The $100 million second lien for Stratus Technologies' broke at 97 after an original issue discount (OID) feature was added and pricing was hiked to LIBOR plus 9% in syndication to make it more attractive to investors. The deal struggled when it went out to the market and terms were rejiggered, pricing increased and steep call premiums added in order to get the deal done. "Syndication didn't go well," one banker said. "Everything is flexing down and this flexed up, what does that tell you?" Goldman Sachs and Deutsche Bank lead the deal, which also consists of a $200 million first-lien term loan that broke at 101, and a $30 million revolver.
The deal, which launched March 2, originally consisted of a $30 million revolver, a $175 million term loan "B" and a $125 million second-lien loan. Price talk on the first lien was LIBOR plus 2 3/4-3% and LIBOR plus 7-7 1/2% on the second lien. During syndication the second lien was struggling so the banks downsized the tranche to $100 million and upped the first lien to $200 million. Pricing was modified a few times and in the final round of changes, pricing on the second lien was pushed up to LIBOR plus 9% and call premiums were added. It is non-callable for six months and then callable at 104 for the following six months and then callable at 102 and 101 the following two and three years. Pricing on the first-lien loan closed at LIBOR plus 3%. The deal broke for trading last Wednesday.
One of the reasons investors shied away from this deal is the fact that the bank structure would stay in place if the company was sold. Investcorp and MidOcean Partners are the existing sponsors and an investor said they may be looking to sell the company in the mid-to-near future and lenders would want to be taken out at that point. It is also a very aggressive credit, the investor said, and it is in the technology sector it is an IT services provider which can be a tough industry to begin with, and there is not a lot of collateral. Calls to Investcorp, MidOcean Partners and Robert Laufer, cfo, were not returned. Bankers at Goldman Sachs and Deutsche Bank declined comment.
Stratus is using the proceeds from the financing to partly fund a tender offer of $145 million of senior notes and repurchase $130 million of preferred stock held by the sponsors. Moody's Investors Service said the company's financial risk has increased with the stock repurchase and that leverage will be about 4.7 times, debt to adjusted EBITDA. The figure also assumes the realization of $13 million from the recent agreement with NEC Corp. The two companies signed two 10-year agreements to establish a joint product development alliance and hardware purchasing arrangement.
The ratings agency assigned a B1 rating to the first-lien term loan and a Caa1 rating to the second lien. The low rating on the second lien reflects its subordination to the first lien and the possibility that this junior class of creditors would be significantly impaired if the company is in distress.
