Forth Howard Corp. is prepaying a portion of its bank debt with a new $100 million loan led by Bankers Trust Co. and priced at a steep increase over the rate on the company's existing debt.

The move coincides with the company's effort to get its banks to consent to a planned offering of $500 million of notes. Both deals are to be completed simultaneously.

"To me, it sounds like a quid pro quo," said one outside banker, referring to the prepayment plan. Michael Lempke, Fort Howard's treasurer, denied that was the case.

A Plan to Redeem Junk Bonds

On Friday, the Wisconsin-based maker of tissue products filed to offer $250 million each of senior and subordinated notes and use the proceeds to redeem higher-cost junk bonds. The senior notes would be of equal ranking with the bank debt.

Though the next payment on Fort Howard's term bank debt is not due until the end of next year, prepaying $100 million of it now seemed like "the prudent thing to do," said Mr. Lempke.

Miriam Zussman, an analyst at Standard & Poor's Corp., said the prepayment is modestly helpful. "The less you have to worry about imminent maturities, the better," she said.

Still, the prepayment carries a cost. The new loan is priced at 275 basis points over the London interbank offered rate, or 125 basis points more than the company now pays on its bank loans.

In addition, Fort Howard agreed to pay bank fees totaling an estimated $4 million for the new loan, according to a registration statement for the note offerings. The company will also pay fees of about $2.8 million to amend its old credit pact.

As of June 30, Fort Howard had $582 million of outstanding bank term debt and had drawn $223 million under a separate $350 million revolver.

Debt from Leveraged Buyout

The bank debt and junk bonds stem from a $3.8 billion leveraged buyout in 1988. Bankers Trust led the bank financing for the buyout.

Fort Howard had been considered a candidate to go public again, but the market for initial public offerings has softened in recent months, and so, too, have the markets for tissue products.

Refinancing Fort Howard's 14 5/8% debentures with the new notes will undoubtedly lower its debt costs, but "this does not fundamentally change the credit," Ms. Zussman said. Fort Howard's senior debt is rated BB-minus by S&P.

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