Responding to difficult times in the pro rata market, Deutsche Bank came to investors last week with an innovative $150 million synthetic term-loan, functioning as a fund to back letters of credit for Premcor Refining Group, but structured to bring institutional dollars into the $500 million pro rata part of the deal. The tranche is the first large-scale synthetic to meet letter-of-credit requirements. Jeff Ogden, managing director at Deutsche Bank, explained "the structure is fairly unique to Premcor, which has a large letter of credit need, but could be used for other companies with significant letter of credit requirements."
Launched last Wednesday, the all-pro rata credit also consists of a $350 million revolver, priced at LIBOR plus 2 3/4 %. Officials at Fleet Boston Financial, syndication agent, and Toronto Dominion, documentation agent, declined to comment on the new structure. Karen Davis, director of investor relations for Premcor, would not comment on the credit, but explained that the company needs letters of credit to back future oil purchases.
To fulfill the needs of portfolio managers to invest in funded loans with a stream of income, Deutsche Bank has transformed the letter of credit structure into a structure for investors that mimics pricing on a fully funded term loan. Deutsche Bank will invest $150 million of institutional money into a fund to back letters of credit for Premcor needed upon oil purchases. Deutsche will then invest the fund so that it generates flat LIBOR for buysiders while Premcor will provide 2 3/4 % through fees for the letter of credits. The result is a Deutsche Bank CD with a combined spread of LIBOR plus 2 3/4 %.
"What you're really buying is a Deutsche Bank CD that pays you LIBOR, then Premcor is paying you the 2 3/4 %," explained a buysider. "It's a unique way to put together a revolving credit facility and it should be interesting to see who buys it," he added, noting it's great for Premcor, as it gets working capital liquidity at a discount, not paying the LIBOR part of the spread.
The risk for investors? Anytime during the term of the loan, if needed, the company can tap some or all of the money in the CD, converting it into a true-Premcor loan as Premcor will pay the LIBOR part of the spread instead of Deutsche Bank. The investor still receives the LIBOR plus 2 3/4 % spread, but the risk is increased as the loan is backed by Premcor, which has junk status, rather than a AA Deutsche Bank rating, said the buysider. "As long as Deutsche has money in the CD you have double-A credit," he said. Liquidity is another concern raised by the buyside. "The problem is selling it. For someone, who wants to buy loans, it's not really a loan, it can only be converted into a loan," he explained. Bankers and buysiders agreed investor response will determine how many more of these we will see.