FairPoint up to $2.1 billion credit facility to be led by six banks; launch expected late 2007

By Sara Rosenberg

New York, March 27 - FairPoint Communications Inc.'s up to $2.1 billion credit facility will be led by six banks - Lehman Brothers, Morgan Stanley, Bank of America, Deutsche Bank, Wachovia and Merrill Lynch, with Lehman the left lead, company officials said at the Lehman Brothers 2007 High Yield Bond and Syndicated Loan Conference.

The credit facility that is being obtained in connection with the company's planned merger with Verizon Communications Inc.'s wireline operations in Maine, New Hampshire and Vermont.

Being that the merger is expected to be completed in January, syndication of the credit facility is expected to begin very late this year, and the same goes for the marketing of the company's high-yield bonds, company officials said at the conference.

The company said that the merger with the wireline operations will be funded with $1.7 billion of new debt and the issuance of 53.8 million shares of common stock to existing Verizon stockholders at an implied value of $18.88 per share, totaling $1.015 billion in equity.

"That [$1.7 billion of] debt does not currently exist because the company has not been spun off from Verizon yet," officials said at the conference.

"A portion of the debt will be in the form of the bank credit agreement, including the $2.1 billion, up to the amount of Verizon's tax basis in the assets, which we currently think will be approximately $900 million. The remainder, up to the assumed debt, will be in the form of a bond to be issued at or around the time of closing and that bond will be done in order to meet the criteria of a security.

"So the $2.1 billion that we already have commitments for, we essentially took the additional financing requirement over and above what we expect because of the possibility that Verizon's tax basis might drift up in the course of the year, so there may be a portion of that, that we may not actually use when the time comes," officials remarked.

"The actual utilization [of the new credit facility commitment] will be $600 million to refinance the existing FairPoint debt, [and] an amount equal to the excess over the basis that Verizon has in the assets up to $1.7 billion, likely to be approximately $800 million also in the bank financing, so that's $1.4 billion.

"In addition, we have $200 million in delayed-draw term facilities to allow for all of the capital expenditures that we make after closing, which will complete the system and will also allow us to, in a very short order, increase the DSL ability of the Verizon network.

"And, the remainder will be a $200 million revolving credit facility merely for purposes of liquidity," officials added at the conference.

The new revolver will have a tenor of six years and the new term loan B will have a tenor of eight years.

Covenants will include a total leverage ratio of 5.75 times in year one and 5.5 times thereafter, and an interest coverage ratio of 2.25 times.

Under the merger agreement, the wireline operations will pay a $900 million dividend to Verizon and will issue an about $800 million bond to Verizon, which Verizon may use to complete a debt-to-debt exchange.

The total transaction value for these Verizon operations is $2.715 billion.

FairPoint's shareholders will own about 40% of the combined company, while Verizon's shareholders will own about 60%.

The combined company will have a significantly stronger capital structure with a leverage ratio of about 4.1 times EBITDA at closing, compared to the current 4.5 times, and a dividend payout ratio of 60% to 70%, upon achievement of expected cost savings and synergies, compared to the current 86%.

FairPoint is a Charlotte, N.C., provider of communications services to rural communities.

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