Goldman Sachs and Credit Suisse First Boston are in the market with a $305 million hybrid deal for FHC Health Systems that was designed to cater to hedge funds but also appeals to yield-hungry investors. FHC opted for this hybrid structure--a bank deal with features of a bond deal--as it provides more flexibility than a bank deal, explained Michael Taylor, FHC's cfo. He noted that FHC wanted to do a bond deal in July, but this coincided with the worst week in the bond market. "FHC had not considered this hybrid market before, but Goldman approached the company with the proposal," he said.
The deal is attracting interest because of the spread and structure, especially in a market that has seen pricing shrink on deals amid a shortage of paper. "The yield is huge for a single-B deal," said one buysider. The $130 million, six-year term loan is priced at LIBOR plus 61/4-61/2% and is being sold at 98. There is also a LIBOR plus 11/4% floor. A delayed drawdown term loan is being sold at 981/2 and has a spread of LIBOR plus 8%. In addition, the deal is structured more like a bond and is non-call for the first two years and then once this expires there is call protection of around 115, said another buysider. A $25 million, three-year revolver is also part of the package and has a spread of 33/4% over LIBOR. Taylor declined comment on the terms and spread except to say the process is ongoing.
FHC, which provides behavioral health-care services and is in a similar space to Magellan Health Services, is refinancing senior debt and some preferred debt. The company is currently responding to a request for proposals on one of its biggest contracts with Arizona state, as a Medicaid contract has to be put out to bid. FHC will not find out until April whether or not it will keep this contract, a buysider said. Combined with virtually no asset coverage, this appears a riskier credit, she added. But the delayed drawdown loan will not kick in until, or if, FHC gets the contract renewed, another buysider said. Also the funded portion, even without the Arizona contract is below three times debt, she commented. Meanwhile, Taylor said the rating is a little out of date as it was assigned at the time of the proposed bond deal. "This deal is only taking out half of the existing $250 million bond deal. The drawdown loan in April will take the rest out," he said.
While the loan may be attractive for investors, it also suits the company, Taylor said. "One basic covenant, for example, gives us the availability to pay out some equity that traditionally senior secured debt does not allow us to do," he noted. "There is also a provision that enables excess cash flow to pay down debt. There is a penalty if we go above the excess cash flow limit, but this early amortization is preferable to a bond." After the pulled bond deal, the feedback was "come back when you win the Arizona contract," he said. But the flexibility and the fact there is no guarantee that the bond market will be there in April are the key reasons why FHC decided to do this now, Taylor concluded.
A buysider said hedge funds were approached a few weeks ago to see if there was interest. Goldman circled the deal with the funds and it is likely they will dominate the group, loan managers said. Steve Hickey, head of Goldman's U.S. loan trading team, did not return calls and a CSFB banker declined comment.