One of the year's most talked about syndicated loans is back in the spotlight after the borrower announced a sweeping restructuring and disappointing third-quarter results.
Needham, Mass.-based Meditrust Corp. last Thursday announced plans to restructure the company by dividing into separate health-care and hotel companies. The real estate investment trust also said it will sell off as much as $1 billion of assets and cut dividends by 26%.
The move has rekindled interest in a $2.25 billion loan package to the REIT that was led by J.P. Morgan & Co. Morgan is hoping the news will boost confidence in the tough-sell credit, rather than damage Meditrust's ability to repay.
In an early indication of how the market viewed the news, Standard & Poor's on Friday lowered Meditrust's ratings from investment grade BBB- minus to a noninvestment grade BB, citing the REIT's "weakening financial profile" and "challenging near-term debt maturity schedule." The loan package was priced at noninvestment grade, or leveraged, levels.
Meditrust also announced a third-quarter earnings loss of $195 million related to a $248 million restructuring charge. The company will take an additional charge of about $200 million in the quarter ending in December.
J.P. Morgan and Goldman Sachs & Co. are advising Meditrust on its restructuring and financing options. Bankers at those firms declined to comment on the deal.
But one source close to the lead bank group hoped Meditrust's announcement could help the loan's value in secondary trading.
"Whenever there's a restructuring announced ... usually the loan is going to trade up in anticipation they're doing the right thing," the source said.
Elaine Quinlan, manager of Meditrust's investor relations, did not return calls seeking comment.
Problems with Meditrust's financing are nearly identical to those suffered by Patriot American Hospitality Inc., a Dallas-based REIT, that announced Nov. 12 that it has asked lenders to ease repayment terms on $2.5 billion in debt.
Both REITs have used equity forwards, a type of bridge finance that gives companies immediate access to cash in lieu of a future stock offering. In each case, shares of the REITs have dropped precipitously in values making such an equity issue expensive and dilutive.
For Meditrust, problems with its bank financing arose in April when it asked Salomon Smith Barney Inc. to syndicate the loan. After the Salomon effort failed in May, J.P. Morgan took over the credit.
Though Morgan eventually closed the deal, the lead syndicators - Morgan, Bankers Trust Corp., Fleet Financial Group Inc., and BankBoston Corp. - were stuck with high commitments.
Elizabeth Campbell, an analyst with Standard & Poor's, said in a report that she sees Meditrust's reorganization as favorable. It also has a bright spot: the intention to sell $1 billion of assets. That money would be used to pay off the equity forwards, bank debt, and possibly bonds.
But she warned, "With its stock now in the much lower $16 a share area, the settlement will result in less sales proceeds being available for other uses" such as financing costs.