Union Texas Petroleum Holdings may proceed with plans to raise $650 million in bank loans, regardless of the fate of a contemplated secondary offering of common stock.

NationsBank Texas won the mandate to lead the new financing, beating out Bankers Trust Co., the lead banking unit of First Chicago Corp., and Union Bank of Switzerland for first position on the credit.

While the situation remains in flux, it's understood that NationsBank would underwrite $100 million of the total credit, while the three other banks have been invited to kick in $75 million apiece as coagents. The rest would be raised on a best-efforts basis.

Stakeholder Seeks Out

As reported, the stock offering would provide a way for Allied-Signal Inc., the selling shareholder, to cash out its 38.5% interest in the Houston-based energy company.

Most of the proceeds from the bank loans would be used by Union Texas to repurchase $500 million of warrants and preferred stock held by Allied and Kohlberg Kravis Roberts & Co., which also holds a 38.5% stake.

The bank loans and stock offering were designed to coincide so that Allied's entire interest in Union Texas could be taken out at one fell swoop.

However, Allied apparently is having second thoughts about the offering because of a recent slide in Union Texas Petroleum's share price.

Loans Still Desirable

But even if the secondary offering is scuttled, proceeding with the bank financing makes compelling sense for Union Texas.

The company pays a dividend rate of more than 20% on $200 million of preferred stock held by Allied. Through a convoluted arrangement, Allied shares a portion of the nearly $41 million in annual dividend payments with KKR. The warrants, valued at $300 million, are held in roughly equal amounts by Allied and KKR.

Andrew Feinman, an analyst at First Albany Corp., figures the $41 million divided really represents the return to Allied and KKR on the entire $500 million of preferred stock and warrants. Looked at that way, Union Texas is paying an annual rate of 8.2% on the combined obligation.

Saving Millions of Dollars

Replacing that obligation with bank debt would save Union Texas millions of dollars a year.

While exact terms of the bank loans haven't been agreed to, the borrowing rate probably would be between half a percentage point to one point above the London interbank offered rate, currently about 4%.

Moreover, interest on the bank loans is tax-deductible, while the preferred dividends are paid out of after-tax earnings, making the effective cost difference even wider.

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