Yield-hungry loan funds will play a prominent role in Jefferson Smurfit Corp's new $400 million bank deal led by Chemical Bank and Bankers Trust.

Among the six lenders that signed up as co-agents, three were funds and one was an insurance company. Only two were banks - Citibank and Chase Manhattan.

The strong participation of the loan funds was not unexpected, given the rich fees and high borrowing rate on the new credit, which will replace a portion of Smurfit's existing $1.4 billion of bank debt.

As reported, the loan is priced at a steep 300 basis points over the London interbank offered rate. The borrowing rate on Smurfit's existing bank debt is 225 basis points over Libor.

Healthy Fee Income

The co-agents are also being rewarded with rich fees amounting to 4.5%, part of which will be paid on the amount they committed, and part on their allocations at different stages of the syndication process.

Some bankers were leery of the new credit, because it was structured as a five-year "bullet" loan. If the company couldn't meet an amortization schedule, they shouldn't be lending it money, these bankers reasoned.

Others bankers, though, said the loan is priced to provide adequate reward for the risk. These lenders essentially view the new credit as a bridge loan, gambling that Smurfit will be able to replace the debt with equity financing in a couple of years.

They are taking their cue from Morgan Stanley Leveraged Equity Fund, which is injecting $200 million of fresh equity into the company.

Jefferson Smurfit is jointly owned by Morgan Stanley and Smurfit International. The latter is providing $33 million of fresh cash equity.

Bankers reason that Morgan Stanley wouldn't be investing the additional funds unless it was reasonably sure that Jefferson Smurfit can be taken public in a stock offering when the paper packaging industry recovers.

Co-agents are receiving rich fees amounting to 4.5%.

Chemical and Bankers Trust, who together underwrote the new $400 million bank loan, initially set a deadline of Aug. 10 for prospective co-agents, but a few lenders were given an additional day.

The required commitment level for co-agents was $40 million, but one lender - Sun Life Insurance - committed $75 million.

Citibank, Chase, and the three loan funds - Chancellor, Pilgrim, and Van Kampen Merritt - each committed $40 million.

NationsBank, invited to participate as a co-agent, decided to commit $20 million. Allstate Insurance Co. committed $25 million. Commitments from other prospective members of the general syndicate are due by the end of the month.

As reported, the size of the new bank credit likely will be reduced if, as expected, Jefferson Smurfit taps the private placement market with a five-year note offering.

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