Bank deals are being launched this week for FairPoint Communications and Valor Communications, two rural incumbent local exchange carriers (RLEC) that are planning initial public offerings of income deposit securities (IDS). Deutsche Bank, CIBC World Markets and Citibank are launching a $450 million bank deal for FairPoint on Wednesday and a bank meeting is scheduled for tomorrow to launch a $790 million term loan for Valor. Banc of America Securities and CIBC are joint lead arrangers and joint book managers for Valor's new facility.
The first few IDS deals that were done caught people's eyes, but they were for smaller companies (LMW, 4/19). FairPoint and Valor are fairly well known in the market and their deals are expected to garner more attention, a loan investor said. IDS are hybrid securities and companies issuing them pay out a significant amount of their cash flow as dividends and interest. The investor said the requirement to pay out all the cash right away raises a flag. "The way they are set up between the interest that's paid on the debt portion of the IDS along with the dividends, effectively a large portion of the income has to be distributed out," he said. "It limits the company's financial flexibility."
But Tim Henry, v.p. finance and treasurer of FairPoint, disagrees the IDS structure affects the bank loan. It is a "traditional, straight up syndicated transaction," he said. "Obviously the IDS is a new security and it is a hybrid because it contains both an equity and debt component. But, beyond that it doesn't influence the debt arrangements any differently than a straight up equity offering, or if one were to be issuing senior subordinated or senior debt."
He explained that in conjunction with the IDS and new credit facility, FairPoint will be completing a recapitalization of the balance sheet. "The IDS vehicle is a yield-oriented investment so that the investor is typically looking for a business that characteristically has stable consistent cash flow," he said. "The RLEC sector of the telecommunications industry typifies that characteristic because of its consistent cash flows."
FairPoint's deal comprises a $100 million revolver and $350 million "B" loan, Henry said. FairPoint is owned by Thomas H. Lee Co. and Kelso & Co. Valor is owned by Welsh, Carson, Anderson & Stowe, Vestar Capital Partners, Citicorp Venture Capital and individual Hispanic businesspeople with ties to the Southwestern United States. Officials at Valor and the private equity firms either did not return calls or declined comment.