J.P. Morgan, Citibank and UBS Warburg threw an eleventh-hour wrinkle into Constellation Brands' $1.6 billion acquisition credit, revamping the security and pricing terms with an inventive twist. A springing lien, to be triggered by rating downgrades, was changed to permanently fall away if the company raises $450 million in equity to take out a bridge piece or if its leverage falls below four times, explained Thomas Roberts, treasurer of Constellation. The lien applies to receivables, inventory and trademarks. Some investors griped about the changes--and a few walked away--but the deal still closed 100% oversubscribed.
"It was sort of a negotiating point," Roberts said. "[The banks] wanted the lien to stay in there permanently. We had to go back and find a way to accommodate the banks in the event we don't de-lever." The credit backs the alcoholic beverage company's $1.4 billion acquisition of Australian vintner BRL Hardy. Roberts said the company was concerned about the lien's affect on the company's Ba1/BB ratings, so it decided to push the revisions. "We don't want to put something in the credit agreement that structurally creates a downgrade," he said, explaining that agencies like Standard & Poor's view the springing lien negatively. He said that the fall-away provision prevented the lien from ever being a ratings issue again. Calls to S&P for comment were not returned by press time. "We felt that we should be able to do it as an unsecured deal," and if Constellation did not raise the equity, the deal would still be secured by the lien, he noted.
Some market players griped about the revamp, saying the company was pushing the credit farther than its non-investment grade status permits. "It doesn't sound like something typical in our market," said one investor. Another investor said, "I'm not particularly comfortable with it." He added, however, that any covenant breaches would likely cause lenders to demand security coverage back on the deal. "We had [the lien] before, so we can have it again," he said.
The LIBOR plus 23/4% pricing for the $800 million "B" loan was also reworked to a leverage-based grid that allowed the "B" spread to fall to LIBOR plus 21/2% when multiples fall below 3.5 times. Roberts said the company's leverage could peak as high as 4.8 times post-acquisition. But Constellation's likely plans to raise equity in Australia to take out debt would make that figure lower, he claimed.
Despite complaints, most investors tolerated the new terms, as the company is known as one that typically de-levers quickly (LMW, 2/17). Roberts said that a few institutional lenders backed out, but the $800 million "B" loan still closed shop with 69 investors. The $800 million pro rata finished with 28 lenders, he added. "A lot of times it does take creativity," he said of the final credit agreement. "Part of it is deciding what the markets are like out there." The credit broke into the secondary market last Thursday and was trading in the par and a quarter range, according to a trader. J.P. Morgan and UBS officials declined to comment, while a Citi banker did not return calls.