Primary market deals see higher spreads and demand for specific provisions

By Sara Rosenberg

New York, Nov. 18 - New deals in the primary bank loan market have seen some specific features added in order to make them more attractive to investors and lenders, including higher spreads, higher upfront fees, Libor floors, call protection, prepayment penalties and amortization requirements.

Overall, "institutional spreads have gotten a lot wider" over the past few weeks, a market professional said, quoting PMD data showing the most recent four-week moving average of 400 basis points for BB rated new issues (the pro rata four week moving average was 313 basis points).

This change in average pricing was also noted in a Bank of America research report, which stated, "400 bps is the new L+ 300 bps. Average BB/BB- institutional spreads have risen above L+ 400 bps for the first time since 4Q01. The pricing pendulum has definitely swung into the investors' court."

Upfront fees have been ticking up, Libor floors have been added to some deals and, there's call protection on a couple of deal, the professional remarked in reference to other trends that he has noticed on recent new deals.

"Over the past two weeks, Libor floors and prepayment penalties have quickly become the toast of the town for investors: Four deals have added Libor floors (CenterPoint Energy - 3.0%, Constar International - 2.0%, National Waterworks - 2.5% and Sierra Pacific - 3.0%)," the Bank of America report noted. "And eight have added prepayment penalties (Bell ActiMedia, CenterPoint Energy, Constar International, Dex Media East, Genesis Health, National Waterworks, R.H. Donnelley and Tucson Electric Power)."

Furthermore, according to the research report, term loan amortization requirements are being sought after.

"While the first half of 2002 saw many revolver/Term Loan B structures (often driven by strong demand technicals), we are now seeing an emerging demand for term loan amortization as a credit enhancement (recently Rexnord was launched and DigitalNet and National Waterworks are adding contractual TLB amortization)," the Bank of America report said.

Recent changes in the shape of primary deals stem from low interest rates and a change in the demand/supply factor, one fund manager explained.

"They all sound so wonderful," the fund manager said about the higher spreads and structural modifications. "But, I think they're a function of the reluctance of senior lenders to be the low cost lender. With Libor at like 1.3%, if you have a 450 spread, you're lending at less than 6%. [That's a] much lower interest rate than the company would get if it went out to the high yield market.

"It doesn't make much sense to lend at like 6% right now. I think that's why managers are holding back on new deals. If you're making 6%, in a worst-case scenario if the company files, it's 3½ years of collecting interest to break even. [People] are looking for any way to increase the absolute return.

"[Also], a lot of prime fund managers are being hit with redemptions [now]. [They] don't have as much cash [so there's] a lot more discipline among managers. If anything it's a challenging environment to generate cash to buy new issues. The lack of new CLOs combined with redemptions has changed the demand side in bank loans. Either a deal is really creditworthy and people pile on or the deal has to be super attractive," the fund manager concluded.

In follow-up primary news, Tucson Electric Power Co.'s $200 million term loan B was flexed up again, this time to a spread of Libor plus 550 basis points from Libor plus 400 basis points, according to market sources. Previously, the deal was flexed up from Libor plus 350 basis points.

The spread on the $60 million revolver and the $140 million letter of credit facility is Libor plus 400 basis points, up from the original pricing of Libor plus 300 basis points.

The Tucson, Ariz. electric company's $400 million credit facility (Ba2/BB+) is being led by Credit Suisse First Boston and TD Securities.

Syndication of R.H. Donnelley's $1.55 billion credit facility (Ba3/BB) "should be finished up soon" since the "loan is doing nicely", a syndicate source told Prospect News. The company's bonds are expected to price late this week with the senior debt being talked in the 9% to 9¼% range and the subordinated debt being talked in the 11% to 11¼% range.

The credit facility consists of a $125 million six-year revolver with an interest rate of Libor plus 350 basis points, a $575 million six-year term A with an interest rate of Libor plus 350 basis points and an $850 million 71/2-year term loan B with an interest rate of Libor plus 400 basis points.

Bear Stearns, Deutsche and Salomon Smith Barney are the lead banks on the deal that will be used to help fund the acquisition of Sprint Corp.'s directory publishing business and refinance debt.

R.H. Donnelley is a Purchase, N.Y. marketer of yellow pages advertising.

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