Oversubscription allowed Domtar and Valley National Gas to cut covenants during syndication, signaling to some similar moves may be on the way. The sponsored deal for Valley National Gas dropped a maintenance covenant Thursday and the corporate deal for Domtar dropped the maintenance covenant and chipped pricing 25 basis points.
"I think we might be seeing this more," one banker said. "We have been talking about it on our desk. We have been pitching it to our clients." Another banker at a different firm agreed the market would be seeing it more, but most likely on sponsored deals than on corporate deals.
However, a banker at a third firm thought the market was still ripe for sponsored deals to be launched without covenants, so his feeling was that in many instances there may be no covenants to cut during syndication. "I don't know why anyone would launch a deal with covenants right now," he said.
Either way, the cut was just another thorn for investors who are worried the no-covenant trend and lower pricing are making the market a more difficult arena to play in. However, one just shrugged, "It's the market we live in," he said.
JPMorgan and Morgan Stanley went out Feb. 8 with an $800 million term loan and a $750 million revolver for Domtar. Last week, in addition to the covenant removal, the term loan pricing was cut from LIBOR plus 1 3/4% to LIBOR plus 1 1/2%. Pricing and covenants on the revolver did not change. Domtar is using the financing to combine with Weyerhaeuser Company's fine paper, paper-grade pulp and related assets to create a new company called Domtar Corp. A JPM spokeswoman could not be reached and a Morgan Stanley banker declined comment. A Domtar spokesman could not immediately comment.
Credit Suisse, UBS and Morgan Stanley lead the Valley National Gas credit, which launched as a $50 million revolver priced at LIBOR plus 2 1/4%, a $165 million term loan priced at LIBOR plus 2 1/4% and a $75 million second lien priced at LIBOR plus 6%. Pricing did not change and an incurrence covenant is still in place, just a maintenance covenant was cut. Valley National Gas, headquartered in Washington, Pa., a packager and distributor of industrial and medical welding equipment and supplies, is being acquired by private equity firm Caxton-Iseman Capital for $312 million. A Credit Suisse and UBS banker did not return a call. James Hart, president and cfo, did not return a call by press time. A call to an official at Caxton was also not returned by press time.
