Deutsche Bank, Merrill Lynch and CIT Group have committed to provide an $850 million credit facility for a merger between communications companies US LEC and PAETEC. The deal will consist of a $50 million revolver and an $800 million term loan tranche, split between a first and second lien, according to a banker. Specific tranche sizes and pricing have not yet been determined. The deal is expected to launch late in the third quarter or early in the fourth, according to Keith Wilson, PAETEC cfo, and soon to be cfo of the combined company.
"We've had long standing relationships with the [banks] and we were using Deutsche and Merrill as advisors," said Wilson. "We felt it was important to keep the concept of the merger to a limited universe of people."
The credit facility will also serve to refinance both companies' outstanding debt and allow for US LEC to repurchase its outstanding Series A Preferred Stock from Bain Capital and Thomas H. Lee Partners. The new credit will have a longer tenor--about six or seven years--and will offer better pricing than the facility US LEC currently has in place, according to Lyle Patrick, US LEC cfo. The company currently has $150 million in bank debt due in 2009. Pricing could not be determined.
After the merger, the companies will become wholly-owned subsidiaries of a new publicly-owned holding company, New PAETEC, with an enterprise value of about $1.3 billion. "Its scope and scale, you're gonna need to be bigger to get stuff done. We've always considered PAETEC to be the best out there and when you put [the two companies] together, you own east of the Mississippi," Patrick said.
PAETEC underwent a $400 million recapitalization earlier this year to help get some liquidity, Wilson said. Soon after the recap, US LEC approached PAETEC with a proposition to merge. "We had known US LEC for a long time," he said, explaining that the chairmen of the two companies had previously worked together. Arunas Chesonis, PAETEC ceo, and Rick Aab, chairman at US LEC, were colleagues at both ACC Communications, which has since been bought out by AT&T, and Rochester Telephone, according to spokesmen for the companies. "We're really excited about it," Wilson said. "The [new] company will provide a lot of stability for investors."
But one investor seemed to disagree. "[Competitive local exchange carriers] are getting levered like four times - they're generally difficult to finance," said an investor familiar with the companies. "I don't think any CLEC that has been done in the bank market has been an easy syndication; it's a difficult business. [Standard & Poor's] recovery ratings generally aren't very good only lenders with a more aggressive investing profile really get into them."
Moody's Investors Service put PAETEC's B2 corporate ratings on review for downgrade following the announcement of the acquisition. The company's pro forma adjusted leverage will rise to 5.7 times from 4.8 times after the acquisition, according to the ratings agency.
In May, PAETEC's $390 million credit facility launched on a Tuesday and was oversubscribed by that Friday buoyed by rich pricing. The first lien was priced LIBOR plus 3 3/4% and the second lien was priced at LIBOR plus 7 3/4% with call protection of 103, 102, 101. Moody's rated the loan B1 and S&P assigned a B rating to the first lien and a CCC+ and a 5 recovery rating (CIN, 5/19).