Interstate Bakeries Wins $230 Million in Bank Financing

Interstate Bakeries Corp. has obtained commitments for $230 million in fresh bank financing on terms far more favorable than on its existing bank debt.

The lead banks in the deal, the banking units of Chemical Banking Corp. and Bankers Trust New York Corp., were willing to grant the improved terms largely because the Kansas City-based baking company expects to get an infusion of capital through an initial public offering expected next month.

Right now, Interstate's debt exceeds capital. But as a result of the stock offering, the company's debt-to-capital ratio will shrink to about 58%.

Interstate, the nation's largest independent bakery, plans to raise between $250 million and $280 million through the offering of 15,625,000 common shares at an expected price of $16 to $18 each.

Proceeds from the offering will be used to retire subordinated debt and preferred stock issued in late 1987 at the time of the $400 million buyout. First Boston Corp., which took the company private, is lead underwriter of the public offering.

With the prospect of a healthier balance sheet, the company was able to obtain new bank financing priced at 75 basis points over the London interbank offered rate, compared to a spread over Libor of 250 basis points that the company is paying now on its existing loans.

Shedding HLT Classification

The cheaper pricing, which is conditioned on the completion of the stock offering, reflects the fact that because of the planned stock offer Interstate will no longer be classified as an HLT, or highly leveraged transaction.

The credit agreement stipulates that if the deal is later reclassified as an HLT, pricing would rise to Libor plus 250 basis points.

About half a dozen banks were approached by Interstate to provide the new loans, and four of those banks actually bid for the business.

Chemical and Bankers Trust were selected because they were the most competitive on pricing and other terms, said Paul Yarick, treasurer of Interstate.

Apparently encouraged by the company's deleveraging, the response from banks in general was "pretty favorable," Mr. Yarick added.

Total fees on the new loan package amount to about 1%. As administrative agent, Chemical will receive an annual fee of $100,000 under the six-year credit agreement.

Complex Package

The loan package consists of a $150 million term loan, a $30 million revolving credit, and a $50 million letter of credit. The term loan will be used to prepay $140 million of bank debt, which is all that remains of the original $280 million buyout loan from a group led by Toronto Dominion Bank.

It couldn't be learned whether Toronto Dominion was one of the banks that bid to lead the new financing.

Chemical and Bankers Trust are expected to begin marketing the credit in a couple of weeks.

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