The pro rata market is in the process of a major restructuring as banks examine the lack of return associated with the business and the increasing difficulty in finding players to share the burden of large credits, syndication pros said in a panel discussion last week. Bankers said those changes are affecting the way deals are structured and posting a red light for certain borrowers.
Once a key component of the financing package, the traditional revolver is now as hot as the XFL. "It [pro rata] is not dead, though it feels like it," said Glen Stewart, managing director at Bank of America. "Banks are getting smarter about what a good investment is, and revolvers are not a good investment." Stewart explained that banks are more interested in funded term loans, not a less liquid instrument that may trade down to 98 out-of-the-box.
Peter Nolan, managing director at J.P. Morgan Chase, said. "We want to downsize the revolver as much as possible and the days of the unfunded acquisition revolver are gone," he said. Nolan added that in response to a challenging market, banks have to more carefully assess potential ancillary business associated with deals. Nolan also pointed out that post-merger there are fewer lenders out there and he said Wachovia Bank's upcoming merger with either Fleet Boston Financial or Sun Trust, exacerbates the issue. "There could be three of us in the future," he said.
Stewart noted some bright spots in the market--Del Monte Corp., Dresser Equipment, Greif Brothers, andMichaels Foods all had pro rata pieces that were oversubscribed--as proof that the market is just more challenging. Though it probably will not be as robust as it once was, he predicts it will come back. Tom Newberry, managing director at Credit Suisse First Boston, said that a herd mentality is in operation, "either a deal flies or it doesn't." There is a fine line between success and failure, illustrating the point with the successful Playtex deal. "A good company with a name people can recognize," he added.
Nolan noted that institutional players are "looking for steady-eddy, BB- or better, center of the fairway performers." The institutions are filling the loans, causing flex-downs and increases in term loan amounts at the expense of the revolver, he added.
Some tough lessoons have been learned, panelists agreed. Chief among them, "Never do an emerging telecom deal," said Nolan. "You mean submerging telecom," one quipped, and "if you build it, they won't definitely come," laughed Newberry, adding, "With negative cash flow transactions, generally speaking, watch yourself." Daniel Toscano, managing director Deutsche Banc Alex. Brown, differentiated telecom from cable by noting that the market has learned that perhaps the monopoly power given to cable operators may have supreme importance to the sector's success. "Nothing stopped anyone from tapping the market [telecom] and we learned the risk after the fact," he said.