At least 35 banks have signed on to the latest and largest version of the blockbuster loan for Norfolk Southern led by Merrill Lynch & Co. and J.P. Morgan & Co.
The total commitments now exceed the value of the $13 billion loan designed to support Norfolk's hostile offer for Conrail. Norfolk has been locked in a bidding war for the railroad with CSX Corp. since late October.
The banks that have stepped to the plate are doing so for the third time. The loan started out at $11.5 billion and was increased to $12.5 billion in early November. The $13 billion version was launched the week before Christmas.
While more than half the original bank group has already stepped up for the latest incarnation of the railroad loan, some bankers are beginning to express concerns about their exposure to Norfolk.
A bank's allocation, or portion of the commitment for which it is accountable, grows by several million dollars each time a loan expands. Moreover, the bigger deal puts Norfolk's AA debt-rating in jeopardy.
"Every time they increase the facility, the allocations change," said a banker contributing to the deal. "At some point, lenders will be uncomfortable with the allocation, especially when the company starts to look less and less like investment grade."
For banks committing $500 million as senior managing agents, allocations have increased to $317 million from their original level of $304 million, said market sources.
Sources close to Norfolk Southern said the railroad is actively watching the effect increasing the bank loan is having on its leverage. The railroad fully intends to maintain its investment grade credit rating.
"The company is constantly evaluating all its capital markets alternatives," said a syndicated lender. "The bank market has continued to be the most flexible means to raise committed financing" for the bid.
Norfolk might consider raising a combination of equity and debt should it need to further increase its bid for Conrail, said a market source.
Indeed, if it wins Conrail, the railroad company is likely to issue equity after the transaction is completed, and to tap the bond market with a multi-billion dollar deal, said market sources.
Some bankers said that $13 billion is not necessarily the upper limit for a Norfolk Southern loan.
"If a reasonable increase were necessary, we don't think that ought to be an obstacle," said Patrick Connolly, an executive vice president at Dresdner Bank, which committed $500 million.
Mr. Connolly estimated that another $500 million increase in the size of the bank loan would be considered reasonable.
"From our vantage point, we can say that we're comfortable with the current level of exposure," Mr. Connolly said. "Norfolk Southern has a good strong asset and cash flow coverage."
Said a banker who expressed concern about the higher debt levels: "We're still comfortable with the business case for the acquisition."