Brocade widens OID, breaks for trading; Rite Aid falls with downgrade, earnings; Goodyear dips

By Sara Rosenberg

New York, Sept. 25 - Brocade Communications Systems Inc. increased the original issue discount on its term loan on Thursday morning and then proceeded to allocate the deal and free it up for trading.

In other news, Rite Aid Corp.'s term loan was wider and softer during market hours as the company was downgraded on weak earnings, full-year guidance was lowered and management changes were announced.

Also in trading, Goodyear Tire & Rubber Co.'s second-lien term loan was weaker after the company said it was drawing down on its revolver, General Motors Corp.'s term loan slid lower and LCDX 10 actually ended the day unchanged.

Brocade came out with an investor-friendly change to the original issue discount on its term loan, gave out allocations and broke the deal for trading, with the term loan quoted in the secondary north of its revised discount price, according to traders.

Under the change, the $1.1 billion term loan was sold to lenders at an original issue discount price of 96½ as opposed to at 98 as was originally proposed, traders said.

Pricing on the term loan remained at Libor plus 400 basis points with a 3% Libor floor for 30 months, and it carries soft call protection of 102 in year one and 101 in year two.

Upon hitting the secondary market on Thursday, the term loan was quoted at 97 bid, 97½ offered and that's where it ended the day as well, traders remarked.

Earlier this week, the term loan was upsized from $1 billion as the company's bridge loan was downsized to $400 million from $500 million, and the soft call protection was added to the tranche.

According to filings with the Securities and Exchange Commission, the 12-month senior unsecured bridge loan is priced at Libor plus 700 bps with a 3% Libor floor for 30 months, and pricing will increase by an additional 50 bps at the end of each subsequent three-month period up until a pricing cap of 12.75%.

The bridge loan will either be replaced by bonds or convertibles.

Brocade's $1.225 billion five-year senior secured credit facility (Ba2/BB+) also includes a $125 million revolver priced at Libor plus 400 bps with a 3% Libor floor for 30 months and a 50 bps commitment fee.

Under the commitment letter, pricing on the revolver and the term loan would have been Libor plus 350 bps if the corporate family rating was Ba2/BB and Libor plus 400 bps if the corporate rating was lower than Ba2/BB.

Being that the corporate credit rating came out at Ba3/BB-, pricing on the deal ended up at the Libor plus 400 bps level.

Financial covenants include a maximum consolidated leverage ratio with an initial level of 4.25 times, stepping down to 2.5 times, a maximum consolidated senior secured leverage ratio with an initial level of 2.3 times, stepping down to 1.5 times, and a minimum consolidated fixed-charge coverage ratio with an initial level of 1.25 times, stepping up to 2.0 times.

Pro forma debt to EBITDA is 3.13 times and the company is targeting to have over $400 million of cash on the balance sheet post closing.

Bank of America and Morgan Stanley are the joint lead arrangers and joint bookrunners on the credit facility, with Bank of America the administrative agent and Morgan Stanley the syndication agent.

Proceeds from the credit facility and the bridge loan will be used to help fund the acquisition of Foundry Networks Inc.

Brocade is purchasing the company for a combination of $18.50 of cash plus 0.0907 shares of common stock in exchange for each share of Foundry common stock. The transaction has an aggregate purchase price of about $3 billion on a fully diluted basis.

The acquisition is expected to close in the fourth quarter, subject to approval by Foundry's stockholders, regulatory approval and certain other conditions.

A special meeting for Foundry's shareholders has been scheduled for Oct. 24.

Hart Scott Rodino and German approval have already been received for the transaction.

Brocade is a San Jose, Calif., provider of data center networking services that help organizations connect, share and manage their information in the most efficient manner. Foundry is a Santa Clara, Calif., provider of high-performance enterprise and service provider switching, routing, security and web traffic management services.

