A $1.3 billion syndicated loan for Madison Dearborn Partners Inc. has won early honors as the most talked-about deal of 1999.
Not that it has much competition.
Syndicated lending in the leveraged sector has slowed to about half the level it was at a year ago. As of Feb. 1, only $19.3 billion worth of deals were either in the market or expected, compared with $37 billion on Jan. 29 of last year.
As a result, the Madison Dearborn loan-its volume representing 7% of all loans in the market-has seized the attention of banks and institutional investors who crave the fat returns of loans to leveraged buyout shops.
Bankers declined to comment on pricing, but the loan is expected to have an annual interest rate at the London interbank offered rate plus 300 basis points-a price considered highly leveraged by market standards.
"It's one of the marquee deals of the year," said Michael Mauer, head of loan syndication at J.P. Morgan & Co., which is arranging the financing along with Bankers Trust Corp.
Already there is interest from investors, though a bank meeting is not scheduled until Feb. 18, and syndication is not set to be kicked off until the last week in February.
"Based on investor interest at the announcement, we expect to see a strong turnout," Mr. Mauer said. "It's the size, the industry, and the fact that there's just not a lot of flow."
Bankers attribute the slowdown in leveraged lending to two factors: the resurgent high-yield bond market and the absence of mergers and acquisitions.
"When you talk about leveraged lending, it's by definition linked to the M&A market," said Thomas W. Bunn, head of syndicated finance for BankAmerica Corp. in Charlotte, N.C. "I think we've lost some of that. And shrinking spreads in the bond market are helping repayment in the leveraged loan market."
Madison Dearborn, a Chicago leveraged buyout firm, is hoping to use the $2.2 billion in proceeds of the loan and other financings to complete its purchase of 55% of Tenneco Inc.'s paperboard packaging division, which was announced Jan. 26.
The deal was born last July when Tenneco of Greenwich, Conn., yielded to its shareholders and said it would spin off certain business lines.
Then the paperboard market hit a slump, and speculation began that a private buyer would step forward. In the second half of 1998, Tenneco hit rough waters. Its fourth-quarter earnings dropped sharply from a year earlier, and its stock price slumped 25% from May to January.
Meanwhile, Sam Mencoff, a partner at Madison Dearborn, sought out advisers at Morgan and at Bankers Trust's BT Alex. Brown subsidiary, to come up with a plan. Both banks brought strengths to the deal, Morgan with its LBO sponsor team and Bankers Trust with its experience in financing the paperboard market.
Together they came up with the winning plan. Tenneco would keep a 45% stake in the firm, assets would be sold, and the LBO firm could "cash out" of the new company, possibly through an initial public offering, should its value increase, company executives said.
As if sensing a building frustration in the loan market, Morgan and Bankers Trust not only came up with a plan but locked in the year's biggest leveraged loan to date.
The banks also cornered a coming $700 million high-yield bond issue that, along with an initial merger and acquisition advisory role, led to millions in fees.
Perhaps more importantly for Morgan bankers, the deal is a high-profile transaction. Morgan has been looking to its M&A advisory business to help build its presence in leveraged lending.
"It's been in the works for a couple years," Mr. Mauer said. "It's a fabulous transaction for us."
