UBS Warburg and Bank of America are hitting the market with a five-year, $6 billion term loan backing Devon Energy's purchase of Calgary-based independent senior oil and natural gas producer Anderson Exploration. The price of the Anderson purchase is $4.6 billion, but the financing package also covers the cash portion of the acquisition of Mitchell Energy & Development, announced last month. Retail syndication of the deal will launch in mid-October. The co-leads started approaching close relationship banks Friday.
Larry Nichols, president and ceo of Devon, said in a conference call last week that pricing on the term loan is "an incredible LIBOR plus 3/4% to 1% or blended 41/ 4% to 41/ 2%." Explaining the use of debt to finance the acquisition Nichols said, "We had a choice of equity or debt, and because of where we and our peers have been trading in the last month or so, equity has become very expensive and we don't like issuing equity at these prices. Conversely, debt is remarkably cheap."
The term loan is structured to have back-end-weighted amortization so that in the first year payments are $900 million, rising to $1.6 billion by the fifth year. A UBS official clarified that pricing will depend on ratings, with a Baa1/BBB+ rating producing LIBOR plus 3/4% and BBB/Baa2 resulting in the higher spread. Ratings are expected by the end of the month.
Nichols, said more long-term debt would be issued in September. "As soon as we have amended a proxy statement with the [Securities and Exchange Commission], we will access the 144A bond markets. The terms now available are 10-year and 30-year, and if the market is there, we will try to complete a $2-3 billion sale by the end of September." He noted the proceeds will pay the first two to three years of the loan, meaning there are no principal payments until 2003 or 2004. There are no prepayment penalties on the loan and Devon can maintain an investment grade rating, explained Nichols. UBS and B of A likely will lead the note offering, a banker familiar with the situation said. Banks wanting to come in on the bond business are expected to come in on the loan.
Both UBS and B of A have relationships with Devon. B of A has historically provided loans to Devon and the $800 million revolver it currently leads will stay in place, the official said. UBS has historically been an adviser to the company. Kevin McCarthy, managing director and head of global energy at UBS, who had covered energy at PaineWebber, was the banker behind the transaction. PaineWebber advised on Devon Energy's $2.4 billion acquisition of PennzEnergy in 1998. Calls to McCarthy were not returned.