RailAmerica has refinanced its credit line to lock in interest-rate savings on its new $475 million credit facility. The company wanted to replace financing that was entered into when the interest rates were higher, explained Bennett Marks, senior v.p. and cfo, and Michael Howe, v.p. and treasurer. The company was able to reduce pricing on its term loans by 75 basis points and pay down part of its interest-rate hedge after improving its credit profile and performance.
As a part of the structure of RailAmerica's former credit, the company was required to enter into an interest-rate hedge that essentially fixed the LIBOR rate at 672 basis points, so the company was paying the artificially high LIBOR plus a spread of 21/ 2% on $212 million of its loan. This feature is designed to ensure that an increase in interest rates would not affect the company's ability to service its debt. RailAmerica is now allowed to hedge 40% of its combined senior and subordinate debt, which is $75 million of the new term loan, locking in low LIBOR rates. RailAmerica calculates that it will reduce interest rate expense by approximately $8 million in the next year.
The new credit comprises a $100 million revolver and a $375 million term loan. The old facility included a $125 million term "A" loan, a $205 million "B" term loan, a recently added $50 million "C" term loan, and a $50 million revolver. The new credit, which was four times oversubscribed, offers investors paper that is backed by a lot of collateral. "We have a lot of assets to pledge as collateral," said Bennett, adding, "Old economy companies have an advantage in that respect." The officials also noted that RailAmerica doubled the amount of its revolver, a move that will give the company the liquidity and flexibility to pursue acquisitions.
Donaldson, Lufkin & Jenrette led the old facility and UBS Warburg and Morgan Stanley lead the new facility. The company officials explained that RailAmerica had developed relationships with the bankers at DLJ who had since moved to UBS, but that it asked for proposals from many of the major investments banks and chose the one that offered the company the best bid. The syndicate includes 73 banks and institutions.