Rite Aid slides

Rite Aid's term loan levels headed lower and widened out as Moody's Investors Service downgraded the company because of the weak second-quarter numbers that were announced early on in the day. Also affecting the debt was the company's disclosure that guidance estimates were revised downwards and management changes have been made, according to traders.

The term loan was quoted at 80 bid, 90 offered, compared to Wednesday's levels of 85 bid, 92 offered, traders said.

On Thursday, Moody's cut Rite Aid's long-term ratings to Caa1 from B3 and its first-lien bank facilities to B2 from Ba3, and the ratings were placed on review for further possible downgrade.

Moody's said the review for further possible downgrade reflects Rite Aid's continued difficulties at its Eckert subsidiary, management's earnings revision, as well as the high likelihood that EBIT will be unable to cover interest for the full year ended March 2009 and that many of its debt protection measures will deteriorate further.

For the second quarter ended Aug. 30, the company reported a net loss of $222 million, or $0.27 per diluted share, compared to last year's second quarter net loss of $69.6 million, or $0.10 per diluted share.

Rite Aid said that the net loss included the expected expense of $36.2 million from an about $700 million refinancing to fund the retirement of several notes that had restricted its ability to borrow the full availability of its $1.75 billion revolving credit facility.

The loss also included expected income tax expense of $5.3 million, a decrease in adjusted EBITDA, an increase in store closing and impairment charges of $35.2 million and an increase in depreciation and amortization expense of $18.4 million.

Adjusted EBITDA for the quarter was $215.3 million, or 3.3% of revenues, compared to $261.5 million, or 4% percent of revenues, for the comparable period last year.

Revenues for the quarter were $6.5 billion versus revenues of $6.57 billion in 2007, with the 1.1% decrease attributed to a decline in sales at the Brooks Eckerd stores and the impact from closing underperforming stores and combining stores in close proximity.

"In this tough retail environment, our core stores delivered solid performance, we made significant progress building our acquired stores' front-end sales, we took steps to increase our financial flexibility and we largely completed the integration of Brooks Eckerd. We also improved our gross profit rate in spite of what has turned out to be a heavily promotional environment in pharmacy as well as front end," said Mary Sammons, chairman, president and chief executive officer, in a news release.

Also on Thursday, the company revised its fiscal 2009 guidance as a result of current sales trends, a longer-than-expected turnaround of Brooks Eckerd pharmacy sales, economists' forecasts for continued weakness in the economy, the closing of underperforming stores and planned cost reductions for the remainder of its fiscal year.

The new guidance anticipates net loss for fiscal 2009 to be between $445 million and $535 million or a loss per diluted share of $0.56 to $0.67, compared to previous guidance of a net loss of $300 million to $415 million or a loss per diluted share of $0.39 to $0.52.

Adjusted EBITDA under the new guidance is expected to be between $950 million and $1.025 billion, compared to previous guidance of $1 billion to $1.1 billion.

And sales under the new guidance are expected to be between $26 billion and $26.5 billion versus previous guidance of $26.7 billion to $27.2 billion.

In addition, the company revealed early on in the day that John T. Standley will return to Rite Aid as president and chief operating officer, and Frank G. Vitrano has been appointed to the combined role of chief financial officer and chief administrative officer.

Both Standley and Vitrano were previously at Pathmark Stores Inc., where Standley was chief executive officer and board director and Vitrano was president, chief financial officer and treasurer.

As chief operating officer, Standley is replacing Robert J. Easley, who is leaving the company to pursue other interests.

Vitrano is replacing Kevin Twomey, the previous chief financial officer, and Pierre Legault, the previous chief administrative officer, who are also leaving to pursue other opportunities.

Rite Aid is a Camp Hill, Pa.-based drugstore chain.

Goodyear inches lower

Goodyear's second-lien term loan posted some losses on Thursday as the company announced plans for a revolver draw, according to a trader.

The term loan was quoted at 84 bid, 89 offered, down from previous levels of 85 bid, 91 offered, the trader said.

