Bankers on Thursday climbed on board the $11.5 billion loan backing Norfolk Southern Corp.'s hostile bid for Conrail Inc.
In the first day of the deal, joint-leads J.P. Morgan & Co. and Merrill Lynch & Co. landed commitments from six banks, including Union Bank of Switzerland and Toronto Dominion, of at least $500 million each. More than 90 banks from the United States and abroad attended a meeting at the Plaza Hotel in New York City to evaluate the blockbuster loan.
The loan will finance Norfolk's $9 billion bid for Conrail, which has already accepted a friendly $8.4 billion offer from CSX Corp. It came to market as Chase Manhattan Corp., BankAmerica Corp., NationsBank Corp., and Bank of Nova Scotia syndicate a $4.8 billion loan for CSX.
Still, demand for the Norfolk loan was brisk, as bankers salivated over the higher fees a hostile bidder pays. In addition, bankers are eager to build a relationship with Norfolk, which currently deals only with a small group of banks.
The loan, the largest ever led by Merrill Lynch, was well-structured and attractively priced, bankers said.
"They need to close it up very quickly", said Parker Knight, a managing director in loan syndications at Union Bank of Switzerland. "The deal is very fairly priced in the market."
The first 15 banks committing at the $500 million level will receive an early-bird fee of $200,000. They will also get a flat fee of $1 million, regardless of Norfolk's success, and a fee of 1.2% on final allocation. The company is also offering a 25 basis point facility fee.
"The pricing was extremely rich, and clearly designed to get everyone in and quickly," said one banker considering a commitment.
Until Standard & Poor's and Moody's resolve their ratings for Norfolk, the initial pricing for the deal is the London interbank offered rate plus 100 basis points. If company's debt remains at its current BBB-minus level, the price would be Libor plus 65 basis points.
J.P. Morgan and Merrill are looking for commitments ranging from $500 million to $25 million by Nov. 14. The only banks conspicuously absent from their two-hour meeting on Thursday were those leading the deal for CSX, bankers said.
J.P. Morgan, which is advising as well as lending to Norfolk, is in something of an awkward position. The blue-chip bank has long had a lending relationship with Norfolk's target, Conrail.
"Historically, a lot of banks have had a problem with hostile takeovers, but feelings on that seem to have changed," said one banker who attended the meeting. "No one at the meeting cited that as a problem."
Mr. Knight of Union Bank of Switzerland said the pace of consolidation across a host of industries will put many banks in similar quandaries. "It's going to be a real challenge in the whole world of one- stop shopping," he said.
Norfolk is expected to use the loan to finance the hostile bid for Conrail, which includes a breakup fee for CSX. Bankers see the deal as a chance to win additional capital markets business.
"If you haven't had a facility, and a lot of banks are interested in establishing relationships, those banks will go the extra mile to step into the agent's position," said Bob Markus, a director and co-head of debt finance at Suntrust Capital Markets.
For Merrill Lynch, the deal raises its profile in the lending market, which it entered just two years ago. "Merrill does a great job on bank deals," said one banker. "They don't try to squeeze out every last penny, and they're willing to offer decent fees that will give people incentive to participate."