J.P. Morgan and Deutsche Bank are preparing to market a $1.6 billion bank deal that will consolidate and refinance the combined debt of Riverwood Holdings and Graphic Packaging, which are set to merge. The overall debt of the two packaging companies will be $2.2 billion, and investors are expecting a hefty "B" loan to liven up the market.
Luis Leon, the cfo of Graphic who has also been offered the cfo spot for the merged company, confirmed that the new credit would include a "B" loan as well as a revolver portion for general corporate purposes. But he would not discuss specific details regarding the deal. He noted that the companies are still undecided about how to handle the $1.2 billion in combined bond debt, but that "the goal is to put all cash flow toward the repayment of debt."
Structure and pricing for the credit is still to be determined, according to several bankers. Existing credits for both companies are priced in the LIBOR plus 23/4% range. The deal is expected to hit the market within a few weeks. J.P. Morgan and Deutsche Bank are Riverwood's banks. They will be joined on the deal by agents Goldman Sachs, Morgan Stanley, Credit Suisse First Boston and Citibank. CSFB and Morgan Stanley lead Graphic's current debt. Goldman and CSFB are financial advisers on the merger.
Early investor response is mixed on the impending deal, with most thinking the credit will perform well in the marketplace, but staying wary of factors such as integration risks in the economically sensitive packaging and forest products sector. "A big impact is on the cost side for these companies," one investor noted. But he said in the longer term, Riverwood and Graphic should integrate successfully. "But there's a lot of green between here and there." Bankers and spokespeople from the leads on the deal either declined to comment or did not return calls.
Moody's Investors Service and Standard & Poor's put both companies' credit ratings on watch following the merger announcement. While Riverwood's B/B2 ratings were placed on review for upgrade, Graphic's BB/Ba3 ratings went on review for downgrade. Market players thought the ratings might end up somewhere in between. "We put them on review because we have to see what the capital structure is going to be," said William Fahy, assistant v.p. and analyst at Moody's. Fahy said the market and sector woes are apparent. "Paper and forest products is a rough market right now," he said. Riverwood has $835 million in term loans and a $300 million revolver, while Graphic has a $175 million "B" loan and a $275 million revolver.