Morgan Stanley and Bank of America last week pitched increased pricing and a tranche reduction on their $500 million deal for HMO PacifiCare Health Systems, but investors are biding their time and looking to grab the paper at a discount in the secondary market rather than chip in now. The thinking is that co-syndication agents UBS Warburg and Lehman Brothers and managing agents Bank of New York, BNP Paribas, and Wells Fargo Bank will be stuck holding large pieces of the deal. With hefty final allocations, there should be some heavy selling in the secondary market, one potential investor noted. "If the company doesn't turn around it may be as low as 80," she said. "Everyone knows the credit risk is high so they're waiting to see just how low it trades initially," she added.
The main concern among investors is the ability of the company's new management to reduce cost issues. The leads have reportedly proposed another 25 basis point price hike and a $100 million reduction on the "B" tranche of the deal last week. The company is offering a rich spread and call protection at 103, 102 and 101. One market source whose bank is involved in the deal, stated that half of the institutional tranche has been filled since the price hike and call protection were added. "We knew there was always going to be some fishing, but this is a Ba3, BB- credit, that has low leverage," he added.
The "B" tranche now stands at $250 million and is priced at LIBOR plus 4 1/2 %. Originally the "B" was launched at 3 3/4 % over LIBOR. The $150 million revolver remains at LIBOR plus 3 1/4 %. A deal for $600 million of senior notes, previously $500 million, kicked off last week. Morgan and B of A are also leading the bond deal, which was increased by the $100 million deducted out of the "B" tranche.
But some investors speculated the deal may not draw many more primary players. "The momentum's gone from this deal and once the momentum's gone, it's hard to get it back," one source said. Officials at PacifiCare declined to comment. Officials at the banks participating either did not return calls or declined comment.