Bankers at J.P. Morgan & Co. are syndicating a $2.25 billion loan for Meditrust Corp. that Salomon Smith Barney Inc. failed to execute last week.
The decision by Meditrust to abandon Salomon as lead arranger is a damaging blow to the investment bank, which is battling a reputation as an inexperienced lending upstart. Though Salomon bankers declined to comment, an insider acknowledged the Meditrust deal has become a high-profile embarrassment.
Meanhwile, the market is greeting J.P. Morgan's syndication with strong demand, sources said.
Meditrust, a real estate investment trust based in Needham Heights, Mass., had asked Salomon to syndicate an investment-grade loan for its buyout of LaQuinta Inns and Cobblestone Holdings after the investment bank's bid on the financing came in at extremely low levels, bankers say.
Salomon's winning bid shocked some of the industry's biggest lenders who were beaten out. Among them was Chase Manhattan Corp. and J.P. Morgan, which submitted bids just under what is expected to be the deal's final pricing level.
But the market turned a cold shoulder to Salomon when it searched for investors in early May. Though PNC Bank Corp., Citicorp, and Fleet Financial Group committed to the Meditrust deal, many lenders balked at its pricing and structure.
Salomon had to either restructure the deal or commit itself to a substantial part of the financing. By May 28, Salomon pulled the loan for restructuring and told Meditrust it would have to increase its pricing to get the loan syndicated.
A source familiar with the loan said Meditrust officials fumed at this proposal and eventually fired Salomon.
J.P. Morgan and Meditrust officials declined to comment on the loan.
But bankers familiar with the deal say Salomon's failure to bring investors into the loan not only embarrassed the firm, but endangered the financing's future.
The loan was originally priced in two parts: a $1.5 billion, three-year revolver with a starting price at 137.5 basis points over the London interbank offered rate; and a leveraged $750 million, one-and-a-half-year term loan priced at Libor plus 175 basis points the first year and Libor plus 200 basis points the final six months.
Morgan is expected to reprice the deal, adding as much as 0.5%, or about $11 million annually. That will reduce the earnings Cobblestone and LaQuinta are able to contribute to Meditrust.
"People aren't going to want to touch it, because they think something's wrong with it," a banker familiar with the deal said.
That's especially bad news for Meditrust, which has been criticized for its acquisition strategy, analysts say. Investors are worried about Meditrust's decision to borrow for acquisitions when financing for REITs has been expensive.
"The Meditrust story hasn't been embraced by investors," one analyst said. "Meditrust has really put forth a confusing story and I'm not sure where the blame should go but the company is really in a tough situation."
As a result, a vote by LaQuinta shareholders to approve the buyout may be in jeopardy. That vote, expected June 18, requires a two-thirds majority.