Dean Foods Ditches ‘B’ Loan After Overwhelming Pro Rata Response

Dean Foods Co. eliminated its "B" loan and increased its pro rata during syndication in response to strong pro rata demand, frustrating investors in institutional pieces. "There was a tremendous response from the pro rata lenders to the original request that we made for the revolver and term loan 'A'," noted Cory Olson, senior v.p. and treasurer of Dean. "The size of commitments came up substantially higher than we anticipated which is allowing us to eliminate the term loan 'B' which unfortunately had a higher cost-to-capital." Unfortunately for institutional investors, that tranche is gone. "We end up sitting with nothing," one loan investor noted.

The credit was originally marketed as a $1 billion revolver, $1.25 billion "A" loan and $750 million "B" loan. The revolver was priced at LIBOR plus 1 1/4% and the "B" loan at LIBOR plus 1 3/4%. The credit is now a $1.5 billion revolver and $1.5 billion "A" loan at LIBOR plus 1 1/4%. Wachovia and J.P. Morgan are leading the credit.

Pro rata demand was considered an oxymoron for some time, but banks have recently been stepping up to lend again (LMW, 10/12). Last month, J.P. Morgan and Citigroup were selling a $200 million "A" loan for The Scotts Co. that would be used along with $100 million of cash to reduce the company's "B" loan from $500 million to $200 million.

The trend of companies doing away with institutional tranches has some institutional investors growing frustrated. The new Dean deal is replacing a $750 million "B" loan and a $400 million "C" loan. "It's kind of painful, especially when we bought it in the secondary at a little bit of a premium." Dean's "B" loan has consistently traded over 101.

Dean originally had just pro rata financings and did not have institutional term loans. "As we grew and the market evolved we added institutional tranches," Olson said. "This will be the first time we don't have an institutional tranche probably in the last four or five years." Olson said he could not speak for the market as to if this will be a new trend and said in this case it simply boiled down to a case of cost-to-capital. "The market clearly is very aggressive for pro rata tranches at this point in time," he added.