G.P.s Take a Shine To 144-A Offerings –

In the past several weeks, buyout firms ranging from large shops like Joseph Littlejohn & Levy to mid-size firms such as Genstar Capital, LLC have arranged financing for investments largely through the 144-A market.

The strategy will be put to the test soon as Apollo Advisors, L.P. and Thomas H. Lee Co. plan to float a $1 billion offering to finance their investment in Patriot American Hospitality with Chase Manhattan Corp. and Bear, Stearns & Co. acting as underwriters (see story, p. 1).

Other recent offerings include DLJ Merchant Banking Partners, Craig McCaw’s Eagle River and Madison Dearborn Partners raising $406 million for Nextel Partners, the exclusive licensee of NEXTEL Communications’ digital wireless services in targeted mid-size and smaller markets. The firms are paying a 14% interest rate for the offering after analysts had predicted they would receive a 13.5% rate. The buyers committed $156 million in equity in the deal for Nextel, which represents only about 15% of the $990 million purchase price. Nextel, though, contributed licenses and related assets in the properties and brought the equity commitment to 30% of the purchase price, said Andy Rush, a managing director at DLJ.

Also, JLL last month increased the amount of 144-A financing for its $453 million buyout of Hershey Food Corp.’s pasta division from $110 million to $160 million, and Genstar financed much of its approximately $320 million merger of portfolio company Panolam Industries with Pioneer Plastics Corp. in a $135 million 144-A offering.

A Harbinger of Times Past

The extent of activity is reminiscent of the first half of 1998 when buyout firms flocked to 144-A investors for better rates and more flexible payment schedules. Firms could no longer access this financing when the credit markets tightened in August.

“I think the 144-A volume amount is clearly healthy; volume in 1999 is $20.5 billion to date as opposed to $27.6 billion at this time last year,” said Michael Miller, the head of high-yield sales at ABN-Amro Bank.

Firms are using the 144-A option even though they are finding the prices they need to pay higher than last year. On the positive side, firms do not need to pay for amortization in a 144-A financing, unlike a senior debt tranche, which still makes it an attractive option.

Genstar, for example, was going to acquire Pioneer, a manufacturer of cabinet surfaces, before the credit markets tightened last year; the firm had anticipated paying an 11% rate on its offering. Now, Genstar is paying an 11.5% rate.

The group managed to get its 144-A financing quickly because it already had lined up 144-A investors in the summer, said Partner J.P. Conte. Typically, 144-A financing takes longer to secure than having a lender arrange senior debt.