J.P. Morgan & Co. and Bank of Montreal launched an $835 million loan syndication this week for Valero Energy Corp.
At the same time, Canadian Imperial Bank of Commerce sought commitments from oil and gas banks for its $150 million loan to remove oil from Valero's balance sheet.
The San Antonio company will use the funds from the bigger loan for its $485 million purchase of Basis Petroleum Inc. and to refinance some debt.
"When you look at the company's debt position after all the dust has cleared, they will have a strong balance sheet after the Basis acquisition," said an oil and gas expert, "so from a lender's perspective, this is a reasonable credit risk."
Valero is selling its natural gas business to PG&E Corp. for $1.5 billion and plans to spin off its refining business.
Nonetheless, experts said, Valero has its work cut out for it in reaping the benefits of the Basis purchase.
"I hope they haven't bit off more than they can chew," said Joseph N. Ancona, an oil and gas analyst at Pauli & Co. Mr. Ancona downgraded Valero to "sell," from "hold," after the announcement.
Mr. Ancona said that his rating action was based on the company's stock price, rather than the purchase.
Other analysts, however, asked whether the company might have been too optimistic in projecting performance for the new unit.
"They're asking the world to take an awful lot on faith," said an oil and gas expert. For one thing, he said, the company has projected that it will earn $90 million from its Basis purchase by next year, which would be a reversal from losses in the last two years of $100 million and $150 million, respectively.
"That's largely based on the view that the company mismanaged several assets and Valero can turn it around," the expert said.
To some extent, said this market observer, Valero is right, but the amount of the predicted earnings swing is "a significant challenge," he said.
Nonetheless, the company has a number of strong fans on Wall Street, who helped boost its stock to a 52-week high of $36.375 on April 1, from $33.875 on March 17, the day of the announcement.
"I'm not as enthusiastic about this deal as the rest of the Street," said Mr. Ancona.
The $835 million loan, which was equally underwritten by Bank of Montreal and Morgan, is structured as a five-year reducing revolver. The transaction is priced on a grid starting at the London interbank offered rate plus 75 basis points.
Bruce Crawford, a director at Standard & Poor's Ratings Group, said S&P does not yet have a rating for Valero's debt.
"It's going to be a difficult call," said Mr. Crawford, who added that the company could wind up either at or slightly below investment grade.
"Even the best refiners are at BBB, and they often have extensive refining and retail networks," said Mr. Crawford. "Valero doesn't even have a retail network."
Nonetheless, Valero will be large and have a strong balance sheet.
The $150 million loan from the Canadian bank also has a five-year duration; it is priced at the London interbank offered rate plus 97.5 basis points.