$140 Million Deal Proves Tough Sell For 1st Chicago

After failing to syndicate a $140 million credit for Boston buyout firm Thomas H. Lee Co., First Chicago Corp. is scrambling to find a sales pitch that will attract other lenders.

The episode could prove an embarrassing misstep, especially if the Chicago bank fails again.

At least one bank has already rejected the deal a second time, saying the issues go beyond just pricing.

First Chicago officials indicated that the marketing effort will keep going for as long as it takes.

The $140 million credit consists of a $100 million, seven-year term loan, and a $40 million revolver, maturing at the same time.

Special-Purpose Corporation

The loan was made to a special-purpose corporation formed by the buyout firm, called ML-Lee Acquisition Fund.

The fund has been Lee's main investment vehicle.

The new loans, which were used in part to refinance existing ML-Lee bank debt, are collateralized mainly by the fund's junk bond holdings.

Although the fund's assets are mainly junk bonds, the fund itself was recently awarded an investment-grade rating of triple-B-plus by Duff & Phelps. That's because the bank loans are overcollateralized by the junk bonds.

Not Enough on 1st Try

Still, the investment-grade rating apparently wasn't enough to entice other banks to join the First Chicago syndicate on the first try.

The market for these types of loans is said to be extremely poor, in part because of the volatility of junk bonds.

"I don't like these deals," one banker said flatly.

Transactions of this sort were considered acceptable, at least conceptually, in the 1980s, but not in today's conservative credit climate, market sources said.

First Chicago was apparently driven to make the loan because of its strong relationship with Tom Lee, whose firm bears his name.

Indeed, First Chicago was the lead bank for the fund's original $225 million revolver.

The spread on the new credit is 100 basis points over the prime lending rate. There is no pricing option based on the London interbank offered rate.

First Chicago officials said they were not able to successfully syndicate the credit last month in part because some lenders were on vacation.

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