Investor concerns over the plummeting all-in borrowing rate has prompted Lehman Brothers to create a LIBOR floor on its $450 million term loan for Tesoro Petroleum. The move, believed to be the first of its kind, is seen as one potential solution to investor fears over current returns and could be implemented on other credits as long as rates stay as low as they are, said investors and bankers. Repeated calls to Lehman Brothers' syndication officials were not returned. David Chacon, director of investor relations for Tesoro, declined to comment on the rate floor.
The all-in rate, comprising the three-month LIBOR rate and the tacked-on spread for term loans, has hit new lows with three-month LIBOR at 2.43%, compared to almost 7% at the end of last year. The all-in rate has dropped from over 10% since last November to just over 6% now, an investor said. This comes as default rates continue to rise, according to Moody's Investors Services data.
Investors on Tesoro demanded a LIBOR floor of nothing less than 3%, effectively tacking basis points onto the rate not the spread over LIBOR, which is what is typically done. Bankers explained that gaining the floor gives short-term relief to the investors because they expect LIBOR to eventually go up. Investors' beef is with the base interest rate, not the company or its credit. In the past, when LIBOR rates have hit highs, the reverse has occurred and banks have imposed a ceiling on the rate. But LIBOR is at the lowest level since the British Bankers' Association began setting the figure in the mid-1980s and investors like to play bank loans versus bonds, where spreads are widening.
The Tesoro deal rolled and closed. The term loan "B" was upsized from $300 million to $450 million as the bond portion of the deal was cut from $350 million to $200 million.The pro rata deck comprises a $175 million revolver an $85 million term loan and a $90 million delayed-draw term loan. The pro rata is priced at LIBOR plus 21/4%.
Ask And You Shall Receive?
The rate floor was one of the ideas discussed at the Loan Syndications and Trading Association conference last week in an overview of the market. Incentives for buyers in the primary market was a major theme. With good names trading at a discount in the secondary market, those low prices are having an impact on the primary. Credit is available, but secondary is too attractive, repeated speakers. Call protection is good and so are upfront fees, but unless banks are willing to issue at 95 it will be tough, investors said.
On sponsored deals, buysiders are looking for (surprise!) more equity from the sponsors or additional warrants. Deals that are popular are asset-based deals, where there is excellent collateral, buysiders said.
S&P To Offer Manager Evaluations
Standard & Poor's will be offering CDO issuers an evaluation of management teams as a part of its rating services on upcoming deals. The CDO panel discussion at the conference spurred discussion regarding managerial differences on portfolios and the importance of information on specific managers for investors. One panelist summed up the group's sentiments when he said, "A manager can ruin any well-timed, well-structured deal."
David Tesher, managing director at S&P, said the evaluation will be a qualitative analysis, focusing on the management experience and credit skills of the team as it relates to its latest deals. Tesher explained that as investor portfolio exposure has grown over time, investors are seeking more tools to differentiate between investment opportunities. The evaluation will serve as a performance analysis in the context of the deals they are managing and will not be a ranking system. Tesher said the agency will provide the service by request for the rest of the year, but will include the service on all deals beginning in January 2002. But managers will have to request that the details be published.
Seen and Heard
* Mike Cunningham of FleetBoston Financial and Michael Nitka of Société Générale bravely honored Merrill Lynch's Nancy Wilson Brothers' request that everyone in Ballroom C at the distressed debt session get up and dance to help relieve last month's stress. A less generous, non-participatory ballroom looked on as "Jock Jams" played and Cunningham and Nitka got their groove on.
* Panelists in the distressed debt session did a role play of a trade, complete with tongue-in-cheek references to bad credits and unsavory business partners. One was from the firm Barely Solvent, the other from Dewey, Robem and Howe. They were trading a piece of C.R.A.P. (the acronym of a fictitious company Consolidated Radio and Paper).
* When LSTA executive director Allison Taylor opened the conference by declaring the LSTA shindig a "hugfest," some attendees were a tad skeptical. But the most fierce competitors were arm-in-arm by the end of the cocktail party Wednesday, once again demonstrating the amazing power of alcohol.