DaVita increases price talk on massive term loan B; 24 Hour Fitness spreads are biggest investor hurdle

By Sara Rosenberg

New York, May 23 - DaVita Inc. widened price talk on its jumbo-sized term loan B on Monday, giving the tranche the potential to price anywhere from 25 to 50 basis points higher than what was originally sought after.

Meanwhile, although the commitment deadline is fast approaching for 24 Hour Fitness Worldwide Inc.'s deal, some investors are still on the fence about whether to participate or not because of the significant reduction in spread that the company would get through this new facility.

The syndicate on DaVita's proposed credit facility is now approaching accounts with new price talk of Libor plus 225 basis points to Libor plus 250 basis points on the $2.65 billion seven-year term loan B, compared to initial price talk at launch of Libor plus 200 basis points, according to a market source.

Speculation that the tranche would need to flex up by at least 25 basis points to get done has been floating through the marketplace for close to two weeks now, with some pointing to secondary performance as a major reason behind the rumors. Sources have been grumbling over the fact that lower-priced large deals are currently trading just through par - a level that's considered no good for anyone involved in the transaction. Based on this recent trading trend, sources have expressed that a deal like DaVita would need a better spread to entice enough investors.

DaVita's $3.15 billion credit facility (B1/BB-) also contains a $250 million six-year revolver and a $250 million six-year term loan A, with both tranches talked at Libor plus 175 basis points.

JPMorgan is the sole bookrunner on the deal, and Credit Suisse First Boston is involved in the transaction as well.

Proceeds from the credit facility along with proceeds from an already completed $1.35 billion bond offering will be used to help fund the $3.05 billion cash acquisition of Gambro Healthcare's U.S. assets and to refinance debt.

The two-tranche bond deal priced in March. The offering included $500 million of eight-year senior notes (B2/B) priced at par to yield 6 5/8% and $850 million of 10-year senior subordinated notes (B3/B) priced at par to yield 7¼%.

Net proceeds from the bond offering along with available cash were already used by the company to repay all outstanding amounts under the term loan portions of its existing credit facilities, including accrued interest.

Following the acquisition, the company's leverage ratio will be in the 5x to 5.2x EBITDA range, but DaVita hopes to reduce that ratio to around 3x to 3.5x in the next three to four years using anticipated strong cash flows.

Completion of the acquisition is subject to customary closing conditions including Hart-Scott-Rodino antitrust clearance.

On Feb. 18, DaVita received a request from the Federal Trade Commission for additional information regarding the acquisition. The company continues to be involved in talks with the FTC, and although no agreement has yet been reached, based on discussions, DaVita expects that it will be required to divest about 5% of the combined number of Gambro Healthcare and DaVita centers, which represents the same percentage of the combined revenues.

DaVita is an El Segundo, Calif., provider of dialysis services.

24 Hour sees hesitancy

The syndicate on 24 Hour Fitness is trying to walk investors through the essentially 100 basis point pricing reduction that would be gained with the execution of the company's in-market credit facility, with the hope being that the book will be filled out by Thursday's commitment deadline, according to market sources.

The proposed credit facility, which launched last Tuesday, contains a $600 million seven-year term loan B talked at Libor plus 250 basis points. By comparison, under the company's existing credit agreement that will be cancelled in connection with completion of the new deal, term loan B players receive an interest rate of Libor plus 350 basis points on their investment.

Proceeds from the credit facility will be used to help fund the leveraged buyout of 24 Hour Fitness by Forstmann Little & Co.

In addition to the new loan, Forstmann plans on financing the approximately $1.6 billion transaction with more than $900 million from its equity and subordinated debt funds.

"I heard it's going OK but I'm not that excited about them reducing pricing to 250. I haven't decided yet whether I'll commit or not," a buyside source said.

"The sponsor is putting two thirds of the capital structure in, instead of the other way around. [The syndicate] is talking people through that. There have been good levels of interest since the first meeting. It had the benefit of it being a roll trade. And, Forstmann has gained a lot of investor confidence," a sellside source explained, agreeing that at this point it really is just a matter of talking people through the spread.

Even before launching, the deal was thought to have the potential for a lot of rollover commitments as the new credit facility is essentially only adding about $200 million of incremental term loan bank debt when compared to the existing credit facility.

24 Hour Fitness' $700 million credit facility also contains a $100 million six-year revolver talked at Libor plus 250 basis points as well.

JPMorgan and Merrill Lynch are joint lead arrangers on the deal, with JPMorgan on the left.

The leveraged buyout, which is expected to close in June, is subject to regulatory approval. It is not subject to financing.

24 Hour Fitness is a San Ramon, Calif., fitness center company.

James River fills out

James River Coal Co.'s $100 million credit facility (B1/B+) - consisting of a $75 million 61/2-year synthetic letter-of-credit facility and a $25 million five-year revolver - was fully circled by Monday's commitment deadline at pricing of Libor plus 275 basis points on both tranches, according to a market source.

Morgan Stanley and PNC Bank are joint lead arrangers on the deal, with Morgan Stanley the left lead and syndication agent, and PNC the administrative agent.

Security is substantially all the company's assets and the assets of its subsidiaries.

Revolver borrowings will be available for working capital needs and other general corporate purposes.

The company is getting this new credit facility in connection with an offering of common stock that is expected to generate gross proceeds of about $50.4 million and a $150 million notes offering. The notes are talked at 9 1/8% to 9 3/8%.

Proceeds from the common stock and notes will be used to repay amounts under the company's existing credit facility, to fund the acquisition of Triad Mining Inc. and for general corporate purposes.

James River Coal is a Richmond, Va.-based producer of steam- and industrial-grade coal.

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