A $275 million telecom credit for Utilicom Networks may test the market's appetite for emerging telecom credit. The company, a broad band cable provider, has tapped
First Union as administrative agent and Bear Stearns and Salomon Smith Barney as co-syndication agents and the banks are quietly approaching prospective lenders with general syndication slated for later next month. But bankers say the deal could be tricky because of its size: too big to be a club deal and more players means less incentive to lend, as the plum on such credits is future investment banking business. The more banks needed to fill the deal, the less chance there is of reaping real rewards through an underwriting of a securities deal.
One banker familiar with the deal said its size falls into a grey area. "It's so hard to raise money for these guys. That's why most are typically done as club deals," he said. The banker explained that this deal could be problematic because club deals tend to lose steam if over $200 million. "To get $250 million done you need about five banks. And generally banks don't want $50 million of a credit this high risk," he said. "Banks provide capital in essence to buy a future seat at the table for debt or equity down the line," he said, explaining that too many players dilute potential future underwriting tied to the deals. "If too many banks are in the agent slot the next guy's thinking how am I going to get any bond business?"
Other bankers who have not seen the specifics of the deal also thought the size could test the market. "First Union's going to have their work cut out," predicted one banker, citing the difficulty small broad band cable companies and CLECS have had getting deals done in the last year. However, another banker noted that equity investor Blackstone Group represents smart money and banks that historically back the buyout firm's deals will surely take a look. These bankers noted that emerging telecom credits are priced in the market currently at roughly LIBOR plus 4 1/2 %. One banker said that if these companies could successfully tap the junk bond market they would at least pay 15% over treasuries or an equivalent rate of LIBOR plus 8%. So why do banks bother with these deals? "Because if you're trying to build a telecom practice these small companies could be the global players of tomorrow and you want a share of future business," he said.
The Utilicom credit comprises a $30 million revolver priced at LIBOR plus 4 1/2 % and a $225 million term loan "A" piece also priced at LIBOR plus 4 1/2 %. Pricing is based on a grid tied to debt.