Natwest Leads $300M Financing for Tobacco Firm Despite Publicity

Amid one of the tobacco industry's worst public lashings, Natwest Markets last week assembled a $300 million high-yield bond and bank loan package for National Tobacco Corp., the producer of Beech Nut loose-leaf chewing tobacco.

The financing, which supports National Tobacco's acquisition of North Atlantic Trading Co., the maker of Zig Zag cigarette rolling papers, was the second high-yield bond issue led by Natwest, the U.S. investment banking arm of Britain's National Westminster PLC.

The deal was also noteworthy because it came to market just days before the tobacco industry agreed to a historic $368 billion settlement with antismoking forces.

Natwest had worked on the merger and financing since March, including a three-week roadshow, said Matthew Gourlay, a managing director and head of high-yield finance at the bank.

The final package included a $155 million junk bond issue, increased from an initial $115 million; a $25 million revolving loan; an $85 million term loan; and an additional $35 million in payment-in-kind, or PIK, preferred securities.

"I can't remember when a deal has changed so dramatically from its inception until we actually finished the transaction," Mr. Gourlay said.

In addition to raising the size of the bond issue in response to investor interest, Natwest also changed the structure of the loan, which was originally to have been syndicated by Societe Generale USA.

But the French bank dropped out after Natwest created the $35 million of PIK preferred securities to buy out a group of investors who held equity warrants in North Atlantic that were set to mature in four years.

The PIK securities made Societe Generale uncomfortable with the loan because they changed the deal's structure, Mr. Gourlay said.

"We said, 'That's O.K., we'll do the bank piece ourselves,"' he said.

The PIK preferred portion of the deal saved North Atlantic Trading, as the post-merger company is known, "tens of millions of dollars," and precluded a subsequent refinancing, said David I. Brunson, executive vice president for finance and administration at the New York-based company.

"We were able to, in this financing, probably cut four years off of our ultimate game plan by taking out prior financial partners," Mr. Brunson said. Natwest's performance was, "in a word, outstanding," he added.

The investment bank, which started its high-yield business last September, led its first issue in March-a $200 million deal for Anacomp, a microfiche company. While that bond hit the market before North Atlantic, Natwest had won the mandate for North Atlantic before signing up Anacomp.

"We wanted to lead with both guns blazing, so we had salesmen in every single city and did a three-week road show" for North Atlantic, Mr. Gourlay said.

That meant convincing investors of the deal's value while news of the tobacco industry's historic settlement remained on front pages. "We had a lot of adversity," said Mr. Gourlay.

Still, the bond issue was oversubscribed by more than four times, and the loans were oversubscribed by more than two times.

"Part of our criteria for selecting Natwest was they had factored (the publicity) into their equation," Mr. Brunson said, "and they felt that they had sufficient relationships on the investor side. They were proven right."

In addition, due to North Atlantic's stable cash flows, "people were seeing a leveraged situation that would de-lever very quickly, and that's always a plus," he said. And unlike most cigarette makers, National Tobacco has never had a liability suit filed against it.

Both loans have five-year terms and were priced at the London interbank offered rate plus 300 basis points, with a commitment fee of 50 basis points on the revolver.

With seven bank and institutional investors in the syndicate, Natwest was sole agent on the loan. CIBC Wood Gundy acted as co-manager on the bond issue, which had about 80 investors at closing.

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