Delphi Corp.'s $2.8 billion refinancing managed to survive another pothole last week after both the company's treasurer and its former v.p. of treasury, mergers and acquisitions resigned as the company admitted it had overstated its liquidity. "This deal was well oversubscribed before this," said one lender. "It's disconcerting when someone leaves the company but it speaks to accountability."
The revelation was another hurdle for leads JPMorgan and Citigroup¸ which have been faced with a number of challenges since the refinancing was announced May 12. A battered auto-parts sector already prompted lenders to jack up pricing to LIBOR plus 6 1/2% on the $1 billion term loan. But the lenders were confident that the latest news was not make-or-break for the credit, and though pricing could be pushed higher, a banker said that is unlikely. A spokeswoman for the world's largest auto-parts maker added that the deal was not yet finalized, but would be completed by June 15.
The refinancing is designed to provide additional capacity to deal with legacy cost issues and $500 million of maturing notes over the next year. Originally pitched as a six-year, $750 million term loan and an increase to the company's five-year, $1.5 billion revolver, the loans will take out the company's expiring $1.5 billion 364-day facility. Banks that were in the 364-day were then asked to roll into the five-year revolver. The company would get covenant relief and lenders in turn would receive improved pricing and security. The spread was set at a hefty LIBOR plus 5 1/2% on the "B" loan and on a grid between LIBOR plus 3% and LIBOR plus 4 1/2% on the revolver.
But banks and institutional lenders, turning to a multitude of credit metrics including Delphi's widening credit default swap price and its unsecured bonds, asked for a higher spread. Indeed, the annual cost of insuring $10 million of the Troy-based company's debt for five years--$293,500 at the start of March-- had climbed to over $1.5 million by mid-May, according to data from Markit Group.
With up to half of its sales tied to General Motors, investors also monitored the credit spreads on the more famous name. Institutional investors typically use these metrics to determine the pricing of the deal, but banks also took careful note. "Moving the loan pricing to the CDS price is not seen very often on a bank deal," said one lender, referring to the revolver. He added that typically relationship lenders often pile in ignoring the relative-value metrics.
The lead banks flexed pricing to LIBOR plus 6 1/2% on the term loan, which was also offered at 99 1/2. In addition, the loan is non-call in the first year and has 102,101 soft-call for the following two years. Once the changes had been made investors jumped into the book and the term loan was increased to $1 billion. The revolver pricing was also increased, but the exact spread could not be determined. According to sources, lenders committed between $300-325 million to increase the five-year loan to over $1.8 billion and the leads were able to get the requisite 51% approval to make the changes.
The lead lenders were informed of the new accounting issues early last week, according to the spokeswoman. The issues included inaccurate disclosure to the credit ratings agencies, analysts and the board of directors about the amount of sales of European accounts receivable, or factoring arrangements, from the date of its separation from General Motors until year-end 2004. Pam Geller, the company's treasurer, and John Blahnik, former v.p. of treasury, mergers and acquisitions, resigned last week. The public investors were informed June 9. A JPMorgan spokesman declined comment and Citigroup bankers did not return calls.
