An $850 million credit to back the $1.8 billion merger of US LEC and PAETEC came to market last Tuesday, led by Deutsche Bank, Merrill Lynch and CIT Group. The deal consists of a five-year, $50 million revolver; a six-year, $625 million term loan "B" and a seven-year, $175 million second lien. The first lien is priced at LIBOR plus 3 1/2% and the second lien is priced at LIBOR plus 6 1/2%, according to a banker.
The merger, announced in August, is being financed through the new debt along with cash on hand. The funds will also be used to refinance all existing debt from both companies and will allow US LEC to purchase its outstanding Series A Preferred Stock from Thomas H. Lee and Bain Capital (CIN, 8/21). After the transaction is completed, the merged companies will be based in Fairport, N.Y. and operate under the PAETEC name.
"It's a CLEC that we turned down about six months ago and we turned it down again," said one portfolio manager. "A lot of deals that were done like six or nine months ago are coming back with more leverage and lower pricing," he said. Old PAETEC tapped DB back in May for a $390 million deal priced at LIBOR plus 3 3/4% on the first lien and LIBOR plus 7 3/4% on the second (CIN, 5/22). At the time, one investor commented that the "extremely rich pricing" was the only thing making it an attractive credit.
Standard & Poor's assigned a B to the first lien and a CCC+ to the second lien, both with a recovery rating of 5. The ratings are based on the vulnerable business risk profile stemming from significant competition from other larger, better-capitalized regional operating companies, and other CLECs, as well as a highly leveraged financial profile. Pro forma leverage is expected to be around 4.2 times throughout, according to a banker. Moody's Investors Service confirmed the B2 corporate family rating and B1 to the credit's first lien and a Caa1 to the second lien. Calls to Keith Wilson, cfo, were not returned.