Lehman Brothers and Salomon Smith Barney are pitching an original issue discount on their deal for Williams Communications, a pioneering twist market players say amounts to a "disguised up-front fee" to entice disheartened investors into the $300 million institutional piece of the struggling deal. Bankers said the six-year term loan "B" is being offered at a discount to par at 96 3/4 as a way for the firms to answer present buyside concerns regarding secondary telecom trading levels and the negative effect telecom paper is having on the net asset values of their funds. But at press time last week agents had only one commitment in. Scott Schubert, cfo of Williams Communications, declined to comment. Officials at Lehman Brothers declined to comment and Salomon Smith Barney officials did not return calls.
The tranche is fully underwritten at $300 million, but one banker close to the deal said the discount would be netted out in the amount of the proceeds the company receives rather than the banks eating the difference. In that case the company would receive a little over $290 million if the deal closes. It could not be determined whether a steeper discount may be on tap.
"An original issue discount has been offered because there's no upside to the [telecom] loans and it's a difficult trading environment as most of the loans that trade, trade down," said one buysider. Even though the market is equating the 96 3/4 discount to a 31/4 % up-front fee, bankers are likening this up-front fee to an original issue discount--a typical incentive on bond deals-- because it's much more significant than what is typically offered for up front fees. "Usually an increase in commitment fees goes from 1/4% to a 1/2%, not from a 1/2% to 31/4 %," explained one banker. A buysider explained it's a packaging difference to appeal to concerns funds have regarding net asset values. "Buysiders are interested in getting something that can move up from 96," he said.
But even with this newly constructed incentive, one buysider noted that funds will not recognize the upside until the paper moves back up to par or nears maturity, much like an original issue discount on bonds. "Williams is considered a very attractively priced deal but it's a tough deal because no one knows where the bottom is right now: what is the right price? What could seem attractive today might go down to 95 next week," he said.
The Williams deal, like Level 3 Communications, Nextel Partners, and FairPoint Communications, has struggled from the beginning to lure investors who consider their portfolios already heavily exposed to the sector. Last week the company announced the $950 million deal would be reduced to $750 million and pricing increased from LIBOR plus 33/4 % to LIBOR plus 4%. And new efforts to re-market the deal do not seem promising as the market overall still seems to think Williams is a tough sell. "The sector really traded off in the fourth quarter of 2000, but now we are seeing the same situation with the backdrop of a softening economic environment, compounded by a lot of large companies issuing earnings warnings," lamented one buysider.