United Defense Industries secured an $800 million credit facility on Aug. 13 to replace its $200 million in high-yield subordinated debt. "We replaced our sub debt with all bank debt for a lower interest rate," said Francis "Buzz" Raborn, cfo. The company had prepaid a $707 million bank deal late last June. He says the new financing was oversubscribed to $850 million, but the company chose to cut back. "We didn't need the extra money," Raborn said. The Arlington, Va.-based company manufactures armored combat vehicles and naval systems. United Defense replaced the bond debt with bank debt because it's less expensive, more flexible, and the overall rates are lower, said Raborn.
The company had been paying 8% interest rate on its bonds and is now paying an all- in rate of 6.8%, or 3.6% plus LIBOR, on its bank debt. "It compares favorably to the prior fixed rate cost of the [bonds]," said Mark Manion, treasurer. The company had discussions with several banks, but ultimately awarded the deal to its original lenders, Deutsche Bank and Lehman Brothers. "We chose them for the total package. They said they could get it done and they did," Raborn said. The syndicate is comprised of approximately 40 lending institutions and got smaller with the refinancing, he added.
Raborn says the company would've preferred better spreads. "[The leads] tell me I'm fortunate we got what we did. We negotiated; we got them to come our way, but we had to go their way," he said. Raborn explained that the company couldn't get the interest rate any lower because it doesn't have bonds backing up the bank debt. "The banks are more exposed in our deal, since there's no bonds standing between us and them. They are the creditors, period," he said.