Bank of America is preparing a $1 billion unsecured term loan for Intelsat to take out $1 billion of floating rate senior notes due 2012. Despite being a term loan, it is estimated it will be sold mainly to bond investors as collateralized loan obligation investors shy away from its unsecured status. As the two markets continue to converge, market players anticipate more of these structures may be on their way.
Due to existing restrictions from investment-grade debt Intelsat issued in the 2002-2003 time frame, debt placed at the holdco company cannot be secured. The investment-grade debt includes three tranches due in 2013. One market player said it would be too costly to refinance that debt now.
Pricing on the term loan is being talked at LIBOR plus 3%. A bank meeting is set for today, with commitments expected to be due Jan. 19. Deutsche Bank, Morgan Stanley and Credit Suisse are also on the deal. Dianne VanBeber, Intelsat v.p. of investor relations, said the reason for opting to do an unsecured term loan as compared to issuing more notes is in line with the company's objectives. "Our goal is to provide the company with as much flexibility as possible," she said. Another market source said pricing on the term loan would be a lot cheaper than issuing new notes and it also won't have call protection. "It is more attractive for an issuer than issuing another non-callable bond," one portfolio manager said.
The current notes are priced at LIBOR plus 487.5 basis points. The price talk of LIBOR plus 3% on the term loan is consistent with the current spread of the 9 1/4% notes due 2016 the company has in place, according to a KDP Investment Advisors report. If the loan clears at LIBOR plus 3%, there would be an annual savings of about $19 million. Although PanAmSat was acquired by Intelsat, it has its own capital structure. Its current term loan is priced at LIBOR plus 2 1/2% and is trading at 101. The portfolio manager suggested that had Intelsat been able to do a secured term loan, it could have been priced as tight as LIBOR plus 2 1/4-1/2%.
Although it is expected mostly bond investors will play in the credit, it is unclear whether all existing note holders will join or not. VanBeber declined comment as did a Bank of America spokeswoman.
The thought of an unsecured term loan has some investors cringing. "It's the worst of everything," said the portfolio manager whose firm does not plan on participating. "You're not secured and there's no call protection. You're basically doing a bond without call protection. If the company does really, really well, it will just refinance for a cheaper coupon. If it doesn't do well then you have no protection. Heads the company wins. Tails the company wins."
Another investor said there was a big push for unsecured term loans going back six months ago, symbolizing an effort to bring the two markets even closer. One recent unsecured term loan came in September when Boart Longyear eliminated its capital markets term loan and replaced it with a senior unsecured term loan (CIN, 9/29). "There is definitely a merging of the two businesses and Intelsat is a good example of that," the portfolio manager said. He thinks that as bond investors continue to find better yields and security in loans they will become a more permanent fixture.
According to a filing with the Securities and Exchange Commission, Intelsat plans to redeem all of the notes on Feb. 2 at a redemption price equal to 101% of the principal amount plus accrued and unpaid interest. The company dropped its investment-grade status after buying some satellites around 2004 and "officially" moved into the high-yield market after it was bought out by Apollo Management, Apax Partners, Permira and Madison Dearborn Partners in 2005. While the company's goal is to continue to deleverage, it is not anticipated that it will be moving back to investment grade anytime soon. At the time of the PanAmSat acquisition, which was completed July 3, there was total leverage of 7 times. Apax and Permira spokesmen declined comment. Calls to officials at the other private equity groups were not returned.
