Investors were looking for a price hike on the $5 billion loan package for Kerr-McGee after the mammoth deal was launched last week into a market softer than it has been in months. "It's probably OK from a credit standpoint, but they will likely have to put in more spread," one investor said. "At LIBOR plus 175, I don't think you raise $5 billion on that, even with a lot of cash."
The facility consists of a five-year, $1 billion revolver, a two-year, $2 billion term loan "X" and a six-year, $2 billion term loan "B." The revolver and term loan "X" are priced at LIBOR plus 1 3/4% and the term loan "B" is priced at LIBOR plus 2%. The term loan "X" is a bridge indicating a shorter maturity and first priority to asset sales payment. The company anticipates the deal to close in mid-May.
"It's big, liquid and it's a double-B, which there isn't a lot of these days," one investor said. " It's a public company with a well-known name. I do think it will be well received. The only question: is it priced right? The market has been kind of choppy this week. Relatively low spread names have been taking a beating in the secondary market."
J.P. Morgan and Lehman Brothers are leading the loans, which will fund a modified Dutch auction tender offer for up to $4 billion of common stock. The stock buyback represents 27-29% of its outstanding shares. Robert Wohleber, senior v.p. and cfo, would not comment on the financing, but he said after the offering, the company plans to "reduce debt through asset-sales and free cash flow. That is our plan on the financing." The company, which had 2004 EBITDA of $2.5 billion, is planning to split off its chemical business.
The move was forced after Carl Icahn told the company to buy back $10 billion of stock and nominate him and Jana Partners' Barry Rosenstein to the company's board. Following the announcement of the buyback plans, Icahn and Rosenstein withdrew their nominations.
"If everyone at the [bank] meeting invested a dollar they would get enough to get the deal done," one portfolio manager joked. But he added to the call that pricing adjustments will most likely have to be made. "It's tough to market that much paper. The pro rata at 175 might have a tough time," another said. But one buysider who plans to commit to the deal said, "It's a very simple and credible story tied to asset paydown...and the ratings spread is good enough to clear the market. I think it has good momentum."
Moody's Investors Service lowered the long-term and short-term debt ratings of the company to below investment grade. It assigned a Ba3 Senior Implied and lowered the company's unsecured notes to Ba3 from Baa3. Calls to a banker at Lehman Brothers were not returned and a spokesman for J.P. Morgan had no comment.
