Citigroup and Merrill Lynch juiced up Cinram International's $900 million "B" piece last week in order to lure more investors into the loan for the DVD and CD manufacturer. The tranche had been slogging along since syndication launched under three weeks ago. Concerns over technology risk, contract expiration and Canadian tax laws were issues that investors were grappling with, buysiders said.
A week after the bank meeting, the arrangers front-ended amortization 40% over the first five years of the six-year deal. A banker close to the deal said this change addressed investor concerns over the longevity of the DVD business. The investors wanted to make sure there would be adequate reduction in the loan and this concession takes that into consideration, the banker explained. But by last Wednesday, Citi and Merrill had also juiced up pricing from LIBOR plus 31/4% to LIBOR plus 33/4% and added a 50 basis point up-front fee on the loan, the banker stated.
The term loan's subscription level by last Friday was building well north of Wednesday's $300 million mark, the banker noted, declining to specify exact levels. The credit facility, which also includes a $150 million revolver and a $150 million "A" loan, is backing Cinram's $1.05 billion acquisition of the DVD and CD manufacturing businesses from AOL Time Warner. The pro rata, priced at LIBOR plus 3%, was oversubscribed within the first week of syndication. Bank One, Société Générale and GE Capital all came in at the documentation agent level, the banker said. An official from Citi declined to comment and a Merrill banker did not return calls.
Some investors said they were just waiting for a pricing increase before they joined the credit. But others questioned the company's hold on changing technologies. If DVDs are hot right now, "what'll be next?" an investor asked. Another investor voiced concern over debt repayment when Cinram's contracts with clients either expire or are not renewed. As part of the transaction, Cinram will enter into exclusive long-term agreements with Warner Home Video, Warner Music Group and New Line Cinema to manufacture, print, package and physically distribute their DVDs and CDs in North America and Europe. "Cinram has an exclusive manufacturing and distribution contract for six years with Warner and [for] an undisclosed length with Fox, which together will account for a significant percentage of Cinram's DVD business," Moody's Investors Service notes. "The loss of one of Cinram's two main DVD customers might nevertheless occur before the loan is repaid," Moody's adds.
A source familiar with the company noted that Cinram, a 33 year-old business, has adapted and evolved with the changing technologies. Cinram started out making pre-recorded 8-tracks and cassettes and now it manufactures and supplies DVDs, CDs, VHS tapes and other related products. An investor relations spokeswoman declined to comment, referring questions to Citi bankers. Lewis Ritchie, Cinram's cfo, also did not return calls.