A $1.13 billion loan package backing Chesapeake Corp.'s hostile bid for two of its packaging rivals may box the company in, analysts said.
The loan, being led by First Union Corp., will be used by Richmond, Va.-based Chesapeake to fund its reverse hostile bid for Shorewood Packaging Group and Boxmore International PLC. Chesapeake, which makes packaging for such household brand names as Ore Ida and Duracell, is looking to trim costs through consolidation.
But Edward Brennan, a debt analyst at Standard & Poor's Corp., warned that the company may be piling on too much leverage to be justified by the gains consolidation may bring. "The potential benefits are more than offset by management's willingness to adopt a more aggressive financial posture than had been anticipated," he wrote in a report. "Chesapeake will be challenged."
Despite the bid's hostile nature, both First Union and Chesapeake said the leveraged loan is meeting strong response. The loan package includes a $200 million, five-year credit facility; a $350 million, five-year term loan; and a $325 million, six-and-a-half-year term loan - all priced at the London interbank offered rate plus 250 basis points. It also includes a $250 million, 18-month credit line priced at Libor plus 300 basis points.
The syndicate includes Wachovia Corp., Canadian Imperial Bank of Commerce, Imperial Bank of Japan, and Toronto-Dominion Bank and Trust.
Since Shorewood bid for Chesapeake last October, the companies have been in a heated struggle that has forced Chesapeake - on the advice of Donaldson Lufkin & Jenrette and Goldman, Sachs & Co. - to build a war chest of more than $1 billion of borrowed funds.
S&P's Mr. Brennan warned that Chesapeake's debt-to-capital ratio would be 65% under the buyout offer and that debt would be four-times earnings - before interest, taxes, depreciation and amortization - a level S&P considers very aggressive. It has rated the bank loan BB-plus, a junk grade.
In an interview Thursday, William Tolley, Chesapeake's chief financial officer, declined to comment on the ratings. But he did concede that the projected debt levels were "well above our targets."
Mr. Tolley promised that Chesapeake would "return to normal debt-to-capital ratios" within a few years as it tries to free up cash flow - possibly through asset sales. He would not say whether Chesapeake would consider repaying the loans through a bond sale but did say it had chosen bank loans because of their "flexibility."
Shorewood's shareholders have until Feb. 18 to decide on Chesapeake's tender offer. Should a majority accept it, final allotments on the loan will be made, and the credit package will be expected to close shortly thereafter, a bank source said. Boxmore approved a takeover last week when 80% of its shares were offered for tender.
