included the issuance of $375 million 8% senior secured notes. The loan consists of a $200 million term loan due 2008 with an interest rate of Libor plus 550 basis points via Goldman Sachs and a $650 million credit facility with a $400 million letter of credit sub-limit via Bank One, with Goldman Sachs as syndication agent. The $650 million facility contains a $500 million revolver with an interest rate of Libor plus 325 basis points and $150 million term loan, both secured by inventory, accounts receivable and cash.

Final terms on the $650 million credit facility will be available after syndication is complete, which is expected to occur next month, a news release said. At close, borrowings under this facility were $321 million.

The $200 million term loan, which is secured by the company's refineries, pipelines and terminals, has a one-year no-call period and then it is callable at 103 in year two, 101 in year three and par thereafter.

"I am very pleased with the strong market demand we received for this refinancing," said Bruce A. Smith, chairman, president and chief executive officer, in the release. "The transaction was over-subscribed, we achieved lower interest rates than expected and less restrictive financial covenants."

The bank facility, combined with proceeds from the note sale, were used to replace the company's previous $1.275 billion senior secured credit facility.

"This refinancing lowers our expected cash interest expense and will also allow us to pay down debt in an expedited manner, when compared to our old senior secured facility, due to the increased sub-limit for letters of credit. The increased capacity to issue letters of credit should enable us to lower our net working capital by more than $100 million and apply the funds to debt retirement - during the second quarter," added Smith, in the release.

Tesoro is a San Antonio, Tex. refiner and marketer of petroleum products.

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