Investors buying into the JPMorgan and Lehman Brothers-led financing for Dunkin' Brands are making an unusual short-term play that will have them paid off in about three months. The $750 million term loan "B" is structured as a seven-year tranche definitely not a typical bridge structure -- but investors were told the bank deal would get taken out with a securitization. If the ABS deal did not work out, the term loan is structured so it can be permanent. The size of the ABS could not be determined.
"You are buying with the understanding you will probably get taken out in three to four months," said one portfolio manager. Some buysiders wondered whether it was worth it to even buy into the deal knowing they would soon be looking for a new investment, but others poured in and the deal was more than three times oversubscribed, one banker said.
"The question was, what is in it for us?" one portfolio manager asked. "Why go through this work for a three-month piece of paper? [The banks] knew that coming to market, but it is such a hot market they can get away with it. If it was not so hot, we might say we want a 100 basis points work fee." He said the bank debt is structured in a fairly safe way and has a 1 recovery rating and a B+/B2 rating from Standard & Poor's and Moody's Investors Service.
Due to the oversubscription, terms were altered last Wednesday, when pricing was cut and $150 million was moved from the bonds into the term loan "B." The seven-year, $750 million term loan "B" was increased to $850 million. The six-year, $150 million revolver did not change. Pricing on both tranches was dropped to LIBOR plus 2 1/2% from LIBOR plus 2 3/4%. The senior unsecured bridge went from $225 million to $185 million and the senior subordinated bridge went from $575 million to $465 million. The deal backs the acquisition of Dunkin' Brands by private equity firms, The Carlyle Group, Bain Capital Partners and Thomas H. Lee Partners.
The pricing cut could make the quickie deal seem a little less worth it in terms of effort. But one investor said he was not troubled by the cut. "I don't think it will be a problem," he said. "If you believed the story the first time, that doesn't change anything."
The banker speculated that those who participated did so because it was a way to put cash to work and pick up a coupon in the process. "For those who bought it, it was a place to park some cash because there was the expectation the loan wouldn't be out for long," said the banker. "There were some questions going in, will they even bother to commit to it with the idea it is a short term [deal]. I think investors viewed it as substitute for cash."
Calls to Dunkin' Brands were not returned. Calls to Thomas H. Lee and Bain were also not returned. A Carlyle professional was not available for comment. A JPMorgan spokesman and a Lehman Brothers banker both declined comment.
-- K.H. and Sean O'Loughlin