RCN, the fiber optic services company locked out of the capital markets for the foreseeable future, has struck a deal with its lender group that increases the interest spread on the bank debt and also reduces the overall lending commitment. "RCN will pay down $187.5 million on its term loan, with cash on hand, and will reduce the size of the pro rata," said Kevin Kuryla, director of investor relations. Interest rates will go up to around 6 1/2% to 7% all-in, but that is still comparatively cheap, he added. RCN has been pressured by competition from incumbent digital subscriber line and cable modem providers. In the past year, competitors have been more aggressive in their offerings of high-speed data services, the growth driver under RCN's competitive business model. Last week RCN's bank debt jumped nearly 10 points in about $30 million in trades as the market started to buzz about an imminent paydown (LMW, 3/25).
A LIBOR rate-floor will be instituted on the pro rata and "B" at 3%, with pricing increased 1/2% across the board. In addition, the $250 million revolver is being reduced $62.5 million and pricing will be flexed from LIBOR plus 3% to the LIBOR rate-floor with a spread of 3 1/2%. The $250 million "A" term loan is subject to the same flex. Kuryla said LIBOR-rates are under 2% right now, but would probably rise this year, so the rate-floor flex should be temporary. The $500 million "B" has been reduced to $375 million, and has seen pricing raised to 4% over LIBOR from 3 1/2%. The floor has also been put in place on the "B." RCN also said it agreed not to draw down its remaining $187.5 million revolver for at least two years.
The amendment seeks to accommodate a revised business plan. "RCN is focusing on adding customers in additional markets, rather than expanding in new markets. This plan assumes RCN is locked out of the capital markets," noted Kuryla. In exchange, RCN is able to sell non-core investments, form a joint venture in California to develop that market, and obtain letters of credit for use in the operations of its business. The agreement also allows RCN to use up to $250 million of new funding to repurchase debt and retain the first $100 million per year from the sale of assets such as real estate. J.P. Morgan is the agent bank and Deutsche Bank, Morgan Stanley and Merrill Lynch are co-documentation agents on the credit. There are approximately 55 institutions on the credit, Kuryla said, comprising funds and commercial banks.