Pricing in the investment- and near-investment-grade loan markets is finally hitting a floor.
This week Chase Manhattan Corp. and three co-arrangers reduced the size of a $5.5 billion loan to Tricon Global Restaurants Inc. to $5.25 billion.
The move was the latest attempt by Chase and its co-arrangers to retool their loan for Tricon, a spinoff of Pepsico Inc. The credit, which lenders say is thinly priced, has received a lukewarm reception since it hit the syndications market in early September.
Last month, as the loan's scheduled close drew near, Tricon's banks increased by 5 basis points the up-front fees paid to lenders to commit to the deal. They also extended the Sept. 17 deadline for commitments to Sept. 29.
"The days of getting deals done with really skinny fees are probably over," said one of the loan's co-arrangers. "Banks are not as aggressive for these types of deals as they were six months ago, and they want more up-front fees."
Coming on the heels of the troubled syndications of other high-grade credits in recent weeks, the Tricon loan was seen by market participants as a sign that the downward trends in spreads and pricing have bottomed out. Deals for Fox Kids Worldwide and Fred Meyer Inc. have also received less- than-warm welcomes in the syndications market.
Tricon's chilly reception was clearly due to its pricing, bankers said. On Monday the deal's participating lenders - with the exception of six managing agents - were allocated pieces of the loan that matched their total commitments.
That is a clear signal that the arranging banks miscalculated the loan's appeal, as allocations are typically lower than commitments, bankers said.
"We're all unhappy about how this went," said one co-arranger. "It's a great company and they didn't really deserve to start life with this kind of reception," he added.
Launched shortly after Labor Day, the loan for Louisville, Ky.-based Tricon is led by Chase as the administrative agent and co-arrangers Citicorp, J.P. Morgan & Co., and NationsBank Corp.
The company, which owns and franchises approximately 30,000 fast-food restaurants in 95 countries under the franchises Pizza Hut, KFC, and Taco Bell, was spun off from Purchase, N.Y.-based Pepsico last month.
Though the loan is currently unrated, it is expected to receive a BB-plus or near-investment-grade rating, according to sources familiar with the deal.
The five-year credit was originally split between a $3.5 billion revolving line of credit and a $2 billion term loan, both offering a drawn spread of 62 basis points over the London interbank offered rate, according to a lender in the deal.
Before the loan's original closing date, the four tiers of up- front fees paid to lenders for their initial commitments were all increased by 5 basis points, bringing the top tier paid to managing agents committing $250 million to 22.5 basis points, said a lender in the deal. A flat fee of $250,000 was also added to the managing agent level, the source said.
On Monday the agent banks reduced the size of the total loan package to $5.25 billion. The spread over Libor for both tranches of the loan were not changed - a fact that irked some lenders.
"The increase in pricing didn't work because it wasn't enough," said one lender who passed on the loan. "It was too little, too late."
"The Libor margin wasn't repriced, which I think was probably the real issue. Up-front fees don't fix a five-year deal," said another lender not participating in the deal.
The increased fees did bring in additional lenders. But the total number of banks in the loan was still below the agent banks' expectations, said one lender in the deal.
A total of 46 investors took pieces of the loan. Chase and the other co- arrangers were each left holding $525 million of the credit - an amount higher than anticipated. Six Japanese banks committed at the managing agent tier and were given allocations of $199 million each.
One investor committed to the loan at $150 million, five at $100 million, and one at $75 million. Another 21 investors committed $50 million each, with a number of other lenders at lower amounts, according to a lender in the deal.
Loan traders are already moving Tricon's credit at below-par on the secondary market. A block of $100 million of the loan has been sold thus far, said one lender in the deal.
The most recent trade was completed at 99.35 cents on the dollar, according to Robert Barmore, managing director at Harrison, N.Y.-based Meenan, McDevitt & Co., a loan brokerage boutique.
A key challenge faced by lenders in syndicating large investment or near-investment-grade credits like Tricon is finding a price that will win them the mandate and also attract marginal lenders - those that would typically invest in higher-yielding or other types of loans.
"How many transactions of that size do we see in a year? The thing you have to ask yourself when you price these deals is how big is it, and if it's big, then you'd better tack on a premium," said one market source.
But as increased competition in the loan market has driven pricing and spreads down, finding the right price is becoming a very difficult balancing act, said observers.
"Let's face it. You can walk in and give the company the right price, but they'd probably throw you out. You can have the right answer and lose the business, or you can have the wrong answer and lose money," said Mr. Barmore.
Lenders in the Tricon deal conceded that competition for the mandate pushed the original pricing too low.
"In a very competitive environment like we operate in today, the banks that bid on this deal bid too aggressively, and when the deal was launched, it was seen by the market in general as too aggressively priced," said one co-arranger.
But sources said other factors also contributed to the loan's troubles, including the simultaneous syndication of a similar loan arranged exclusively by Chase.
That loan, a $5 billion five-year credit to capitalize the spinoff of a new hotel and gaming entity from ITT Corp., ITT Destinations, was oversubscribed at closing according to a lender in the deal.
The ITT credit, which was given a Standard & Poor's rating of BB-plus, was priced at a premium and absorbed much of the loan market's capacity for credits of this type, said both Tricon lenders and market sources.
"We knew going into this that capacity was going to be an issue," said a co-arranger in the Tricon deal.
"You've got two very large deals, kind of in the same credit zone, both BB-plus, both in the market at exactly the same time, and I think that just made the capacity issue that much worse, because you can only move so much through the market at a time," added the lender.
Tricon's leverage ratio of 3.4 times debt to earnings before interest, taxes, depreciation and amortization - and wariness of the restaurant sector - were also cited by lenders as reasons the credit did not syndicate smoothly.
Although Tricon's syndication was clearly slowed by pricing, market observers questioned if the deal served as a lesson to other agents in the syndication market.
"Does everybody have to get their fingers burnt once before they get the message?" said Mr. Barmore.