Michael Foods adds $135 million floating-rate piece, reduces proposed bond offering size

By Sara Rosenberg

New York, Nov. 3 - Michael Foods Inc. made some changes to its debt offerings that will result in changes to the company's capital structure, as a result of the addition of a senior unsecured floating-rate tranche that is expected to find a supportive audience in the bank loan market.

The company is now offering a $135 million eight-year senior unsecured floating-rate piece (B2) with price talk of Libor plus 400 to 425 basis points. The tranche will have call protection of 103 in year one, 102 in year two and 101 in year three, according to a fund manager.

The company also will offer $150 million of new senior subordinated notes with UBS, Bank of America and Deutsche acting as bookrunners.

Previously, it was expected that the company would sell $285 million of new senior subordinated notes, and there was no talk of a senior unsecured debt tranche.

"This new [unsecured] tranche is really just being carved out of the bonds and is essentially another part of the bank deal - a cheaper option for the company," a market professional said.

This change will result in leverage of 4.2 times senior debt as opposed to the previously forecasted 3.3 times senior debt, the fund manager explained. The 3.3 times senior secured debt level and the 5.2 times total debt level remain the same.

"I think it will be sucked up by the traditional bank market," the fund manager said when asked whether the unsecured piece was being aimed at hedge funds. "It's being sold off the Bank of America bank desk. There are enough CLOs with baskets for unsecured paper."

Last week, Michael Foods launched a $595 million credit facility consisting of a $100 million revolver with an interest rate of Libor plus 275 basis points and a $495 million term loan B talked at Libor plus 275 basis points.

The term loan B was a complete blowout as talk had the tranche receiving something like $800 million in commitments by the end of the launch date.

Bank of America and Deutsche Bank are the lead arrangers on the deal, including the senior unsecured piece. UBS and Deutsche are co-syndication agents with bank of America acting as administrative agent.

Proceeds from the credit facility as well as from the bond offering and unsecured floating-rate debt offering will be used to help support the company's leveraged buyout by Thomas H. Lee Partners, chairman and chief executive officer Gregg A. Ostrander and senior management from Vestar Capital Partners, Goldner Hawn Johnson & Morrison and the Michael family.

The transaction, which is expected to close by year-end, values Michael Foods at about $1.05 billion, subject to certain adjustments.

Banc of America Securities LLC was the sell side mergers and acquisition adviser to Michael Foods and Vestar. Kirkland & Ellis LLP was the legal adviser to Michael Foods and Weil, Gotshal & Manges LLP advised Thomas H. Lee in the transaction.

Michael Foods is a Minnetonka, Minn., diversified food processor and distributor of egg products, refrigerated grocery products and refrigerated potato products.

In the secondary, Charter Communications Inc.'s opco term B closed the day at 96¾ bid, 97¼ offered, compared to opening levels of 96¼ bid, 97¼ offered, according to a trader. However, following the company's earnings release, which investors viewed favorably, the paper was spurred to heights of 97¼ bid, 97¾ offered before settling back down, the trader added.

For the third quarter, revenues were $1.207 billion, up from last year's third quarter revenues of $1.166 billion, operating costs and expenses totaled $719 million, a 3% increase over the year ago quarter, income from operations totaled $117 million, an increase of $26 million, or 29%, from the $91 million reported in the third quarter a year ago. Also for the quarter, adjusted EBITDA was $488 million, a 5% increase over adjusted EBITDA of $466 million for the year ago third quarter and net income applicable to common stock was $36 million for the quarter, or 12 cents per share, including a $267 million gain recognized from a $1.9 billion debt exchange transaction completed in September, compared to a net loss of $167 million or 57 cents per share in the same period last year.

For the first nine months of 2003, revenues were $3.602 billion, an increase of $225 million, or 7%, over last year's revenues for the first three quarters of $3.377 billion, operating costs and expenses rose $121 million, or 6%, compared to the nine months ended Sept. 30, 2002, income from operations totaled $306 million, an increase of 12% from $273 million reported a year ago, and adjusted EBITDA totaled $1.443 billion, up $104 million, or 8%, compared to the year ago period. For the period, net loss applicable to common stock declined to $184 million, or a loss of 62 cents per common share, compared to a net loss of $645 million, or $2.19 per share, last year. Net cash flows from operating activities were $638 million, an increase of 22% from $522 million reported a year ago and free cash flow was $96 million compared to negative cash flow of $1.072 billion last year.

As of Sept. 30, the St. Louis cable company had $18.5 billion of outstanding debt, $135 million in cash and borrowing capacity of $735 million under its credit facilities.

The offer on Dex Media Inc.'s credit facilities backed up by about half a point or so on Monday on the heels of the company's announced plans to pay a dividend to equity holders with proceeds from a $750 million notes offering.

Previously, offers were seen in the 102 area, however, after the dividend payment news emerged, offers were being seen at 101 3/8, 101½ and 101 5/8 on both the Dex Media East LLC and the Dex Media West LLC term loan Bs, according to a trader.

"People figured now might be a good time to get out especially since the Dex East mark-to-market pricing seems to be going through. Although that was already priced in," the trader added.

Recently, Dex Media East launched a repricing of its $660 million term loan B to Libor plus 250 basis points from Libor plus 400 basis points. Under the proposed pricing terms there would also be a step down to Libor plus 225 basis points if leverage were to fall below 4.5 times.

JPMorgan, Bank of America, Deutsche Bank, Wachovia Securities and Lehman Brothers are the lead banks on the Englewood, Colo. directory publisher's deal.

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