A jittery market has forced banks to hold back on attempting to off-load buyout-backed loans. Will they have any better luck with Chapter 11 exit financings?
This month, auto-parts companies Delphi Corp. and Dana Corp., chemical manufacturer Solutia and energy company Calpine all entered the market seeking exit financings to support their emergence from bankruptcy protection. Their timing couldn’t have been worse. The ailing credit market will likely force at least some of these issuers to pay up in terms of spread and fees, while others may be forced to stay in Chapter 11, waiting for better times. Not only are buyout firms watching the loan sales as an indication of the health of the leveraged-lending market, but a few LBO shops have stakes in companies seeking to come out of bankruptcy.
“They are all ending the bankruptcy process at roughly the same time,” one banker said. “So, they don’t have the option of playing the market conditions.”
Delphi faces the sternest challenges, in part due to its sector. American auto manufacturers—Delphi’s biggest clients—are struggling just as the economy appears poised to enter a recession. The company has also been embroiled in a bitter dispute with its unionized work force. Delphi will “launch, but there are certain terms in the paper that need to be cleared, and if they don’t, the exit bankruptcy process may be delayed,” another banker said.
Hedge fund Appaloosa Management is leading a consortium that committed to provide Delphi with a $2.5 billion equity investment upon exit. But there are strings attached. If the company’s pro forma cost of debt exceeds $585 million in 2008, then Appaloosa can pull the plug on its equity commitment. Without the equity investment, Delphi’s plan of reorganization becomes moot and the exit would be delayed. “The question is, can the financing be raised and can it be raised on terms that Appaloosa deems acceptable?” a market source said.
Delphi is looking to issue more than $6 billion in loans, including a $1.6 billion asset-backed revolver, a $3.7 billion first-lien term loan and a $825 million second-lien term loan. The first lien is set to price at LIBOR plus 450 basis points and sell at a discount of 96 cents on the dollar, although investors could push for a discount of 94, according to one buyside participant. If the loan proposal does fall through, it wouldn’t be the first time. Last year, the auto-parts maker had to reduce its exit financing package by $2 billion after
Dana, whose largest equity holder is
Calpine also entered the market mid-month, seeking $2.6 billion of debt split between a $2.3 billion term loan and a $300 million asset sale bridge loan. Goldman Sachs and Credit Suisse led the deal. Calpine’s largest equity investor is hedge fund Harbinger Capital Management. Calpine was scheduled to exit bankruptcy by the end of the month, although the date is now being challenged in court by shareholders that consider Calpine’s post-bankruptcy value artificially low.
Elsewhere, Solutia is looking to sell a $400 million asset-based revolver and a $1.2 billlion term loan B, which is being marketed with a discount of 96 cents on the dollar. Solutia plans to exit bankruptcy protection later this month. The company entered Chapter 11 after it was spun off from Monsanto Corp., taking with it a substantial portion of Monsanto’s legal liabilities.