In a tacit admission that they had misread the market, a Bankers Trust-led underwriting group sweetened the fees on a $875 million refinancing for Dr Pepper/Seven-Up Cos.
The agents increased the commitment fees they were offering other banks by as much as 75 basis points. But that still may not be enough to make the deal fly.
"The market smells blood now" and may hold out for yet higher fees, said one banker who is doing just that.
Dallas-based Dr Pepper won't be affected by the fee increase. Instead, it will come out of the pockets of the underwriting banks.
Dr Pepper paid $30.6 million to the underwriters, representing a fee of 350 basis points on their $875 million commitment. The underwriters initially offered other banks a maximum fee of 175 basis points for commitments of $50 million.
In what looks to some as a classic case of greed, the underwriters had tried to keep too much for themselves, and the market balked.
The underwriters are now offering 250 basis points for commitments of $50 million. Fees were also increased for lesser commitments.
Further Problems Possible
As of Thursday, the Bankers Trust-led group had raised only $250 million in commitments from other lenders, or less than half of their target level. The official deadline for commitments had been Wednesday, but it was extended until next Thursday.
Ironically, the fee increase could make it even more difficult to syndicate the loan.
Banks that had been expected to take $50 million commitments, thereby assuming some of the agent banks' underwriting risk, complained that the initial fee structure failed to reward them for taking such risks.
By raising the fees, the underwriters are sending a clear signal that the deal is in trouble, and that may make other banks even more reluctant to commit for more than they are prepared to hold on their books. Had the fees been set initially at the new, higher level, the syndication effort probably would have proceeded without much of a hitch, said a market source.
The Dr Pepper credit was initially underwritten last month in full by Bankers Trust, Chase Manhattan Bank, and NationsBank. They were then joined by Barclays Bank, Canadian Imperial Bank of Commerce, and First National Bank of Chicago.
These same six banks underwrote a $750 million credit for Dr Pepper in the spring, but the deal was canceled when the soft drink maker withdrew the centerpiece of the recapititalization - a $600 million initial public offering of stock.
In its revised recapitalization, Dr Pepper has increased the amount of new bank debt, and replaced the equity portion with new subordinated debt. Proceeds will be used to replace higher cost debt.