"It could have been the draw or it could be the market. Market's just crappy. Cash market in general is mixed. Some thing up, some things down, some tings unchanged," the trader added.

Early in the session, Goodyear said that it plans to borrow $600 million under its U.S. revolving credit facility as a result of a temporary delay in its ability to access $360 million of cash currently invested with the Reserve Primary Fund.

The Reserve Primary Fund, which is a money market fund, has delayed the payment under an SEC order allowing an orderly disposition of its securities.

Akron, Ohio-based tire company Goodyear went on to say that the revolver borrowings will also be used to support seasonal working capital needs and to enhance its cash liquidity position.

General Motors down again

General Motors' term loan continued to grind lower on the bid side, possibly on market technicals, possibly because the company completed its revolver drawdown and possibly because the revised agreement with Delphi Corp. was approved by the bankruptcy court, according to traders.

The Detroit-based automotive company's term loan was quoted at 67 bid, 72 offered, compared to previous levels of 68½ bid, 70½ offered, traders said.

On Thursday, General Motors said in an 8-K filing with the SEC that it borrowed $3.4 billion under its $4.5 billion revolver, as it previously said it intended to do.

The term of the draw is six months.

Proceeds from the draw will be used to help the company maintain a high level of financial flexibility for its ongoing restructuring during uncertain times in the capital markets, and will also be available for the retirement of $750 million of debt maturities coming due in October, and to pay Delphi in excess of $1.2 billion as part of its reorganization efforts.

Also on Thursday, news emerged that the modified settlement and restructuring agreements with Delphi were approved in court.

Under the revised agreement, General Motors will provide Delphi with support of $10.6 billion for its emergence from Chapter 11, increased from roughly $6 billion in the January settlement.

In addition, the agreement modifies the mechanics and expands the amount of Delphi's net hourly pension liability transfer to General Motors to $3.4 billion from $1.5 billion.

Delphi's DIP term loan on Thursday was quoted by one trader as unchanged at 84 bid, 89 offered and by a second trader as higher at 86½ bid, 87½ offered, compared to 85¼ bid, 87¼ offered.

LCDX holds steady

In more trading news, LCDX 10 held at unchanged levels on Thursday even though equities were higher, according to a trader.

The index was quoted at 93.40 bid, 93.60 offered, in line with where it went out on Wednesday, the trader said.

As for stocks, Nasdaq closed up 30.89 points, or 1.43%. Dow Jones Industrial Average closed up 196.89 points, or 1.82%, S&P 500 closed up 23.31 points, or 1.97%, and NYSE closed up 159.05 points, or 2.05%.

1-800 Contacts nets orders at different levels

Back on the new deal front, 1-800 Contacts Inc.'s $194 million credit facility is heard to be about two-thirds of the way done but at various original issue discount levels, according to a buyside source.

The original issue discount level, if the deal gets done, is expected to definitely come lower than the 96 area that has been rumored on the deal since roughly the time that it launched, the source said, adding that the price might end up somewhere in the low 90s.

"Remember though that JPM already funded this, and if market clearance terms become too unattractive for the company, JPM may just hold on their books," the source concluded.

The facility consists of a $179 million first-lien term loan and a $15 million revolver, with both tranches talked at Libor plus 395 bps with a 3.75% Libor floor.

The term loan has 101 soft call protection for one year.

JPMorgan is the lead bank on the deal that will be used to back the buyout of the company by Fenway Partners LLC, which was already completed about a year ago.

When that buyout was announced, it was said that the company was getting a $235 million senior secured credit facility, consisting of a $20 million six-year revolver expected at Libor plus 275 basis points, a $140 million seven-year first-lien term loan expected at Libor plus 275 bps and a $75 million 71/2-year second-lien term loan expected at Libor plus 625 bps.

1-800 Contacts is a Draper, Utah, direct marketer of replacement contact lenses.

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