In a sign that investment banks are blurring the line between bank loans and bonds, lenders have included two-year call protection in a loan for the AMF Group buyout.
The $815 million loan, which Goldman, Sachs & Co. is leading with Citicorp, supports a $1.4 billion leveraged buyout of the bowling company by Goldman Sachs Capital Partners. The call protection applies to a $315 million part of the loan.
Call protection, which requires borrowers to pay a penalty if they pay off a loan before a certain date, is uncommon for bank loans. One of the attractions of a bank loan to the borrower is that there is no prepayment penalty.
"It's the beginning of a trend," said James C. Lewis, division executive of corporate finance at Bank of Boston Corp.
"As the institutional market takes bigger and bigger pieces of bank loans, you could well see more of this," said Simon Jawitz, a vice president and co-head of the bank loan group at Goldman Sachs.
The call protection for the AMF loan, and for the others that have used it, applies specifically to the institutional portions of a loan - usually termed B, C, and D tranches - which have a longer duration and a higher return.
"From the investor's point of view, having the call protection gives them additional comfort that they will have the asset longer, and more significantly, it increases the likelihood that the asset may trade in the secondary market above par," Mr. Jawitz said.
"The loans are taking on more-bondlike qualities, which broadens the base of investors that issuers can tap into," said a loan trader. "Now, it's not as important because more investors are chasing fewer deals, but that will change when there are a lot of deals and fewer investors."
Loan syndicators said the call option represents a trade-off for issuers. They secure the loans for lower prices, but have to pay a penalty to refinance.
"To me, call protection is a major step backward because it reduces the flexibility of the bank loan market," said a loan syndicator. "The syndicating agents went and gave something away that belonged to the borrower, and didn't attract any incremental capacity."
On the loan for the AMF acquisition, investors receive the London interbank offered rate plus 287.5 basis points for a seven-year, $200 million tranche, and Libor plus 312.5 basis points for an eight-year, $115 million tranche.
Lenders said that without the call protection, investors would have received Libor plus 300 basis points for the A tranche.
The call penalty for both tranches is 101.75 basis points at the end of the first year and 101 at the end of the second year.
The relatively low prepayment fees for only two years mean that the protection is "weak," said a loan expert.
The real sign that call protection has taken hold, said the lender, would be a multibillion-dollar deal with five-year call protection.
