A key piece of financing for the planned merger of Jefferson-Smurfit Corp. and Stone Container Corp. seems to be on track, a lender familiar with the loan said.
Bankers Trust Corp. and Chase Manhattan Corp. have crafted a $550 million extension to Jefferson-Smurfit's existing $1.3 billion credit line to help cash-strapped Stone Container meet its bond obligations.
The extension is the latest stopgap to help the merger close. The two companies, which both operate paper mills and make cardboard containers, agreed in April to merge in a deal that valued Stone Container at $2.12 billion.
But global financial turmoil has driven up the price of financing what would have been a below-investment-grade deal, and the paper and packaging industry have hit a slump. Both companies reported lower earnings for the most recent quarters.
Those conditions have cast doubt on the proposed merger. Shareholders of both companies are scheduled to vote on the deal Nov. 17.
Cynthia Werneth, a credit analyst at Standard & Poor's, predicted "the deal will get done" but said questions remain about the combined entity's debt level, which would be about $7 billion. Another concern is whether lenders will approve numerous changes to the deal.
"One of the things that needs to be considered is whether the two entities should have the same credit rating," Ms. Werneth said. The new financing is complicating that question because it is "taking money for Jefferson-Smurfit and putting it into Stone."
Another question that remains is how much of the merger will be financed by bank loans. Stone Container, Jefferson-Smurfit, and their lenders are considering restructuring existing debt and offering less than $1 billion in new financing.
An original $4.8 billion bank loan financing for the entire merger was shelved in September after pricing estimates for the loans came in high. Jefferson-Smurfit, of Clayton, Mo., and Stone Container, of Chicago, tested the high-yield bond market, but prices there have driven the companies to seek alternative ways of getting the deal done, sources said.
In an Oct. 8 amendment to the deal, both companies said a new parent company would be created, with Jefferson-Smurfit and Stone Container operating as subsidiaries.
If new money is needed, the holding company will proceed to the high- yield bond market and syndicated loan market when better pricing is available.
The combined company also plans to funnel more money-as much as $300 million-to Stone Container, so Stone can pay down debt.
The change in financing requires approval from existing lenders-approval that might be hard to come by, according to some bank observers.
"That's going to be a real challenge," said one lender familiar with the loan. "These companies don't have the best track records."