Several portfolio managers were left frustrated last week as an amendment for an incremental add-on term loan for Allied Waste Industries' $3.15 billion credit also cemented a provision that allows the company to reprice the credit in the future without existing lender approval. Further irking some of the lenders is the fact that the company only required a 51% approval to pass the amendment, while repricings almost always need 100% lender approval, said one buysider. J.P. Morgan and Citigroup lead the deal with UBS, Credit Suisse First Boston and Deutsche Bank also serving as top tier agents. A J.P. Morgan spokesman and a UBS official declined to comment, while Citi, CSFB and Deutsche Bank bankers did not return calls.
To get a repricing, Allied Waste will need the 100% vote of the affected ongoing lenders. But if a lender says no it can be replaced by a lender willing to take that commitment. "Essentially, the nuance is that they are calling it a refinancing instead of a repricing," said one of the frustrated investors. A big institution can come in with $200 million and the new lender rather than the existing lender has the opportunity to vote on the repricing, a second manager said. "The word repricing is not written anywhere. It is called a refinancing instead and it changes the voting parties in a new amendment," the first investor said. "If they want to do a new financing the only votes that count are the ones of the people committed to the new deal. This does not require the consent of any other lender."
But the portfolio managers were fighting a losing battle in preventing the amendment passing, as technical pressures kept many lenders' hands tied to the deal. Many investors are under pressure to invest and some said if they did not sign the amendment they ran the risk of getting left out of the new loan. Some investors simply did not read the language closely enough to discover the loophole, the buysider said. The lenders "who knowingly or unknowingly signed this are doing a disservice. Our job is to make sure we get well-structured bank loans," an investor added. Calls to Peter Hathaway, cfo of Allied Waste, and Michael Burnett, v.p. of investor relations, were not returned.
Loan managers complained it takes away all their leverage as an investor. "Effectively, at any time the company wishes to, they can bring a tranche to the market to repay other term loans without the [full] vote of existing lenders," a buysider explained, adding that it gets around a repricing as long as [the company] has enough lenders who want to do it. The most they have to ask is how much of the new deal investors want, said the investor.
Beyond the repricing loophole, investors also objected to the reverse flex in pricing for the $250 million add-on from LIBOR plus 31/4% to LIBOR plus 3%. One investor admitted that it is common lately for oversubscribed credits to price down, but it was still objectionable in this case. "A lot of lenders were aggravated and didn't understand why the company was adding more senior secured debt," he added. "They essentially have the same amount of senior secured debt that they had a year ago," he added, explaining that investors would expect the debt to decrease over time. The incremental term loan is set to take out some of Allied Waste's subordinated debt.
But not everyone saw a problem. "Allied [Waste] has built up a lot of goodwill," an investor noted, adding that there is a camp of market players that believe the company has plenty of collateral to cover its debt. He added, however, that this amendment would not pass under different market conditions. "[The company] is taking advantage of strong market technicals," he said. The credit was put in place last April and includes a $1.5 billion revolver, a $1.2 billion "B" piece and a $200 million letter of credit facility, in addition to the add-on.