Donaldson, Lufkin & Jenrette is leading a $100 million loan for Pioneer Americas that combines elements of a bank loan and a high-yield bond.
The term loan, part of a $335 million financing package for Pioneer, is the latest example of how the high-yield bond and bank loan markets are converging.
DLJ, one of the last investment banks to enter the syndicated loan business, said it designed the loan to appeal specifically to institutional investors.
"We've really been focusing on the noncommercial bank investors in the bank loan market, and trying to understand what they need in terms of structure," said Harold J. Philipps, a managing director and co-head of the loan group at DLJ.
The $100 million loan portion of the package, which was launched last Wednesday, is a 9.5-year, secured, bullet-term loan with a nominal amortization of 1% annually. Most term loans mature in 5.5 years.
The financing backs the $102 million acquisition of an Occidental Chemical plant by Houston-based Pioneer Americas, a chemical manufacturer and marketer.
The term loan accompanies the rollover of an existing $35 million five- year asset-based revolver, to be placed as a whole with BankAmerica. Salomon Brothers is the co-arranger and documentation agent on the loan; BankAmerica is administrative agent.
DLJ also led a high-yield bond issue for Pioneer Americas, first set for $175 million and raised this week to $200 million. The issue was co-led by Salomon Brothers.
But it is the 9.5-year term loan that has garnered the most interest. Already syndicated to 17 investors and oversubscribed by 100%, the term loan's covenants are the same as for the bond, and after a period of 30 days, they cross-default to the bond.
Another bond-like element of the loan is its pricing. First offered at a range of 250 basis points to 300 basis points over the London interbank offered rate, it was narrowed to between 250 basis points and 275 basis points through market "price talk."
The price was finally set at 250 basis points over Libor on Tuesday.
Both the term loan and bond are secured by the fixed assets of Pioneer Americas on a pari passu, or equal basis, while the revolver is secured by the company's current assets.
"What we've done gives them (Pioneer Americas) the benefits of the bond market, through covenants and nonamortization, but makes it a pre-payable, floating-rate instrument so they can take their excess cash flow and pay it down," said Mr. Philipps.
Because cash flows for chemical companies tend to be cyclical, they usually finance themselves with a high-yield bond and a small revolver, he added. That capital structure lets them avoid both amortizing debt and financial covenants that give them problems when business cycles turn.
The deal is reminiscent of a $135 million hybrid instrument that Bankers Trust New York Corp. issued for Huntsman Corp. last March. Institutional investors considering this latest hybrid term loan expressed interest but said they would have to look at Pioneer's cash flows.
"We want to be happy that we like the business first of all, and then we'll look at the structure, because normally you can get around the structure issues," said Howard Tiffen, who manages a loan portfolio of $1.35 billion at Pilgrim America Prime Rate Trust.
