Donaldson, Lufkin & Jenrette and J.P. Morgan & Co. have put the final touches on a $3.5 billion debt refinancing package for Lyondell Chemical Co.
The deal, announced this week, includes the issuance of 35 million new Lyondell shares, valued at $665 million; $1.9 billion in senior secured notes; and two term loans worth a combined $1 billion. It is expected to close Monday.
The completion of the refinancing terms is the culmination of weeks of hectic negotiations between Morgan and DLJ, Houston-based Lyondell, and the investor group that committed last year to the original $7 billion in financing.
"We think it's a significant and innovative deal," said Stephen P. Hickey, DLJ's managing director for loan syndications and trading.
Bankers were given the responsibility for refinancing the deal after Lyondell's cash-flow projections made investors doubt whether the oil company could meet the original loan's repayment schedule.
In early April, Moody's Investors Service downgraded Lyondell's bank debt to Ba3 from Ba2, citing the ailing petroleum sector and Lyondell's inability to sell more shares. Critical to wrapping up the deal, bankers said, was the use of call protection in both the 2004 and 2007 senior secured notes. In addition, the $850 million term loan, which matures in 2006, cannot be redeemed until 2002.
"It's a very unusual feature that I've never seen in a loan," said Bill Sacher, managing director of high-yield finance at Morgan.
Call protection, which keeps Lyondell from paying down debt early, offers some assurance that the loan will offer investors returns at least until the call date arrives. Because investors know Lyondell cannot pay off the loans or notes, they can more easily buy and sell the company's paper without fear that the investment will disappear.
"It was designed for institutional bank buyers, institutional investors, and crossover buyers in the bond market, and that's exactly who we have in the deal," Mr. Sacher said.
With the call options in place, Morgan and DLJ bankers increased the amount of the note issue and the loan to generate more cash. The original senior secured note issue was increased to $2.4 billion from $1.5 billion. Bankers also ramped up what was supposed to be a $750 million loan by creating two term loans worth a combined $1 billion.
Lyondell, however, will have to pay for the breathing room. The loan comes at a price that ranges between the London interbank offered rate plus 350 basis points and Libor plus 387.5 basis points, about 50% more than the original loan's price a year ago.
