Market players were aghast last week over talk about Del Monte Foods' plan to refinance its $1.245 billion credit without shelling out the call protection premiums attached to the deal. The credit's $750 million "B" loan has call protection 102 in the first year of maturity and call protection 101 in the second year. But an investor explained that the new term loan could be fashioned as an identical "C" loan and the paydown of the "B" piece will be classified as a mandatory pre-payment, as opposed to a non-mandatory prepayment that would trip call protection fees. "If they have a non-mandatory prepayment, they pay two points and if they have a mandatory payment they pay par," he explained. A Del Monte spokeswoman said the company is considering its refinancing alternatives but it has not made a final decision yet. She declined to comment further.
"What's the point of putting something in if you're not going to stick to it?" another buysider argued regarding the call protection feature. "At some point, investors should talk more," the first investor added, stating that this situation shows how there may be a need for the buyside to communicate more so this does not happen again.
There is going to be a larger-than-usual amendment fee paid out by Del Monte, he did point out. "The borrower knows what they're doing [and maybe] they don't feel too comfortable about it, so they're paying a higher fee," he said. But that fee is only expected to be in the half-point range, so it will not cover what would have been paid out in call protection. The pricing on the new loan is said to be in the LIBOR plus 21/2-23/4% range, while the existing "B" piece is priced at LIBOR plus 33/4%. "It's a drastic [pricing] cut," he added.
While some market players think the deal will meet heavy resistance, others said it can get done. "[Del Monte] is a very, very solid credit," an investor said, stating that the company does not pose a lot of credit risk relative to others in the leveraged loan market. He said mutual funds, hedge funds or even a collateralized loan obligation could easily buy a lot of the deal.
Further adding to the situation, lead lender Bank of America is teaming up with Morgan Stanley this time around to arrange the credit, while former co-lead J.P. Morgan is not involved in the new transaction, according to sources. One buysider said J.P. Morgan decided to walk away from the new deal, but this could not be confirmed and a J.P. Morgan spokesman declined to comment. A B of A official declined to comment and Morgan Stanley bankers did not return calls.
The credit was put in place last December to help back Del Monte's acquisition of businesses from H.J. Heinz (LMW, 12/16). The existing deal also includes $495 million in pro rata debt priced at LIBOR plus 31/2%. In addition to B of A and J.P. Morgan being leads on the existing credit, Morgan Stanley is also a co-documentation agent on the deal. UBS and Harris Trust & Savings Bank are also co-documentation agents. Calls to UBS and Harris officials were not returned.