Centennial Communications' $50 million term loan "C" add on, offered at 95 in syndication, may have pleased new entrants to the credit, but the discount to its 97 trading level presents a problem for investors. A banker familiar with the deal said that offering an add-on credit at a discount results in existing debt being marked down in portfolios. "Centennial is trading at 97, and logically if you can buy Centennial debt at 95 elsewhere and it is a similar security with a similar spread, you have to mark your own loans at 95. If a bank is holding a $5 million piece, then this is a $100,000 hit," the banker explained, adding nothing of this magnitude has occurred before with an add-on.
Discounts could hurt loan funds. Scott Berry, an analyst at Morningstar, explained that when a new security comes out and it is similar to one the fund holds, the loan is marked down. This affects the net asset value of the portfolio.
J.P. Morgan is leading the deal, while Bank of America, Merrill Lynch and Bank of Nova Scotia are administration, syndication and documentation agents, respectively. The loan is priced at LIBOR plus 31/ 4% and is an add-on to a $1.05 billion credit arranged at the end of 1998 and amended to $1.25 billion in February last year. Bankers said the deal had to be offered at 95 in order to entice investors into the troubled telecom market. Loans offered at a discount in syndication have recently gained favor as lenders try to appeal to an institutional marketplace looking to push up values in portfolios. If a deal is at a discount, then the chances are that it will trade upwards towards par, and then the investor can show increased yields (LMW, 8/13). Another banker said, "this is a huge impact. Institutions care about upside, which is why this was done, but it could take months to trade back up to 97 or par. This will show on the profit and loss column," she added. Andy Tuck, spokesman at J.P. Morgan declined comment.
The add-on term loan will fund the rollout of Centennial's Caribbean operations and pay down the $250 million revolver. The wireless provider offers cellular service in Indiana, Louisiana, Michigan, Mississippi, Ohio and East Texas. Centennial also provides personal communications services in Puerto Rico, the U.S. Virgin Islands, Jamaica and the Dominican Republic. Centennial uses a competitive local exchange carrier license to operate in Puerto Rico. Peter Chehayl, senior v.p., cfo and treasurer of Centennial declined to comment.