The second-lien term loan for Kelson Holdings was trading off last week, dipping to 96 1/2-97 1/2 last Wednesday and rising slightly to either side of 98 on Thursday afternoon, according traders. "It's significantly off," one trader commented. "The damn thing broke a week ago at par." The first lien was down to 99 3/8-3/4 from par or just north of par the week before. "There's no market worthy news driving it down," he said.
The financing was used to repay about $1.5 billion in senior project debt. A spokesman at Harbert Management Corp, parent of Harbinger Capital Management which owns Kelson, declined comment.
In order to get better allocations in the first lien and holdco term loan, some investors played in the second, according to another trader not involved in the credit. "The second lien is viewed from a risk return perspective as the least desirable piece of paper," he said. He suggested some investors sold off their allocations in the second because they didn't really want to hold the paper. A banker, however, suggested trading was just due to choppy market conditions, and not to unhappiness with the credit.
Merrill Lynch leads the deal, which consists of a $50 million revolver, a $990 million term loan, both priced at LIBOR plus 3 1/4%. There is a $470 million payment-in-kind second-lien term loan priced at LIBOR plus 6 1/2%. Once the interest-to-EBITDA ratio hits 1.65 times the company has the option to pay in cash and pricing would drop to LIBOR plus 5 3/4%. There is also a $160 million holdco term loan with a fixed-rate PIK-coupon for life at 13.459%. Merrill bankers declined comment.
A banker explained the new debt was sold on asset coverages. The first lien was roughly 2.6 times asset covered, the second is 1.8 times and the holdco is 1.6 times. He explained that the value proposition is that these plants are in areas of the U.S. that are still developing demand and when that demand catches up to the supply is when investor's value will grow.
Another buysider commented that it's just an unattractive credit. "With these deals, like Entegra and MachGen, they are basically restructuring formerly bankrupt situations," he said. "People went for the cheap flip money and found out that was it."
