Del Monte Deal Puts New Face on HLT Funding

With banks under pressure to trim portfolios of highly leveraged transactions, a growing number of borrowers are looking elsewhere for fresh capital.

Del Monte Corp., for example, is sidestepping regulators' concerns with a private placement that looks and smells like a bank loan - but isn't one.

As part of a new $800 million refinancing, Del Monte is preparing to raise $200 million to $250 million in senior financing secured by equity.

Ordinarily, the company would turn to banks for the funds. But instead it will offer floating-rate securities to institutional investors on the same terms that banks usually get.

"It's essentially a bankloan security," says Kevin Meenan, a principal at Meenan McDevitt & Co., a firm specializing in the valuation of loans.

Underwriters Merrill Lynch and Citicorp Securities have fashioned a deal for Del Monte that mirrors a $200 million private placement that enabled Clayton & Dubilier to purchase IBM's typewriter business for $1.1 billion earlier this year.

Wide Appeal

However, the Del Monte deal appears to go a step further. "The bridge between bank lenders and investors is coming down," said one source close to the transaction. "This is the first large deal that is geared to appeal to ... nonbank term-loan buyers and investors."

Rather than finance an acquisition, Del Monte will use the proceeds to retire debt accumulated when the company was spun off from RJR Nabisco in a 1989 leveraged buyout.

Distinction Blurs

But otherwise, bankers cannot point to any meaningful distinction between Del Monte's private placement and a $100 million bank loan that also is part of the larger financing package.

The move illustrates how highly leveraged companies and their investment bankers are finding ways to raise funds without using the dreaded highly leveraged transaction category. In doing that, investment and commercial bankers are blurring the distinctions between loans and securities, experts say.

For bankers, the trend is good and bad. As more of these deals are crafted, banks can reduce their exposure to highly leveraged transactions, while corporations sell debt that is more liquid and marketable than bank loans.

Losing to Wall Street

But at the same time, commercial banks are losing the last corporate finance product not taken by Wall Street, once an exclusive province of banks.

"Banks are getting disintermediated by Wall Street," said Mr. Meenan, formerly head of loan sales at Citicorp.

Traditionally, banks have not made room in their deals for other senior lenders. But problems in obtaining bank capital has forced borrowers to turn to alternative sources of credit. And given that the high-yield subordinated debt market is still moribund, banks are sharing collateral to get deals done.

Broadening Debt's Appeal

In a related sign that banks are giving way in the Del Monte deal where they haven't before, Merrill Lynch will join Citicorp as a co-lead manager on the $100 million bank loan, rather than First Chicago Corp., the syndicate agent on a new $325 million revolving credit line.

This way, Merrill Lynch and Citicorp Securities Markets can market the securities to both banks and traditional private placement investors - insurance companies and pension funds.

"Engineering a bank loan into a private security broadens the appeal of the debt," says Mr. Meenan.

Because private placements avoid the highly leveraged designation, mutual funds and other institutional investors can purchase the debt because the securities include rights to register them as public securities.

Changing Roles

These financings underscore the evolution of the capital markets away from clear distinctions among creditors. As bank cut back on their appetite for higher leverage loans, other markets are replacing the banks' traditional role.

"There is a new found appetite for high-quality variable rate assets," explained Christopher L. Snyder Jr., president of Loan Pricing Corp.

Mr. Snyder pointed out that because of banks' strong relationships with borrowers, banks can add private placements to their arsenal and keep the business without booking loans on their balance sheet and tying up precious capital

"They can do it without any balance-sheet risk," Mr. Snyder noted.

Dealmakers say many new transactions will likely include a lower share of bank debt and a substantial portion of nonbank senior debt.

"We don't like to share collateral, but banks are pressuring borrowers to reduce their bank loans," said one lender to buyouts.

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