Solo Cup slides on raw materials pinch; Roundy's, Scorpion Drilling bring deals

By Paul A. Harris

St. Louis, Oct. 4 - The words, "raw materials" seemed to creep into most discussions with bank loan sources on Tuesday, with one citing Solo Cup Co.'s paper trading lower and another seeing vulnerability in chemical company names.

Meanwhile Roundy's Supermarkets Inc. revealed structure on its $825 million bank deal and Scorpion Drilling unveiled a $200 million loan that will back its construction of drilling rigs.

And sources said that Madison Dearborn Partners LLC and U.S. Power Generating Co. LLC will receive $925 million of financing to acquire three New York City power plants in early 2006.

No real competition at this time?

One syndicated loan investor told Prospect News on Tuesday that the strength in the market will last until another asset class becomes more tempting to investors or until economic news becomes more dire.

The latter circumstance, the source added, will almost certainly be foreshadowed in the high-yield bond market.

"The technical demand for bank loans from the CLO structures is going to be good and very strong until other asset categories can be structured in a way that makes for real competition," the investor said.

"As long as hedge funds are borrowing at Libor plus a small spread, bank loans are going to look good to them too, especially on the second-lien side because they are much bigger into second-liens than first-liens."

Because of the strength in the bank loan market, the source added, observers are now witnessing issuers migrating from subordinated bond structures into second-lien bank loan structures.

"The natural tendency right now is for people to try to figure out how much can be pushed into the loan market," the source said. "At the first-lien level the loan market likes to have the value of the company be two times the value of the loan. When you start to push into the first-lien market you are going to get some resistance.

"But there will be a lot less resistance on the second-lien side."

Second-lien is "junk in disguise"

The source went on to say that the second-lien loan deals now finding its way into the institutional market are really junk deals in disguise.

"In general the high yield market has been weak," the source commented.

"The ability to switch money out of high yield and into bank loans is very easy. And in a weak market for high yield it's clearly cheaper."

Neiman Marcus solidifies

Also on the move Tuesday was the new Neiman Marcus Group Inc. paper.

Neiman Marcus' $1.975 billion 71/2-year term B (B1/B+/B) broke for trading on Monday, after which sources reported seeing healthy demand.

That demand appeared to have waned somewhat on Tuesday, however.

One source spotted the paper in the "high pars," 100.75 bid, 100.875 offered and commented that it seemed "pretty well solidified."

Another trader commented that the paper had been trading around a lot, and had come down from where it was Monday.

The trader commented that Neiman Marcus broke around 101.25 bid, 101.375 offered. Tuesday morning the bids were 100.625.

"It sounds like a lot of people selling."

Meanwhile the above-quoted investor commented that the $925 million that the high-end retailer moved from its bond deal to its bank deal last week likely never really belonged in the bond market at all.

"It was a squeeze to stick that in the high-yield market in the first place, but they wanted to bring it in a fixed format," the investor said.

"The high-yield market didn't need that piece of paper. It was just an aggressive attempt by the underwriters.

"Moving it over into the bank loan made more sense."

Raw materials crunch

Meanwhile sources throughout the debt side markets were commenting Tuesday that the recent hurricanes and the energy crisis which they exacerbated appear to be having a corrosive impact on a wide variety of credits including steel names and chemical names.

One trader said that Solo Cup is starting to have a hard time with some of its cost pass-throughs, and added that the loans, which had been trading "with a solid 101.50 bid," on Tuesday were spotted at 100.25 bid, 100.75 offered.

"Anything oil or natural gas-related is going to get hammered right now," the trader added.

New deals

News surfaced Tuesday on new business coming into the market.

Roundy's Supermarkets will hold a bank meeting Thursday for its $825 million credit facility to refinance debt and fund a dividend.

The bank loan is comprised of a $125 million revolver and a $700 million term loan.

There will also be a $325 million two-part offering of high-yield bonds.

Bear Stearns & Co. and Goldman Sachs & Co. will lead on both the bank and bond portions of the financing.

Elsewhere Scorpion Drilling, a wholly owned subsidiary of Houston oil and gas exploration and production company Scorpion Offshore, will also launch a $200 million second-lien term loan at a bank meeting on Thursday.

Morgan Stanley is the sole arranger.

The loan, which is talked at Libor plus 500 basis points, will be used to fund the construction of four jack-up rigs in the Gulf of Mexico.

And Madison Dearborn Partners LLC and U.S. Power Generating Co. LLC have received $975 million of committed financing from Morgan Stanley and Goldman Sachs & Co. backing the purchase of three New York City power plants from Reliant Energy, in a deal is expected to close in early 2006.

The package will include $600 million of first-lien debt including a $50 million revolver, $120 million of synthetic letter of credit commitments and an approximately $430 million term loan. The financing also includes $300 million of second-lien debt.

Panolam loan closes

Panolam Industries Inc.'s acquisition by Genstar Capital, Sterling Group and management has been completed, the buyers announced Tuesday. Financing including a new $135 million seven-year term loan at Libor plus 275 basis points and $150 million of high-yield bonds.

Panolam also obtained a new $20 million five-year revolver at Libor plus 275 basis points with a 50 basis points commitment fee.

The facility was rated B2 by Moody's Investors Service and B+ by Standard & Poor's.

Panolam is a Shelton, Conn., provider of decorative surfaces for commercial and residential interiors, store and store fixtures and furniture.

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