Investors are circling R.H. Donnelley's $1.45 billion add-on bank loan backing the acquisition of SBC Communications' yellow pages publishing business, keen on the paper and company but questioning whether they are being paid for the increased risk.
"They are going from a position of 2.8 times senior to 4.8 times based on the acquisition and the fact we're having to share $325 million with the bond guys," said one buysider. At the same time the spread is unchanged at LIBOR plus 2 1/4% on the institutional loan and is being reduced on the pro rata by 25 basis points. The leverage increase is primarily due to the new debt, but also Donnelley's $325 million of outstanding senior secured notes, which will become pari passu with the bank debt due to a springing lien trigger.
But the buysider also pointed to high trading levels in the secondary as reasons why the deal would be well received. Prior to the acquisition the "A" loan was quoted at 101-101 1/2 and the "B" loan was quoted at 101 3/8-101 3/4. The buysider explained that the name is well sought after.
Jenny Apker, treasurer of Donnelley, responded that over the past 20 months the company has established a track record of delevering. "Given our commitment to use free cash flow I have to believe the [lenders] are comfortable." She described the effect of the springing lien as not significant considering it is only half a turn. "It's changed in a proportionate manner." She declined to comment on the issue of spread, only noting that the deal is priced consistently with others in the market.
Donnelley will add $400 million to its $100 million "A" loan. The $918 million "B" loan has been increased by $1.05 billion and the revolver has been increased from $125 million to $175 million. Donnelley is adding this debt to financing taken out for its acquisition of Sprint Publishing & Advertising last year. The pro rata debt is being shopped at LIBOR plus 2%, which is 25 basis points lower than the existing loans, and the "B" has a spread of LIBOR plus 2 1/4%. The tenor of the "A" and "B" loans has been increased by one year and the fixed charge coverage ratio has been removed from the credit facilities.
Donnelley is financing the acquisition completely with bank debt to benefit from cheap rates and the option of prepayability. "We are really comfortable with the way we have chosen to finance this transaction, with the minimum weighted average cost of the incremental debt," Apker noted. J.P. Morgan is leading the deal with Bear Stearns. Bear Stearns already had a lead role on the company's existing bank debt with Deutsche Bank and Citigroup, but J.P. Morgan is new, said Apker. Citi and Deutsche Bank are still very much a part of the syndicate, she added. Deutsche Bank is sole admin agent and co-arranger, confirmed a bank spokesman. Last year Donnelley repriced the original credit through an amendment. The spread on the "A" was reduced from LIBOR plus 3 1/4% and on the "B" loan from LIBOR plus 4% to LIBOR plus 2 1/4%.