J.P. Morgan, Goldman Sachs and UBS Warburg have thrown in a bunch of investor-friendly concessions on the bank deal backing the buyout of National Waterworks, including a funky yield protection clause. The feature has been introduced into the documentation so if a new add-on is attempted, the yield has to be within a similar range as the existing loan, explained a banker. The spread can be 25 basis points wide, but this prevents the old loan from trading down if a richer priced add-on credit is introduced, he added.
The clause has been featured on deals in the past, but has been reintroduced into the market for the Dex Media East deal, and now Waterworks, investors said. Buysiders cited the situation with a loan for Terex as the main reason for the timing of the move. A $210 million loan for Terex came out in September priced more generously than existing debt, sending levels for the old paper down into the 90s (LMW, 9/30). "Terex highlighted the need for this, and I believe it will be demanded much more in the future," said one buysider. "Fool me once, shame on you, fool me twice, shame on me," said one buysider, who said he was furious after Terex. He said the feature was not seen much in the past, as nobody thought the banks would price add-ons differently, but he added, "You will see this asked for in the future when further debt is expected."
One buysider explained the feature is necessary on National Waterworks and the Dex deal, as a future add-on is expected. The potential add-on for National Waterworks, which is being acquired by J.P. Morgan Partners and Thomas H. Lee Partners, has been halved from $100 million to $50 million, the banker said. But if the new deal is priced with a higher spread, this would impact his holdings. The add-on is there for flexibility in case the company attempts an acquisition, he noted, adding there is very little demand for revolvers, which would have been used in the past.
One buysider said a key reason for the yield protection is the fact that it is a buyer's market. Pricing on the $250 million "B" loan has been flexed to LIBOR plus 4% from LIBOR plus 3 3/4 % and the upfront fee has been increased from 1/4% to 1/2%. A LIBOR floor has been installed at 2 1/2 % and call protection is now in place at 102, 101. The amortization schedule has also been altered. Now $10 million will be paid in '03, $15 million in '04 and '05, $20 million in '06, $25 million in '07 and '08 and $140 million at maturity. "EBITDA is $90 million and though capex is low, investors did not want to rely on excess cash flow to pay down the loan," he added.
The "B" loan was half filled at the old price, but these changes will fill the deal, the banker noted. The $75 million revolver is priced at LIBOR plus 3% and Antares Capital and GE Capital both signed on already, he said. A $200 million senior subordinated note issue will price on Friday. The two buyout firms are buying the waterworks distribution business of United States Filter for $620 million (LMW, 10/28). The sale of the waterworks distribution business is part of U.S. Filter's strategy to divest non-core assets and focus on its wastewater equipment and services business and its consumer and commercial businesses.