First Data launches $15 billion; LCDX up on week; Archstone-Smith sets Wednesday meeting

By Paul A. Harris

St. Louis, Sept. 14 - The First Data Corp. deal, which the leverage markets have been anticipating for months, launched on Friday, with $13 billion of term loans and a $2 billion revolver.

Elsewhere the primary market heard news that Archstone-Smith will hold a bank meeting on Wednesday for a new credit facility backing the buyout of the company.

Meanwhile a bank loan trader said that loan paper, in general, was a quarter of a point better over the past week, and added that during the course of the week the bank loan tracking LCDX index was up to 96 bid from 95¼ bid.

The LCDX closed Friday at 95.85 bid, 95.95 offered, up slightly, the trader said, adding that the session had been extremely quiet with the Rosh Hashanah holiday thinning the ranks in the capital markets.

"The big news is the First Data deal," the trader asserted.

Meanwhile a bank loan portfolio manager said that the market felt stronger over the past two or three days, and added that investors are beginning to bid things up a little bit.

"There are some good values out there," the buy-sider said.

"The question is, where is the demand going to come from as long as the CLO bid is on the sidelines?"

First Data launches

First Data will hold a bank meeting on Monday afternoon for its $15 billion credit facility (Ba3/BB-).

The tranches include a $2 billion six-year revolver at Libor plus 275 basis points (bps) with a 50 bps undrawn fee, a $5 billion seven-year senior secured term loan B-1 at Libor plus 275 bps, prepayable at par, a $5 billion seven-year term loan B-2 at Libor plus 275 bps, callable at 103, 102, 101 (including $1 billion equivalent euro-denominated sub-tranche) and a $3 billion seven-year senior secured term loan B-3 at Libor plus 275 bps, non-callable for 3¼ years.

All tranches are talked at an original issue discount of 96.00.

Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, Lehman Brothers and Merrill Lynch are the bookrunners.

Proceeds will be used to help fund the LBO by Kohlberg Kravis Roberts & Co.

The deal includes a senior leverage covenant, a concession, market sources said, which the bookrunners won in late negotiations with sponsor KKR.

Loose but significant

With the First Data deal expected to be a bellwether transaction that could point the way for the massive forward calendar of LBO deals, observers throughout the capital markets have been keen to know the terms.

When rumors spread that KKR had conceded to a leverage covenant, assertions were heard that the concession could not be a very meaningful because the underwriters had already been committed to the financing in its original form.

"Everybody knows the banks are over a barrel," said a bank loan portfolio manager during a Friday conversation with Prospect News.

However having said it, this buy-sider contended that the inclusion of a leverage covenant is certainly a meaningful development.

"Without that covenant we wouldn't even look," the source said.

The investor added that the inclusion of the covenant, which is expected to grant the company a wide degree of latitude with respect to leverage, transforms the First Data bank deal from covenant lite to "covenant-loose."

"The covenant itself may be 'covenant-loose,'" said the investor, "but a lot of people with a newer CLO, with S&P's recovery rating methodology, want to minimize covenant-lite loans.

"And there are also a lot of investors in CLOs who regard the percentage of covenant lites as a crucial factor; they don't want too many of them.

"And since CLOs have been such a large portion of the market it's kind of important."

This mutual fund portfolio manager added that should the CLO market come back in four months or six months, covenant lite loans will be an important issue.

"If you intend to buy loans at 94 or 95, that are most likely to go back to par in a market that gets its head on straight, you're not going to buy covenant lite loans," the source asserted.

"So it's important to put in a covenant just so that you can tell investors that the loan is not covenant lite."

Primary will return

This investor also asserted that said that even in the absence of a regeneration of the CLO market, the long-dormant bank loan primary market is bound to resurface.

With the new issue supply more or less choked off, there is steady amortization, said the source who reckoned that if you assume a three-year average life on a loan then a third of the market pays off every year, in addition to the fact that coupon payments keep coming in.

"That cash will have to go somewhere, and it will either go into the secondary market or into a primary market where prices are reflective of where secondary issues are trading," the investor said.

"So the primary market will recover without CLOs.

"It's just going to take a while."

Archstone bank meeting Wednesday

In addition to the First Data news, the loan market heard Friday that Archstone-Smith will hold a bank meeting on Wednesday for a new credit facility backing the buyout of the company by Tishman Speyer Properties, a deal valued at $22 billion, including assumed debt.

The size and tranching of the credit facility remain to be determined.

Lehman Brothers and Bank of America are leading the deal.

The transaction is expected to include a $5.1 billion equity contribution.

Expecting a cut

The preponderance of leveraged markets sources who spoke to Prospect News on Friday expect the Federal Reserve's Federal Open Market Committee to cut Fed Funds rate by 50 basis points to 4.75% from 5.25%, where the rate has sat unchanged since late June 2006.

A hedge fund manager said that anything less than 50 basis points, in conjunction with "accommodative language" meant to assure the markets that the Fed will be prepared to take further action if necessary, is apt to sour the markets.

Meanwhile the mutual fund bank loan portfolio manager, who let the word "recession" slip during the Friday telephone conversation with Prospect News, believes that the most likely scenario is that the Fed trims the rate by 25 basis points to 5% even.

This investor also believed that the mood of the credit markets will hinge upon the statement that emerges from the Tuesday meeting.

When Prospect News asked whether this source anticipates that the U.S. economy will slip into a recession in the months to come, the investor said "We're not calling for a recession.

"But we are more or less with the consensus that the housing market is going to get weaker, the consumer is a question mark, and the Fed is going to be cutting.

"Those things say that people are going to be increasingly scared of a recession, and will probably trade securities in that context."

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