“Credit profiles matter but so do incentives. In the current market, bankers have a lot of incentive to avoid writing down debt. MEG’s Term Loan A puts its paper in the hands of typical banks with BAC serving as the lead bank. BAC and others in the lending group would likely prefer to extend rather than write down MEG’s debt. BAC probably also recognizes that credit markets could improve in terms of health so an extension could give its borrower some more time whereby it could refinance out into a healthier market, should a window like last spring’s emerge in the coming years. In structuring the right amendment and extension, BAC could generate up front cash fees, avoid any write down of debt, have a higher yielding performing asset on its balance sheet, and ultimately when credit markets thaw, be made whole when MEG refinances.”As for refinancing terms, almost precisely one month ago, I presented my thoughts on MEG’s potential refinancing terms, stating that BAC would be:
“..hitting MEG up for $3-5MM for amendment/extension fees and pricing its new debt at L+700 w/a 150 basis point LIBOR floor, MEG would be looking at $31MM on the new loan, $5MM in fees, and then $35MM in interest expense tied to its high yield bonds totaling $71MM in annualized financing expenses.”This is actually quite close to what was realized in the new facility. Per MEG’s latest press release:
“The amended bank term loan facility has an interest rate of LIBOR with a 1.5% floor plus a margin ranging from 5% to 7% (and commitment fees ranging from 2.25% to 2.50%), determined by the company’s leverage ratio, as defined in the agreement. In addition to this cash interest, the company will accrue payment-in-kind (PIK) interest of 1.5%. PIK interest increases the bank term loan outstanding, is accrued on outstanding balances and is payable in cash on amounts outstanding at loan maturity.”Based on MEG’s leverage ratio, total interest expense will range from 8%-10%. with up front cash interest expense ranging from 6.5%-8.5%. The extension is contingent on MEG issuing at least $225MM in new notes by May 25, 2012 and using the majority of proceeds to take out the Term Loan. I had expected a high yield offering of about $125MM so the expected offering is significantly higher and also suggests that the offering could be along the lines of a Term Loan B offering. JP Morgan (“JPM”) is arranging the deal and is well regarded in the leveraged loan and high yield markets. One would guess that the $225MM in notes was already loosely discussed by JPM and BAC’s syndication desks and is reflective of strong appetite for the credit.
This is playing into the incentives I discussed earlier in the year. BAC is replacing its existing low-return asset with a higher yielding one while also taking advantage of a healthy credit market to reduce its exposure to MEG. The amended facility may also telegraph what JPM is ultimately able to arrange for MEG. The current deal structure in terms of a LIBOR floor, PIK component, and small revolver are consistent with a Term Loan B (“TLB”) offering and I believe the amended facility is an A Loan in name only. As a result, one can take an educated guess that the deal arranged by JPM may match the terms of the extended facility albeit with a longer maturity.
EXHIBIT I: MEG SUMMARY FINANCIALS POST $225MM TERM LOAN B ISSUANCE
About the author:
Amit Chokshi is the founder and owner of Kinnaras and affiliated companies and is responsible for security analysis, selection, portfolio management, and Firm operations. Prior to founding Kinnaras, he worked as an associate at the Royal Bank of Scotland ("RBS") in the firm's Corporate Advisory Services group, which provided corporate finance and mergers and acquisition ("M&A") services to the firm's clients with a particular emphasis on private equity firms. Amit also worked at Morgan Stanley and received a B.S. in Finance from Bryant University and an MBA from Emory University. In addition to passing the NASD Series 7, 63, and 65 exams, Amit is also a CFA Charterholder and on the Board of the Stamford CFA Society. Amit has appeared on Bloomberg Radio and has also been quoted in various publications regarding Firm-specific holdings.