Refco rollercoasters on scandal; Targa upsizing could be in the works; Professional Service nets orders

By Sara Rosenberg and Paul A. Harris

New York, Oct. 12 - Refco Inc.'s bank debt plunged into the low-90 context on Wednesday as controversy continued to swirl around the recently uncovered receivable scandal, but worked its way back up to the mid-90 context late in the day.

In primary doings, Targa Resources Inc. could potentially see a term loan upsizing if the company opts to reevaluate its bond offering. And, Professional Service Industries Inc. kicked off syndication on its new deal, meeting with positive investor feedback as about a quarter of the term loan was subscribed before day's end.

Refco's bank debt was incredibly active during Wednesday's session, seesawing all over the place on the Phillip R. Bennett receivable scandal, with levels dropping off to as low as 90 in the morning hours and then clawing their way back into the mid-90 area as the day progressed.

The paper was quoted at 93 bid, 96 offered by one trader and 93 bid, 95 offered by a second trader late in the afternoon. Morning lows were seen around 90 and mid-day levels were seen more around the 92 bid, 93 offered context.

Although the paper managed to steadily improve over the day, it still closed out the session down from Tuesday's levels in the 97¾ bid, 98¼ offered context, the second trader said. Prior to news of the previously undisclosed receivable, the bank debt was being quoted right around 101.

"It feels like it found a home in that area," the second trader said about the bank debt. "The bonds were like low-90s yesterday and now they're like 80, 81.

"I heard there was a lender call going on today. I think around 2 p.m. I assume it's about the situation. People (meaning company clients) may want to pull money out. There will probably be fines from the SEC. [But], I think the bank debt is fine from what I hear so people who bought it at 90 may be happy," the second trader added.

Earlier this week, Refco announced that it had discovered through an internal review an approximately $430 million receivable owed to the company by an entity controlled by Phillip R. Bennett.

And then on Wednesday, the fire was fanned some more as The Wall Street Journal reported that an investment firm controlled by Bennett paid a New Jersey hedge fund to help him hide the receivable, and other new reports emerged that Bennett was charged with alleged securities fraud.

Based on the results of an internal investigation, the company believes that the receivable consisted in major part of uncollectible historical obligations owed by unrelated third parties that arose as far back as at least 1998.

The fact that the receivable was from a company controlled by Bennett was hidden at the end of quarterly and annual reporting periods by reason of transfers to a third party customer account, Refco said.

Bennett, now ex-chief executive officer and chairman of the board of directors as he was asked to take a leave of absence once the news broke, was said to have repaid the receivable in cash, including all accrued interest.

In addition, Santo C. Maggio, president and chief executive officer of Refco Securities LLC and Refco Capital Markets Ltd., was also asked to take a leave of absence.

William M. Sexton, who recently announced his impending resignation as executive vice president and chief operating officer, will remain with the company and has been appointed as chief executive officer. Joseph J. Murphy, chief executive officer of Refco Global Futures and president of Refco LLC, has been appointed president. And, Peter McCarthy has been appointed president of Refco Securities LLC.

As a direct result of this receivable scandal, Refco determined that its financial statements for the periods ended Feb. 28, 2002, Feb. 28, 2003, Feb. 28, 2004, Feb. 28, 2005, and May 31, 2005, should no longer be relied upon.

Furthermore, the company will likely delay the filing of its 10-Q for the period ending Aug. 31 because of the current audit committee investigation.

Refco said that it has voluntarily contacted the Securities and Exchange Commission, the Commodity Futures Trading Commission, the New York Stock Exchange, and other regulators about this matter and is cooperating fully with them.

On Tuesday, in reaction to all of this controversy, Moody's Investors Service and Standard & Poor's cuts Refco's ratings, with Moody's dropping the company's senior secured credit facilities to B2 from B1 and S&P dropping the company's senior secured debt to B+ from BB-.

Refco is a New York-based diversified financial services organization.

Affinion slide continues

Affinion Group's term loan B weakened a little bit more during Wednesday's trading hours, with levels quoted at 99 bid, 99½ offered late in the day, compared to Tuesday's closing quotes of 99 3/8 bid, 99 7/8 offered, according to a trader.

"It's just heavy. Technicals," the trader said.

The bank debt just broke for trading last Thursday around the par ¼ bid, par ½ offered context, proceeded to trade down on Friday to the 99 5/8 bid, par area and has continued to grind lower ever since.

The term loan was increased during syndication to $860 million from $760 million after the company decided to drastically reduce its bond offering. At the time of the term loan upsizing, pricing on the tranche was increased to Libor plus 275 basis points from the Libor plus 225 to 250 basis points range and 101 soft call protection for one year was added.

Supposedly, there was only about $1 billion in orders for the enlarged term loan, which could explain the heaviness.

Affinion is a Norwalk, Conn., direct marketer of membership clubs and insurance products.

Targa may upsize

Rumor has it that Targa Resources may decide to bring its acquisition financing solely as a loan transaction, as opposed to using a bond component as well, since the credit facility has been well received, according to a market source.

Word is that the $1.15 billion seven-year term loan B that is talked at Libor plus 250 basis points already had over $1 billion in orders as of last week, making it easily increasable, and allowing for the $350 million notes offering to be cancelled, the source said.

However, no news of a definitive decision on the matter was obtainable prior to press time.

Targa's $2.4 billion credit facility (Ba3/B+) also contains a $250 million six-year revolver talked at Libor plus 225 basis points, a $300 million six-year synthetic letter of credit facility talked at Libor plus 225 basis points and a $700 million two-year asset sale term loan talked at Libor plus 225 basis points.

Credit Suisse First Boston, Merrill Lynch and Goldman Sachs are the lead banks on the deal, with CSFB left lead.

Proceeds from the loan will be used to help fund Targa's acquisition of Dynegy Inc.'s Midstream natural gas business for $2.35 billion.

The Midstream business, once acquired, will continue to be based in Houston and will be combined with Targa's Louisiana and Texas assets.

Completion of the acquisition, which is expected to take place in the fourth quarter, is conditioned on the expiration or termination of the Hart-Scott-Rodino waiting period and the fulfillment of other customary closing conditions.

Targa is an independent midstream energy company formed in 2003 by management and the global private equity firm Warburg Pincus.

Professional Service draws investors

Professional Service Industries launched its proposed $125 million credit facility Wednesday morning to a packed room, despite the miserable rainy New York weather, and the meeting paid off as $25 million in commitments were placed on the $100 million term loan before the day was through, according to a market source.

In addition, the $25 million revolver is already fully circled, the source added.

Both the term loan and the revolver were launched with opening price talk of Libor plus 300 basis points.

The term loan is being offered to investors at par.

Royal Bank of Scotland and General Electric Capital Corp. are the lead banks on the deal, with RBS left lead.

Proceeds from the unrated facility, along with proceeds from $45.5 million of senior subordinated notes that are already spoken for, will be used to help fund Olympus Partners' acquisition of Professional Service Industries from Bain Capital.

At close, leverage through the first-lien will be 31/2x and total leverage will be 5x.

EBITDA for the last 12 months is $30.3 million on $189 million of revenues.

Professional Service Industries is an Oakbrook Terrace, Ill., provider of environmental consulting, geotechnical engineering and construction testing services.

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