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Investors Fight Back On Potential Allied Waste Repricing

30 Mar 2006

Some investors are voting with their feet on the proposed 50 basis point cut on the $1.275 billion term loan "B" of Allied Waste Industries.

Some investors are voting with their feet on the proposed 50 basis point cut on the $1.275 billion term loan "B" of Allied Waste Industries. JPMorgan held a conference call last Wednesday pitching the cut and some large accounts holding $40-50 million positions began selling. One firm began selling when it was still priced at LIBOR plus 2%, in anticipation of the new terms. "I think people are just trying to unload their positions in protest," said one investor whose firm had not decided whether or not it would commit to the new deal.

The bank is offering the repriced term loan and a six-year, $495 million term loan "C" ­ priced at LIBOR plus 1 1/2% ­ as a new deal, not an amendment. Commitments were due today and there was little doubt the deal would get done. But investors were making a lot of noise. "People are really up in arms about it," the investor said, noting that the amount of calling among buysiders was higher than usual.

Some investors said they would be amenable to a cut to 175 basis points, potentially with a grid if the credit got downgraded. "I think it is right for the market and the company, at 175, they are not overpaying," one portfolio manager said. "But it's just unfortunate that with all this liquidity, I just don't think [175] is going to happen. I don't blame JPMorgan at all; it's one of these mass hysteria things. I'd like to think our market is sophisticated, but we're just like a brawling mob ­ it feels like the Gangs of New York." A JPMorgan spokesman declined comment. Calls to Peter Hathaway, cfo and executive v.p., were not returned.

The new deal will bring the company's debt total to about $6.5 billion in senior debt, with another $600 million of subordinated debt. About $2 billion is in bank debt and the rest in bonds. According to Moody's Investors Service, which affirmed a B1 rating of the term loan in February, the company has high leverage with an estimated adjusted debt to EBITDA ratio of about five times as of Dec. 31. The investor said the market's concern is that the company is highly leveraged and may not be able to pay back its debt. "It's a steady business, but not a good capital structure," the investor said.

Investors said they worried about the precedent the deal could be setting. With so many investors in the market and increasingly tightening spreads ­ in February the average spread of leveraged loans had fallen to 227 basis points, down from 233 basis points at the end of January, according to Standard & Poor's ­ people are getting worried. "People are concerned about the market generally, it's just not a healthy sight," the portfolio manager said. "The patient is still alive, but [we're] using electric paddles a bit too often. Allied Waste is simply a touchstone for a theme we've been following."

Allied Waste's term loan "B" fell three-quarters of a point to 100 3/4 at the beginning of last week, according to Markit. It climbed to 101 by the middle of the week and then fell again to 100 1/4 on Thursday. At press time on Friday one trader said it was at 100 1/4-100 1/2. According to Markit and TRACE, its 7.375% '14 bonds were down to 98 1/2 from 99 1/4 on Wednesday. Its 6.375% '11 bonds were down to 98 from par on March 28. Trading on the name has been very active.

30 Mar 2006